Nobody said there’d be math.
Fair enough. But industry expert Gary Pica knows from experience that gaining command of your MSP business won’t happen until you understand—and control—the numbers. So stay with us here. Even the most arithmetic-averse will find Gary’s formulas easy to swallow…and follow.
In the MSP business, profit is determined by leverage—simply put, generating the most amount of service revenue with the fewest number of employees.
Gary shares that, in looking at 3 different MSPs—each with 12 employees—the average business might see $1,200,000 in annual service revenue, best-in-class is looking at $1,500,000, while a world-class MSP is bringing in $1,800,000.
Why the unrealized profitability for some MSPs? It’s all about understanding key cost drivers and defining, then matching, every employee’s role to top-line revenue. Gary breaks it all down in what he calls macro and micro ‘Pica-nomics.’
Determining your gross margin on a per seat basis begins with defining your organization by roles in 5 basic service delivery areas: centralized services, network administration, support, virtual CIO and non-recurring services.
Let’s examine the key area of support as an example of determining the metrics behind lining up roles with revenue.
- Knowing how many tickets any one of your customers is generating per month, along with how much time is spent on each ticket, determines how many seats can be managed by one support engineer.
- Multiply that number of supported seats per engineer by what you charge on average per seat and you’ll see the relationship between the role of your employee and monthly recurring revenue.
Gary sees MSPs with dramatically varying numbers; some must hire another support engineer for each additional $10,000 in MRR, while others can increase MRR up to $70,000 before adding another employee.
Why the dramatic difference? Profit margin.
To calculate profit margins, first determine your costs by looking at all the delivery areas you’ve bundled into your monthly fee. Gary gives this illustration of an average MSP:
|COST PER MONTH PER SEAT
Knowing the total average monthly cost per seat is around $36, the next step is looking at how your all-in seat price (AISP) will impact your profit margin.
|AISP||TOTAL COST PER SEAT||GROSS MARGIN||GROSS MARGIN %|
The math is simple, but powerful. In this scenario, at $85 AISP, you’re setting yourself up for a break/fix margin. To reach the world-class MSP level, your AISP needs to be at $125.
Gary summarizes his Pica-nomics class by posing these questions to consider:
- Does each of your employees have a defined role?
- Can you match those roles to top-line revenue?
- Do you know your real costs on a per-seat basis?
- Do you know the key drivers impacting your leverage?
Learn more from this respected industry leader about the essential steps to becoming a world-class MSP.