Why MSPs should live and breathe service department gross profit
For MSPs and other service-based companies, one of the most essential metrics for success is service department gross profit (SDGP). While other metrics, such as net profit, service salaries, and gross profit, often receive most of the focus, ensuring you have a healthy SDGP is crucial to operating as a healthy service-based business.
Of course, this doesn’t mean that these other metrics are irrelevant—it just means that they’re heavily influenced by the quality and success of your services. So, if you’re going to focus on any one metric for 2024, we recommend living and breathing SDGP!
Breaking down SDGP
Breaking down SDGP starts with understanding the difference between products and services. Simply put, products are things that we sell, and services are things that we do. Services require labor from our team in either a fixed or variable amount, depending on how you’ve built your service offerings. It’s also likely that services will require spending on both agreement and non-agreement tools. With both time and tools involved, it’s important to ensure that you’re setting a gross profit target that helps you meet all other goals, including net profit training sales and service quality.
Now, if we were to stop with tools and labor cost of service, we would actually be measuring a different metric: agreement gross profit (AGP). And while this can be helpful, it’s not what we’re looking for at this point. The differences between AGP and SDGP are centered around two things: non-agreement tools and non-billable labor. Since SDGP includes all employee wages and service-based tools, setting a great target and getting the right numbers are the first challenges to attack.
In most service-based businesses, SDGP will fall between 50% and 60%, based on the balance of tools and labor required. Most healthy MSPs will fall right in the middle, at around 55%, and once you’ve hit that number, you’ll see many other metrics fall in line as well.
If you are new to measuring SDGP, it can take a little time to nail down the right target and calculation. The hardest part is often ensuring that your service department tools only include agreement and non-agreement service tools, that your service labor includes the entire service team, and that your service revenue includes all of the “things we do,” not the “things we sell.”
From there, it’s easy math:
1 – (service department tools + service wages) / service revenue = SDGP
Once you’ve calculated your SDGP, you can see if it’s hitting the target range or if adjustments are needed. If you’re not quite getting to that 55% target, there are a few specific factors that you should consider adjusting to improve your SDGP. This includes:
- Cost of tools: Ensure that the tools you’re paying for are necessary and frequently used to avoid wasting money on old or inefficient systems
- Cost of labor: Adjusting staffing levels can be complex and painful, but having the right number of employees at the right price is critical to ensuring the profitability of your company
- Pricing: If tool and labor costs are under control, make sure that you’re charging an appropriate amount for your services to ensure you hit the proper SDGP
Cutting tools that aren’t needed, adjusting pricing that is too low, and ensuring that you have the right number of employees to properly deliver your services are three healthy activities MSPs can take to improve SDGP. Regularly reviewing these factors is crucial for improving your SDGP—we recommend doing so once per quarter.
Owning or leading an MSP has a lot of challenges, and mastering service department gross profit (SDGP) will help you eliminate the many that come with growth and success. Fixed margins on products are easy to change, and expenses can be controlled with diligence and good focus, but having a solid SDGP takes work and almost always results in excellence in all other areas.
If you’re struggling with SDGP or any other metric, our team at ConnectWise has you covered. From solution advisors to partner development experts and beyond, there’s seemingly no end to the support and valuable insights available to our partners.
Contact our team and start upgrading your operations today!