Reviewing our client base and the time it takes to service an all you can eat contract is something we do regularly. We look at support effort over a period of months, usually 12 – 24 to get a good picture of where our team spends it’s time.

The reality is that the 80/20 rule applies to a managed services business the same as any other business, 20% of your clients will generally make up 80% of your revenue.

This is not necessarily a bad thing but more something for you to be aware of. In our business we have consciously stayed away from clients that would end up making up a large percent of our revenue so things are a bit more balanced but ultimately we have to make tough choices about where our team spends time.

An easy example would be if you have a $6000 / month client that averages 95 hours per month working with your team. You are losing money and with these numbers probably going to go out of business if the trend continues across your client base. Even though this is an easy example to understand it is difficult to fix the problem.

A $6000 contract is a good revenue contract by any standards so do you really want to go to the client and increase their prices? Do you really want to risk the client looking to someone else for service? Well most providers say no but I would argue heck yeah you want to do these things.

If you do not talk to the business owner / decision maker and help them understand that your business needs to make money in order to be there to provide them service in the future then you are missing the boat and bound to have crummy gross margins.

One exercise you should be going through with your client base currently is to determine the low gross margin (GM) high dollar value clients and moving them to high GM and high dollar value or moving them out of your organization.

It is a tough conversation to have and even tougher the first time a high revenue low GM client transitions from your services because of this conversation but it will keep your business much healthier in these though economic times.

Josh

I was talking to a new MSP yesterday about how they should structure their service plans, when a saying from Kent Erickson at Pointivity in San Diego rang in my head:

“It’s all about risk management, Mike.”

Sometimes a few words can turn on a light bulb in your head and make things so clear.  Kent’s phrase was one of those times for me.

The business of managed services is about risk management.  You are assuming a level of risk on behalf of your client, relieving them from some of the headaches and unknowns of technology.  In return, you are getting paid.

It’s all quite simple, but easy to forget in the course of your daily business operations.  I have a simple formula that can  help you put this simple insight to work at your managed services practice every day:

More Risk = More Compensation, Less risk = Less Compensation.

Pretty simple, right?  But totally powerful as well.

In all dealings with your clients, and in all cases where you are designing and pricing new services for  your business, keep this formula in mind while you evaluate the decisions you are making.

Would adding this feature to your service offering increase the risk you are assuming?  Then it must increase the compensation you will receive as well?

And if your client wants a lower price from you, what are they willing to take out of your service equation to lower the risk that you are managing?

Keep this formula in mind at all times and I guarantee you will see increased margins in your business over time.

Thanks Kent!

MRC

We discuss this and other topics in our membership site for MSP executives, MSPCoach.com.

Mike Schultz of Wellesley Hills Group, a leading provider of sales and marketing strategy services for professional services firms, provides some good advice on how to handle clients when price haggling occurs. Read his article here.

I’m surprised at how many salespeople don’t have at least 1/2 a dozen good responses ready to go automatically for when these situations occur. This is the difference between selling at high gross margins or selling at margins barely high enough to keep food on the table.

One of the best books on the subject is:

It gives great advice on everything surrounding the psychology of the price/value relationships and how to make sure your business is getting the highest margins for your product or service offerings.

MRC

This post could just as easily have been titled Arnie Bellini of Connectwise is right: Most IT service providers SUCK at business!

I don’t mean to come across as a jerk, but it is so frustrating to find verified proof that our industry is constantly shooting itself in the foot with aggressive competitive discounting of service prices.

A just-released pricing benchmarking report from RainToday.com, a publisher of sales and marketing strategies for professional services firms, shows that of all of the professions they studied, IT service providers were:

1. Most likely to feel presssure to compete on prices due to aggressive pricing and tactics from competition
2. Most likely to feel pressure to compete on prices from prospects and clients (gee…I wonder why, given point #1 above!)
3. Most likely to discount, with the average discount being 11.7% of fees

11.7%?!  Most companies don’t even make a profit of 11.7%!

What’s the solution?  Start treating what you do as a profession of value, and not as a commoditized trade.  Start having confidence.  Take some courses in how to sell value instead of price.  Get some guts and work on some creative and firm responses to prospects that ask for discounts.

Whatever you do, get it through your head that if you continue discounting your prices, you are in the a race to the bottom of the field and an unprofitable business.

MRC