or bad people . Far from it . But it does make them far less successful in business than they could be . So , if you honestly want to generate more money for yourself and more profits from your business , the first thing you need to analyze is your TRUE motivation .
Are you genuinely more motivated to stay safe , keep it simple , and avoid the situations listed previously OR are you sufficiently determined to push through those fears and feelings , trusting that it IS possible to raise your prices and make more money , and accept the truth that all the limitations you feel are just emotional baggage you ’ re choosing to carry around , not hard , immovable , concrete roadblocks that can be overcome ?
Only you can answer this , but I will suggest you don ’ t automatically dismiss your ability to make more money and be more successful . You CAN learn . You CAN model others who ’ ve been successful . You CAN make mistakes , then course-correct . Very few mistakes in business are totally irrevocable and permanent “ death ” sentences . Thousands of multimillionaires and billionaires have gone bankrupt and recovered . You can always start again .
What Should You Aim For In Profitability ?
What does “ being profitable ” mean exactly , and how much should you grow ?
It helps to know what “ good ” is so you can determine if you ’ re above average and on track and what goals you should set for yourself . For most financial analysts and consultants in the MSP world , “ being profitable ” means you are paying yourself a fair market salary and you ’ re generating at least 10 % net profit AFTER your salary ( minimum ), with a goal of up to 20 % EBITDA ( net profits ).
Your salary is NOT your profits , which is a common misnomer among smaller MSPs . Your salary is a business expense . If you had to leave the business and replace yourself , or if you sell the business , the new owner will have to pay someone to do your job . How much should your salary be ? Roughly $ 100,000 if you ’ re in the $ 500,000 –$ 1.5 million range in topline sales . From there , your salary will increase by roughly another $ 100,000 for every $ 1.5 million in sales you add . Yes , location and cost of living play into this , but an MSP generating over $ 4 million should be getting a salary of at least $ 350,000 . At $ 10 million , a $ 500,000 salary is appropriate . Another general rule of thumb is that you should be generating at least 10 % net profits after your salary . There are some best-in-class MSPs that generate 20 %. Personally , I don ’ t like to see more than 18 % net because , from my perspective , you ’ re taking too much profit from the business and should be allocating more money to growth ( sales and marketing ). You might say I ’ m biased about this as the CEO of a marketing firm , but many growth-oriented MSPs running large , multimillion-dollar enterprises agree with me on this point . Some don ’ t like to see more than 10 % EBITDA .
As for a growth goal , you should have no less than 12 % growth in topline sales this year over last . That ’ s “ par ,” and anything less is truly lagging . Keep in mind , if you ’ re smaller , it should be easier to secure bigger growth percentages than when you ’ re bigger . Going from $ 1 million to $ 1.2 million is relatively easy . Adding 20 % growth when you ’ re $ 40 million is much more difficult .
Again , ALL of this is situational and relative to goals you have , markets you ’ re targeting , and further economic developments ( like a hard recession hitting ). But in general , if you ’ re paying yourself a fair market salary and taking home at least 10 % EBITDA , you ’ re at least “ good .”
How To Raise Your Profits : There Are Only 4 Ways .
If , after reading this , you ’ re inspired to grow the bottom line , there are four ways to do it . Anyone can work to raise profitability , but if you stack them all , your chances of increasing the bottom line go up exponentially . It also may be best to take a nuanced approach to these , raising prices for some clients who need it or lowering some costs ( like your tools ) while fueling others ( like marketing ).
1 .
Raise Your Prices . Most MSPs are grossly ( or at least mildly ) underpriced , which is a big reason they ’ re unprofitable and don ’ t have sufficient funds to hire , grow , and do marketing . Right now , your stock “ managed IT ” support should be priced in the $ 150 per user range , more if you have advanced cybersecurity protections , and even more if you ’ re offering compliance services . Yes , a lot of variables impact that price , but if you ’ re under that number , there ’ s a very good chance you ’ re underpriced and not hitting at least 50 % service gross margin .
2 .
Lower Your Costs . Gross margin , also called contribution margin , is revenue ( sales ) minus COGS ( cost of goods sold ). For MSPs , your COGS on managed services is your labor and your tools and should be at least 50 %. Right now , with inflation what it is and engineer labor through the roof , reducing technical labor is a tough nut to crack . Overhead walks on two legs , and you should anticipate your techs ’ salaries to increase by another 6 %– 10 % this year . Therefore , many MSPs are looking for cheaper tools as a way of lowering costs . On a recent call with 21 MSPs , many were in favor of signing longer-term contracts to get cheaper rates . Also , remember to raise your prices to clients every year by 3 %– 5 % so when the contract comes up ( and your costs go up ), you ’ re not caught with lower margins .
3 .
Increase Efficiencies . Another big area
for increasing profits is ensuring you ’ re truly efficient in your service delivery — and many MSPs don ’ t give it enough thought . A rule of thumb is that your techs should have at least 75 % utilization , which means 75 % of their hours are directly correlated to billable client work , not administrative duties , meetings , etc .; it ’ s also critical you ’ re not having expensive techs ( or people for that matter ) doing “ low money ” work .
24 | MSPSuccessMagazine . com • VOLUME 4 ISSUE 2