Are Tools Shrinking Your Profit Margin?

| Author
TruMethods

MSPs are using more software tools now than ever before.  

This could be viewed as good thing — especially if MSPs are using these solutions and services together effectively hep their customers and improve their bottom lines.  

I've spoken with quite a few TruMethods members using numerous tools and services to improve the offerings they’re delivering to their customers. Some of these MSPs have told me this: Using these solutions collectively have positively impacted MRR.  

But, unfortunately, for many of you, tool costs are rising faster than the prices you’re charging for your offerings. When this happens, you see a decline in gross profit margin.  

If you’re not seeing the results you’re looking for on a monthly basis, evaluate the tools and services you’re currently using. 

 

Begin with cost 

You must have a common denominator in order to assess all tool costs. At TruMethods, we teach MSPs how to use seat cost as that unit of measure. Every software tool provider has its own pricing model, which you’ll need to convert to an average cost per seat.  

For example, you may pay for backup based on storage used.  

To evaluate whether this solution is right for your business, use the following thought process: 

  • First, figure out what the total cost would be to deploy the tool across your customer base.  
  • Then, divide that total by the number of seats you manage to determine the average seat cost. 
  • Next, determine how much your seat price would have to increase to include this feature in your monthly fee.  

Think of it this way as a rule of thumb: For every dollar seat cost (that’s labor or tools), you need to add $3 to your seat price to maintain 70% gross margin, so now you have a simple process to evaluate tools and decide if they should be bundled into your seat price. If there is labor required to manage the tools, be sure to include that cost as well. 

 

Why invest in a new tool? 

From my experience, there are several reasons why MSPs invest in new tools: 

  • Lower costs. Maybe these tools will automate something being done manually or will eliminate the need to do something.  
  • Increase your value. Will adding this feature increase the value of your service offering. Can you clearly explain the value to a prospective customer? 
  • Generate additional revenue. Will the investment in the new tool generate additional recurring or non-recurring revenue from your customer base? 
  • Reduce risk. Will the new tool reduce your risk or customer risk? (Hopefully, this means reducing risk means adding value as well.) 

In some cases, you’ll find tools you want to offer your customer, but the pricing makes it prohibitive to bundle into your monthly fee and still maintain 70% gross margins.  

When this happens, you have two choices: The first is to wait until prices come down, and the second is to offer the feature outside of your seat price.  

Many MSPs will sell backup or an enhanced security feature outside of their bundled price because they can’t bundle the technology and maintain 70% margins, so they sell the additional feature at a lower gross margin  maybe 30-40%  and still maintain a 70% margin on their core offering. 

While there are lot of great tools and services for you as an MSP to consider, be sure they enable you to build a high-value offering while keeping your profit margin intact. 

New call-to-action

TOPICS: world class msp MSP profitability

Subscribe To TruMethods Blog

Discover everything you need to know about becoming a top MSP.