Increasing MSP Profit Margins with CentreStack and Triofox
MSP profit margins range from 8-18% from average to best in class.
As an MSP owner, you don’t need a Harvard business degree to
understand that profit margins are one of the key financial performance
indicators that will play a significant role in
determining the health and value of your business.
Unfortunately, the average MSP have been hovering around 8%
for quite some time. For example, Service Leadership published an article exploring how to accelerate MSP revenue growth. During the discussion, they examined the same set of MSPs across a 5-year period from 2012 to 2017. They found that there was a modest increase in revenue but margin growth essentially remained flat.
Source: Service Leadership Newsletter
And lest you think things have changed, the latest numbers
from Service Leadership highlight the same trend. Average MSP margins are still
8% while the best-in-class MSPs with the highest Operational Maturity Levels only
see margins approaching 18%.
Cross-Selling to Increase MSP Profit Margins and Revenue Growth
In this article, I'll briefly introduce three ways that MSPs can use Gladinet's products, CetnreStack and Triofox, to significantly increase revenue and margin growth.
Increasing margins with CentreStack
As a multi-tenant, service provider focused product, we
often see CentreStack getting used in two ways to enhance margins by reducing
server costs. In the first case, MSPs use CentreStack to create multi-tenant
file servers and in the second, they use it to reduce compute costs by reducing
the load on terminal servers in hosted application environments.
Reducing infrastructure and management costs with multi-tenant file servers
The core value provided in this example is the ability to
replace multiple file servers for multiple clients with a single, centralized
file server that provides the same functionality with lower infrastructure and
management costs.
In other words, CentreStack allows an MSP to merge multiple
file servers while maintaining separation and security in an easy-to-manage, multi-tenant environment. This can be really useful when servicing customers who can only complete partial migrations to the cloud or are forced to keep their data on-premises for a variety of reasons.
The financial dynamics for this use case can be quite interesting. Let’s say, for example, that you have a client that recently migrated to Office 365 and is hesitant to move all their file server data into SharePoint. Perhaps they were using a legacy application like AutoCAD or just have data sovereignty or control concerns.
If they keep a file server on-premises, they will typically pay an MSP $100 per user per month to manage it. Assuming that MSP is average, they’ll make $8 in profit per user. So, if the company has 10 users, they’ll need to pay $1,000 per month so the MSP can make $80 per month. But let’s say you set up a centralized file server in your data center. You can charge that same client $30 per user to make $25 of profit. So, for the same 10 users, they’re paying you $300 to make $250 per month. You saved them 70% while tripling your profits.
This is summarized in the table below.
|
Description |
Distributed
FS Management |
Centralized
FS Management |
|
Users |
10 |
10 |
|
Customer Cost
per User |
$100 |
$30 |
|
MSP
Profit per user |
$8 |
$25 |
|
Total
Customer Cost |
$1,000 |
$300 |
|
Monthly
MSP Profit |
$80 |
$250 |
But what about the costs of that
centralized server? Well, those costs basically approach zero as you add users
and disks to scale vertically to more and more tenants.
At the same time, you’re legitimately increasing customer value since they may feel more secure knowing that you’ve got greater control of their data, they no longer have to worry about a file server on-premises, maintaining VPN connections (to their office or anywhere else), or any other IT infrastructure headaches.
Reduce compute costs for hosted applications
to make it easy to run those non-essential workloads on the workstations instead of on the server. The key is providing a mapped drive that securely links the workstation with the hosted environment so it’s easy to use QuickBooks as a published application instead of from a fully hosted desktop. We’ve seen this approach cut compute costs by up to 70%.
Increasing margins with Triofox
One of the keys to accelerating the growth of any business
is to maximize the lifetime value (LTV) of your customers. This is particularly
true when customer acquisition and retention costs are high. The ideas presented
so far focus on doing that, but they are more focused on client relationships
that are governed by managed service agreements.
Triofox, on the other hand, offers a way to add a highly profitable stream
of recurring revenue by leveraging existing relationships with mid-market or
larger companies that have their own internal IT departments but may have a
more consultative, or project-based engagement with your MSP business.
Deals are typically 100-500 users at $144 per user per year and we’re offering 60% commission for the first year and 20% for each renewal year. So, let’s say you’ve got a $5M MSP business with a $500K profit per year. You can almost double your profits by selling 5000 seats of Triofox per year. That’s two 200-seat deals per month. Do that for three years and the residuals make it permanent.
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