Managed Service Providers (MSPs), and Cloud Service Providers (CSPs) are enjoying increased growth and demand in the post-cloud era. But billing and tracking finances in the cloud can be hard and take a long time, which can lead to differences in finances and a lack of knowledge about how much a service really costs. This is where FinOps comes into play. FinOps, which stands for “Financial Operations,” is an approach to managing and optimising cloud spending that is based on data and combines financial, operational, and technical disciplines. It involves constantly monitoring, analysing, and changing how cloud resources are allocated and used, using automation, cost allocation tags, and performance metrics to find ways to cut costs while keeping performance and scalability. FinOps helps organisations get better cost visibility, accountability, and control in their cloud environments by building a culture of shared responsibility and cross-functional collaboration. MSPs and CSPs that use FinOps principles report a significant reduction in cloud costs, leading to increased profit margins.
This article provides MSPs and CSPs with a series of best practices focused on improving profit margins. We cover topics such as pricing models, automation, high-margin services, the “land and expand” strategy, vendor partnerships, and multi-function automation tools. We also talk about the benefits of automating common service workflows, like provisioning and configuration, which can save up to 80% of the work needed for a task.
Summary of best practices for improving MSP profit margins
By using the below methods, MSPs and CSPs can increase their profits and build long-term, successful businesses in a competitive market.
Implement scalable pricing models.
Offering fixed-price contracts can lead to over or undercharging. Use pricing models that change based on usage.
Focus on high-margin services.
Put more effort into services with a higher margin.
Utilize the ‘land and expand’ strategy.
Get a new customer by doing something small for them at first, and then offer them more services to grow the relationship.
Lean on your partner programs.
Apply for deals and funding opportunities with your cloud providers to enjoy lower rates and other rewards.
Resell cloud tooling as an additional income stream.
Create a marketplace and resell tools from multiple vendors through it. Many vendors offer bulk licenses at wholesale cost to MSPs for onselling.
Become a cloud reseller instead of buying from other resellers.
Avoid a reseller hierarchy that makes it harder to control margins by becoming cloud resellers instead of purchasing cloud services from another reseller.
Leverage programs such as reserved instances and savings plans to retain even more margin
Cloud providers offer discount programs based on varying levels of time commitments that produce savings MSPs can share with their clients for a win-win outcome.
Partner with multi-function, multi-cloud automation vendors.
Partner with multi-function, multi-cloud automation vendors to standardize workflows across clients and platforms.
Automate billing and invoicing processes.
Use tools to automate billing and invoicing to reduce mistakes, speed up payment schedules and improve cash flow.
Fundamental concepts about MSP profit margins
Before diving into the best practices, let’s quickly review some essentials around profit margins. When figuring out how profitable an IT MSP is, keeping an eye on three primary margins; the gross margin, the EBITDA margin, and the net margin is essential.
Three profit margins
- Gross margin is the amount left over after deducting the cost of goods sold (COGS) from the total revenue.
- EBITDA margin stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. It shows a business’s profitability before considering costs unrelated to operations.
- Net margin is the amount left over after deducting all expenses, including taxes, interest, and depreciation.
By monitoring all three margins, MSPs can ensure that they remain profitable.
Cost of Goods Sold
The cost of goods sold typically includes the following:
- Virtual hardware and software costs
- Third-party licensing fees
- Wages for technicians directly involved in service delivery.
For MSPs, the COGS can be tricky to calculate, and it’s essential to consult an accountant to ensure it’s done correctly.
Optimum profit margins
According to MSP360, typical gross margins for MSPs range from 8–18%. However, it’s important to remember that this percentage doesn’t consider the direct costs associated with capturing that revenue. For example, gross margin calculations typically include labor, marketing, and hardware purchases. MSPs should be aware of these costs and include them in their prices to keep healthy profit margins.
MSP profit margin best practices
Next, let’s look at eight innovative best practices to lower COGS and boost profitability!
“The features and support CloudBolt provides will allow my team to spend more time focusing on the delivery of quality customer outcomes.”
#1 Implement scalable pricing models
Offering fixed-price contracts or pricing based on a client’s specific needs can lead to over or undercharging for services. Instead, MSPs can use
- Pricing models that change based on how much a client uses.
- Flexible pricing tiers based on the level of support, the availability of services, and other factors.
For example, charging based on the number of virtual machines or the amount of data stored in a cloud environment is a more scalable and fair way to price services than fixed-price contracts.
Flexible contracts increase the perceived value for clients and reward them for loyalty. Your customers feel supported knowing you have their back when they are new and can grow with them as they scale.
Example pricing models:
- Clients only pay for the resources they actually use, making it a fair and transparent pricing model.
- Easier for clients to understand and budget for, as they can track their usage and costs in real-time.
- Can attract clients who prefer not to commit to long-term contracts or have variable workloads.
- Revenue may be less predictable for MSPs/CSPs, as it depends on the clients’ fluctuating usage patterns.
- May require more sophisticated billing and tracking systems to accurately calculate usage-based charges.
- Simplifies billing and allows clients to select the tier that best matches their needs and budget.
- Provides more predictable revenue for MSPs/CSPs, as clients commit to a specific tier with a set cost.
- Can encourage clients to upgrade to higher tiers to access more features or better support.
- Some clients may feel they are paying for features or resources they don’t need in a specific tier.
- Tiers may need to be updated frequently to stay competitive and aligned with the market.
- Combines the benefits of both pay-as-you-go and tiered pricing, offering both predictability and flexibility.
- Allows MSPs/CSPs to charge a fixed fee for basic services while still offering additional usage-based services to generate more revenue.
- Can cater to a wide range of client needs and preferences.
- May be more complicated to implement and manage, as it involves both fixed and variable pricing components.
- Clients may require more guidance to understand the pricing structure and choose the
#2 Focus on high-margin services
MSPs can determine which services have the highest margins and focus on becoming experts in these areas. For instance, the profit margins for cloud migration and management services are often higher than those for basic cloud infrastructure or helpdesk support. MSPs can also change their pricing strategy to reflect the value of high-margin services and increase clarity around MSP positioning in the market.
#3 Utilize the ‘land and expand’ strategy
The “Land and Expand” strategy involves landing a new customer with a small initial engagement and then expanding the relationship over time. MSPs can offer customers a small pilot project or trial of their services to show their value and then upsell as customer requirements change. The land and expand strategy helps MSPs
- Increase customer trust and establish credibility.
- Obtain more referrals and positive reviews faster.
- Maintain long-term customer relationships.
- Increase revenue over time.
Learn more about the growing complexity and the widening skills gap causing this dissatisfaction.
#4 Lean on your partner programs
Cloud providers like AWS, GCP, and Azure all have partner programs that give MSPs resources like
- Co-funding for pre-sales activities
- Payments for assessment
- Additional sales reps to sit in on deals
- Discounts for bulk purchases
- Visibility and marketing support
- Bonuses and loyalty rewards
- Premium customer support
MSPs can use these programs to cut costs, boost sales, and improve their cloud services. For example, Microsoft’s Partner Earned Credits is a reward system designed to incentivize and reward the efforts of partners in driving the adoption of Microsoft cloud services such as Azure, Dynamics 365, and Microsoft 365.
#5 Resell cloud tooling as an additional income stream
MSPs can create a marketplace and re-sell tools from multiple vendors. MSP profit margins increase because they can:
- Expand the range of services and solutions with minimal effort
- Reach a new customer base that wants additional support with big brand tools.
- Increase per-customer revenue as customers choose more offerings
- Bring customers better prices and customer service than what they are likely to get from the big brands.
For example, CloudBolt’s Rainmaker Partner Program offers partners a discount on licenses that can be sold to end customers, helping MSPs increase revenue and profitability.
#6 Become a cloud services reseller instead of buying from other resellers
MSPs can enjoy more control over pricing and service delivery when they resell AWS, Azure, or Google’s cloud services directly. They can own the end-to-end customer experience, from billing and support to pricing and service delivery. The approach also helps MSPs build stronger relationships with customers, who appreciate the convenience of a one-stop shop for their cloud services.
#7 Leverage programs such as reserved instances and savings plans to retain even more margin
MSPs and CSPs can also keep more of their margin by taking advantage of programs like reserved instances and spot instances. Cloud providers like AWS, GCP, and Azure offer these programs to allow customers to commit to using specific amounts of resources in exchange for discounted rates. By taking advantage of these programs, MSPs and CSPs can save on their cloud costs and retain more margin, which can be used to invest in other areas of their business.
Cloud financial management tools like CloudBolt offer specialized features that help MSPs and CSPs manage their cloud resources. For example, CloudBolt’s AWS Reserved Instance report allows users to view, purchase, and apply reserved instances at scale, reducing cloud costs and increasing profitability. CloudBolt’s platform also enables margin distribution across clients and portfolios, giving MSPs and CSPs the flexibility to choose how much of the savings to keep and share with their clients.
For example, if an MSP reserves 10,000 compute hours and receives a discount, they can leverage CloudBolt’s report to subjectively distribute the savings across their client accounts while keeping some of the savings resulting in a win-win arrangement. This way, MSPs can retain more margin while offering their clients competitive prices and better value.
#8 Partner with multi-function, multi-cloud automation vendors
Partner with companies that offer multi-function, multi-cloud automation to automate common workflows and standardize processes across clients and platforms. Labor-intensive processes such as provisioning computing resources, removing unused services, and creating cost allocation reports can be automated, resulting in the need for fewer employees over time. CloudBolt’s platform lets MSPs provide infrastructure and application services faster and more affordably. MSPs can reduce the required manual labor, reducing expenses and improving margins.
#9 Automate billing and invoicing processes
While not impacting profit margins directly, billing automation speeds up the invoicing process. MSPs can shorten the time between billing and payment to improve their cash flow while minimizing administrative overheads. MSPs can also cut accounting and admin-related costs to some extent.
For example, CloudBolt’s billing engine processes large datasets used in cloud cost reporting quickly and accurately, so MSPs can bill with confidence and speed every time. CloudBolt’s platform works with major cloud reseller’s programs, such as direct and indirect Azure CSP, AWS Direct SPP, and Google’s Partner Advantage program. By automating the billing and reporting process, MSPs can reduce mistakes and streamline payment processing.
MSPs can grow their businesses, increase profits and improve customer satisfaction by following our MSP profit margin best practices. Prioritizing high-profit services, partner programs, cloud services resale, and automation tools can positively impact profit margins. Automating billing and invoicing saves time and cuts down on mistakes. MSPs must use profit margin best practices to stay competitive in an industry that changes quickly!