MSPs Can't Sell Their Way to Profitability (There, I Said It)
Let's dive into this together (warning, there's a bit of math involved).
The Myth of Sales-Driven Profitability
Don't get me wrong, you absolutely must sell more MRR (Monthly Recurring Revenue). Grow or die, right? But sales alone won't make you profitable and could even make things much harder than they need to be.
The Real Challenge: Profitability Goals
During my conversations with MSP owners, a recurring theme has emerged: when asked what their #1 goal/challenge is, they usually say adding more MRR. But when I dig deeper and ask about profitability goals, I typically find they don't have one or it's not a KPI they track and methodically work to improve. This brings to mind the adage, 'top line is for vanity, profit is for sanity.' Profit is the oxygen the business runs on, and the MSP business is just way too hard not to earn the profit they deserve.
An Illustrative Example
Consider a hypothetical MSP with $150K in monthly managed-services revenue, a goal of adding $50K, and a 45% managed-services gross margin. Before adding capacity for growth, I would want to understand how pricing, delivery cost and workload produce that margin.
The Impact of Gross Margin
MSP Fuel teaches a 70% managed-services gross-margin operating standard. It is a target, not an observed market benchmark or promised client result. In this example, moving from 45% to 65% gross margin adds $30K monthly gross profit: a 20-percentage-point change on $150K MRR. If SG&A and other expenses stay unchanged, that also adds $30K to modeled profit. At an assumed 10% incremental net margin, adding the same $30K would instead require $300K in new monthly revenue. Actual costs may change as you grow.
The Takeaway: Focus on Margins
So, here's the takeaway: Aim to boost your managed services margin AND sell more MRR at the right margins. Strong operations lay the foundation for strong sales. It's about delivering undeniable value, setting yourself apart, and building trust with your clients so they continue to invest in your services, which shows up as predictable project revenue.
A Question of Stress and Profit
Would you rather have a $6m MSP at 10% margin or a $2m MSP at 30%? Both produce $600K annual profit. Workload and stress still depend on how each business operates. I say be the $6m MSP at 30%+ margin consistently, earning life-changing money and becoming an attractive acquisition target if that's your goal.
Need Help?
If you're struggling to nail down your managed services gross margin or develop a plan to increase it, book a call with me. We'd love to chat and help you chart a course to more profit with less stress.