We’re almost halfway through the year. For a lot of MSP owners, that’s a sobering thought. It’s always weird for me as well. Once we get through the first part of June we’re 2/3 through our Peer Group meetings for the year.
January feels both like yesterday and 30 months ago. You had goals, maybe a budget, and hopefully some revenue targets you were quietly optimistic about. Now it’s May, and the question worth asking is simple: how are you actually doing?
I mean, how are you actually doing? Not happy path or the story you’re telling yourself. Really . . . how are you actually doing?
Start with gross margin
If you haven’t looked at your gross margin recently, now is the time. Pull your numbers for Q1 and what you have of Q2. Are your margins holding? Trending up? Quietly slipping while you’ve been heads-down doing the work? I’ve been doing a lot of reviews with MSPs in my Peer Groups over the past couple of weeks. This is a good time of year to do this review. Thankfully it’s still early enough to make an impact on your numbers before the end of the year.
For most MSPs, margin pressure shows up in one of two places: labor costs that have crept up without a corresponding rate increase, or a tool stack that’s grown faster than it should have. Neither is a crisis. Both are fixable. But you have to know what you’re dealing with.
One thing that could put you in crisis mode is losing clients. Losing clients hurts, especially when you lose a good client. Lost revenue can be painful and has a major impact on your gross margin.
A healthy service gross margin is typically in the 65% range. If you’re sitting below that, the second half of the year is a good time to close the gap before it becomes a year-end problem. The only way to move margin up is to increase revenue, decrease COGS, or both…
And while you’re at it, check your pricing
If you haven’t raised rates in the last 12-18 months, you’re already behind. Costs go up. Your rates should too. Mid-year is actually a decent time to start planning that conversation with clients, well before budgeting season hits. This is one of those things that can sneak up on you as you get closer to the end of the year.
If you are worried about losing clients when you raise your prices know that I’ve talked to dozens and dozens (probably well over 100 at this point) about raising prices. Very few clients ever leave over a modest price increase, so don’t let that hold you back. Check out this post about raising prices to learn more.
So, how is your year going?
Are you where you thought you’d be? If the answer is yes, great. Keep going. If the answer is no, the worst thing you can do is wait until December to figure out why.
Most MSPs struggle at least some with generating new leads. I’ve talked about this on and off for the history of my YouTube channel and this blog. I’m working on some more content to talk about this to help MSPs build up their lead generation muscle. You’ll see this content on both the YouTube Channel and here on the blog. One deliverable I’m working on is a lead generation plan that you call can use in your business. This will be ready by the end of June.
I’m also working on an update to my MSP Pricing video along with a calculator. This should be ready sometime in Q3. Since this content creation stuff is one of my side quests I need to prioritize these extra things I’m working on.
This is exactly the kind of thing we dig into in my peer groups. If you’re running an MSP in the $1-5M range and you’re doing it without a group of peers around you, you’re making it harder than it needs to be. Reply to this email and I’ll tell you more about how it works.
Either way, review your numbers. The second half of the year is yours to shape.
Recent Content
The past few weeks have been largely a return to my talking head style videos plus my Podcast with Natalie. Here’s some of the recent content:
- MSPs and the Shiny Tool Problem: Blog Post | YouTube
- The MSP Owner as a Bottleneck: Blog Post | YouTube
- The First 90 Days After Onboarding: Blog Post | YouTube
If you’re heading to Pax8 Beyond in June, I’ll be there as well. I’ll be speaking about Gross Margin and Shadow IT (AI) Tools in your client environments. I’d love to catch up with any of you that happen to be there. Reach out via LinkedIn or leave a comment here and we can find a time and place to chat.
Thanks for inviting me into your inbox.
Adam
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65% SGM is huge. Isn’t BIC 50% from SLI data?
You’re correct SLI is running about 50%. That said, as I’ve been looking at more and more people’s books I’m seeing a LOT of mixing of cloud revenue into the services revenue which drags the whole mess down. Combine that with many MSPs running their projects closer to break even than being a profit center and 65% is a target WAAAYYY out in the distance. There are a lot of things that can mess with Service Gross Margin, so I’m hoping to have folks think about their SGM and pay more attention to this vital statistic.
I also see plenty of $1-5M MSPs hit 65% and not break a sweat, so it’s achievable. Not easy, but certainly achievable. For nearly all MSPs, where SGM goes so does EBITDA. You will also find that I’m more pragmatic than some when it comes to financial performance. If you’re making deliberate decisions and actively managing your finances and your SGM target is 48% and you hit it? Cool. You should be proud. If you have no idea what’s happening in your books and you’re hitting 65%? You’ve got some work to do.