Calculating Profit Margin
The profit margin of your MSP business is basically the money left over once you subtract associated expenses. So, if you made $100 and it cost $10 to do that, you really only made $90, for a profit margin of 90%. That’s a pretty big profit margin, and as an MSP, you likely won’t see one so large–but it’s not impossible. Tech unicorns routinely hit those numbers until they’ve finished blowing up.
So, a basic profit margin equation would look like this: (Profit After Expenses)/(Total Revenue). In the above example, it would be 90 divided by 100; 90/100. That comes to .9, or 90%. By contrast, it’s possible to see profit without spending money in a field like consulting; something not all MSPs do.
Real Expenses to Consider
As a tech company, you’ve got some real expenses. A server will likely cost you around $10k a year, depending on its size. You might be able to get one for under $1k a year, but it will be limited in capacity. A network of servers compounds this cost. You need to install, upgrade, maintain, troubleshoot, and replace servers; all of which items are expensive.
In addition to such costs as that, your MSP business must acquire marketing solutions which facilitate ROI (Return on Investment). R&D is likewise integral; without it, you can’t remain competitive. Then there are employee acquisition and benefit costs, and fallout from errors. Once you factor all these things in, don’t be surprised if your profit margin is as low as 10% for a long time.
Where MSPs make this money back is through high profile clients that become long-term patrons with proper handling. All you need is a handful, in fact, if they’re big enough. Until you land those big clients, you’ll have to deal with smaller, more transitory ones. In order to buff up your profit margin, there are a few tactics worth employing:
- Optimize outreach strategy
- Reduce hardware needs
- Hire for the long-term
You want an outreach strategy to be as optimal as possible–content marketing is key since it has an organic component to it with viral potentiality through proper management. Beyond viral explosion, you can definitely create a sustainable audience through effective, useful content parleyed across multiple platforms and regularly updated.
Cloud computing reliance, optimization, and outsourcing can also be key in reducing on-site infrastructural expenses. Hiring for the long-term will help you reduce employee turnover, and for all these things, outsourcing can be a prime solution.
Enabling Your Business to Succeed
An MSP business has an uphill climb ahead of it even if everything is properly managed. If you’re going to see profit margins sustainable enough to see a regular increase, you’ll need to trim all the fat and optimize as best as you can. Outsourcing, online marketing through SEO agencies specializing in MSPs, and reduction of hardware needs are all recommendable strategies toward such outcomes.