Hitting plateaus is part of life. We’ve all been there before, right? Things are going well, and then all of a sudden we’re coasting — awaiting the next climb. These natural places in business and life where people and businesses get stuck are what I call impact zones.
Identifying Impact Zones
As MSPs, we usually see these measured in terms of revenue and profitability. For instance, your growth slows or stops after hitting a certain MRR level, or you get stuck after reaching a particular profitability level. More often than not, these two things are tied together (in other words, they’re related). The lower your profit margins, the more likely you are to hit revenue plateaus. Not sure why? I’ll do my best to explain it to you.
It’s a function of low leverage after net profit margins fall below 20%. What I mean by this is the following: You’re inefficient, probably noisy, and it takes more people and more resources to deliver relative to the amount of service revenue you generate. This is the relationship between service revenue and the number of people in your organization. This is caused by some combination of the following three factors: your seat price, your reactive hours per end user per month (RHEM) and your average MRR.
To simplify things a bit: When your relative noise levels — or the amount of tickets and alerts generated per end user — support is high, value is lower, so price per seat you command is less. MSPs get stuck because their noise levels become higher than their revenue and team can manage, so adding new clients makes it worse — you’re stuck.
How MSPs Get Stuck
I’ve see people get stuck at a revenue level for years. I remember a few years back when my current MSP was under $100,000 MRR. There was a TruMethods member at around the same level as me. The two of us decided to have a race to $150,000 MRR. By the time I reached $150,000 MRR a year later, he was still at around $100,000 MRR. How could this be? What happened to him during this time period? This smart and motivated business owner hit an impact zone and couldn’t move find the way forward.
The three factors I mentioned earlier — price, noise and average deal size— had overtaken his ability to grow. During that year he planned and fixed a bunch of things in the business: He hired or replaced staff, implemented new systems and process, and even brought on some new customers, but despite all of these efforts, he, unfortunately, remained stuck, taking one step forward and two steps back. But what did he do wrong?
Well, it’s simple — not easy to change, per se, but simple to understand. None of the changes he made impacted the forces holding him back. His ticket counts remained high, so most resources were still focused on support or professional services and escalations (this, of course, kept value down and hindered the sales process of his MSP).
Avoiding Impact Zones
One quick gut check you can do is look at the number of support resources you have. Compare that to the number of end users you support. Support resources includes everyone who works on tickets and alerts included in your monthly fee. Tickets, alerts, escalations, moves, adds and changes you don’t bill for, separate from your monthly fee. You want to have each support resource manage 500 end users, so if you manage 1,500 end users, you would have three support resource. As your ratio of resources to users decreases — in other words, you have more people or each person manages less end users — this makes you more likely to hit an impact zone.
Recognizing you’ve hit an impact zone is the first step to getting through it. From there, focus time, money and energy on changes that will actually get you through the impact zone. Most importantly, don’t try to fix everything. In fact, don’t fix anything that doesn’t lower restive noise or increase the value of your service offering.
If your looking for more information on MSP profitability, check out our MSP Calculator and uncover the metrics that directly impact your profitability.