MSP Finance: Managing by Margin

Pricing is one of those delicate balancing acts — you want to price high enough to make money, but low enough to be competitive. What people sometimes don’t realize is that these options are not mutually exclusive. Operational excellence allows any MSP to have the flexibility to be better than the competition, and cheaper. We call this managing by margin.

The core concept of managing by margin is to know that everything you do for your customers has a cost, and then set pricing based on that. The key to this is to operate as efficiently as possible. Doing so will lower your cost base, and that in turn allows you to set competitive prices that still deliver healthy margins. There are a few elements to this.

Streamline your stack

It’s hard to be efficient with a bloated stack. The more your techs have to learn and maintain, the slower they will be. Even the most amazing documentation won’t save you when your stack is a mess. Each tool costs money, so streamlining the stack improves your margin; your cost of goods sold decreases.

The key here is to know your ideal stack and move your clients towards it. No, this doesn’t happen overnight. New clients in particular can take upwards of a year, sometimes more, to transition their stack. But focus on streamlining the stack — creating incentives, if necessary — and get them there.

Become process-driven

Implementing processes is an essential part of efficiency. Define the most efficient processes and document them. Train your techs so that they use these processes every time. Clearly defined processes can be duplicated, and familiarity with these process breeds efficiency.  And with efficiency comes lower costs. A continuous cycle of process improvement leads to consistent lowering of costs and increasing of margins.

Master all-in seat pricing

All-in seat pricing sets a price for everything you do and puts those prices into a bundle. If you are doing work, know what that work costs, and set the fee accordingly. Get everything into a bundle, so you don’t find yourself doing work for free. When you can show the client what you do, it’s easier to charge for it. Get a margin on everything you do, as this lets you set margins at whatever point works best.

Know who your high-cost customers are

Take a look at your customer base. Some customers are consistent money-losers. You know the ones. They insist on running out-of-date equipment. They have weird things in their stack that are hard to work with. In a lot of cases, the high-cost customers are also the ones your techs dread dealing with. Quiz your techs on this and compare with the list of high-cost customers. There’s going to be some overlap there.

Part of working with margins is being able to communicate with such clients that what you do for them costs more than it does for others. That’s not wrong — some clients are just like that. But if you’re not making money on them, then you need to gather the evidence to show that they need to pay more. Either they get on board with your stack, pay more, or you cut them loose. Make consistent margins on all clients, and you can charge everybody less and make profit for yourself.

As you can see, managing by margin affects a lot of areas of your business — pricing, stack, operational processes, documentation and client management. That’s because everything affects margin. Adopting a margin mindset will help you run a tighter operation, and that cost control will give you the pricing flexibility you need to compete effectively in your marketplace.

IT Glue is a documentation platform that helps you to streamline your processes, record and organize information, and reduce the amount of time your techs waste looking for information. IT Glue’s partners report efficiency gains almost immediately after launching the platform. Watch the demo to find out more.