Is your MSP really profitable? Here’s how to check

MSP’s and IT providers are fiercely divided on the topic of pricing models and which work the best. Is it hourly rates, fixed fee per user/device or a hybrid of both? 

Getting the pricing model right and understanding the numbers is the key difference between a lucrative IT business and a less profitable one.

However IT providers package their pricing – everything eventually boils back down to a rate per hour. Here’s why:

If Company A delivers 10 hours of work for a client and charges $150 per hour then it’s fair to say that the effective hourly rate of that company is always $150 per hour.

But, if Company B wins an MSP contract of a 10-user firm and charges $150 per user or per device but spends more than 10 hours working for their client each month then the effective hourly rate falls below $150.  As an aside, don’t be shocked by the number –  a significant number of IT providers actually charge a lot less per user/device than $150!

Many would argue that this is the ‘swings and roundabouts’ of doing business but our analysis shows that often there are far more swings in the customer’s favour than roundabouts in the MSP’s favour. So in the end a large percentage of MSP’s do more hours for a lower hourly rate than their break/fix counterparts.

So where is your MSP? A Self Assessment

So how can an IT business grow profitably if hourly rates stay the same and labour costs keep going up? How does your business fare? Here’s a simple self assessment whether you’re on the path to profitability.

1. Are you an “all you can eat” provider?  Review every service contract, calculate the hours spent per customer and work out your effective hourly rate.  The formula is monthly contract value divided by number of hours spent per month.
2. Are you an hourly rate provider?  Review your labour time per customer and ensure you are billing for each hour of service ensuring your effective hourly rate is the same per customer.  The formula is much simpler – hours spent servicing customer compared to hours billed per customer
3. Look at labour costs and staff utilisation – are staff entering time sheets?  If so, what is the average billable time of each staff member (Hint: it should be at least 80%)

If the results mean you are working more hours and earning less per hour it’s a sign that something needs to change.

Trend toward outsourcing

With pricing pressure on traditional IT providers unlikely to change any time soon, many MSPs and IT providers are looking at outsourcing as an option.

Unlike staffing an MSP, a well structured outsourcing solution reduces the overall cost of the MSP business model allowing owners to scale faster with fewer overheads.

Our core purpose at Benchmark 365 is to not only help MSPs reduce their costs but to ensure that every single customer is profitable through ongoing benchmarking, analysis and sales coaching.

Our partners have reported significant profitability increases and revenue growth since working with Benchmark 365.  In other words, Benchmark 365 partners bill more and spend less than the overall MSP market.