What is the best way for MSPs to grow gross margin? Cut COGS or grow sales? The right answer to the question is both. But, which of the two options can give your managed services business the best opportunity for upside? Hands down, no question about it: GROW SALES!
The MSP is right! They are not making money.
An MSP typically can’t sell at $100 per seat and expect to (1) make money, (2) deliver exceptional service, and (3) have a robust technology stack. At $100 per seat you get to pick one of the three.
I would like to focus on OML 1. By definition OML 1 represents: “Beginning. Most often, those MSPs who are at OML 1 or 2 are delivering sub-median financial performance.” You see the table states that OML 1 MSPs are charging between $50 - $60 per seat.
You may be thinking, “So how does an MSP not make money when selling at $100 per seat? That math makes no sense, VanDeWalker!”
Let’s look at the 2019 data from Service Leadership Inc. The OML data shows a typical MSP is selling their all-in seat price at $139.
At Collabrance, we are passionate about transparency (click here to see our pricing). Let’s run two scenarios.
So if this MSP was just selling at the lowest OML (beginner), they would be at a 53% margin. Not bad! You can make money in managed services at 53% margin.
Collabrance currently ranks as an OML 4. This is one reason MSPs work with Collabrance to increase their OML faster. Let’s assume an MSP could get to the average over time and sell at an OML 3. What is the impact to the MSP’s margin?
In example 3, I am asking the MSP to be average and sell at $169 per seat. In our example, the MSP would increase the selling price by $69 per seat from OML 1 to OML 3.
Some MSPs might decide, “We need to take over the service internally to make money rather than outsourcing.” Here is my question: “Instead of working on sales and growing price per seat by $69, can they reduce their cost $69 per seat?” That is obscured. They can’t effectively deliver COGS at -$4. Their COGS today is $65, is it possible to deliver the same service quality, the same technology stack, the same MSP satisfaction for $45 per seat? Possibly. But, that only gets them $20 per seat of margin.
Every company has limited resources and limited effort to exert. We are all striving to grow our businesses and that consequently means growing margin.
I think the math makes it clear MSPs have more opportunity to grow gross margin by increasing your price per seat faster, rather than trying to take cost out of the business.
Once an MSP can get to an OML 4 or 5 and sell in the $185+ per seat category, go ahead and focus more on driving your cost down.
The COVID-19 issues can certainly make it more difficult not just to get $150 per seat, but to get a MSP to say yes at any price per seat. I realize we are in uncertain times, and the price per seat may look a little wonky these days. But we all need to do what we need to do to stay profitable. For the long-term health of our business, we need to drive strong margins and the best way to do that is to drive top line price per seat.
Join our next MSP Sales Training to learn a proven sales process that helps you overcome price objections, and leads with a value-based sale to close more managed services deals.
Sales Simplicity Seminar
August 25-26th | Online Event
Greg VanDeWalker, Senior Vice President of IT Channel and Services, is responsible for the strategic vision and performance of Collabrance and the GreatAmerica IT and Unified Communication Financing business units. Greg has consistently been recognized for his leadership in the IT channel. Most recently, he was named a ENX Difference Maker 2017. He was also honored by CRN in 2016-2018 as Channel Chief, and was named on the "100 People You Don't Know But Should" list in 2015. Greg has also served as Chair of the inaugural Managed Print Services Community of CompTIA, and has helped various advisory boards in the IT, Telephony and Office Equipment channels.