As the owner of an IT Solution Provider or Managed Service Provider (MSP) business, if I asked you who was your biggest client, you’d probably be able to tell me. Our thoughts immediately jump to the client who brings us the most revenue. They are our biggest client, right?

When I ran my own MSP business, I thought the same thing. But I learned that our biggest clients, in terms of size or revenue, are often not our biggest clients in terms of profitability.

Profitability vs. revenue

When I was an MSP owner, we, like many IT businesses I speak with today, had a client who accounted for a substantial portion of our revenue. We considered this client to be our “biggest” client. They took up the most time, and they brought in the largest amount of revenue when compared to other clients on our roster. However, as a business owner, I was beginning to learn that not all revenue is created equal.

Profitable revenue is more important than any other type of revenue. For example, if I sold $10 bills for $5 per bill, I could quickly build a million dollar business, right? But it wouldn’t be a profitable business.

Many MSPs that I know are treating their largest client in the same way. The client may bring a lot of revenue, but may not necessarily be profitable. So, how can we work out which clients are profitable?

Measure your time to work out your profits

If you measure the amount of time you spend with each of your clients, you can quickly ascertain their profitability. Most MSPs can record the time they spend working with a client through their Professional Services Automation (PSA) tool.

If you don’t currently use a PSA tool, then your Helpdesk ticketing tool should be able to give you a rough estimate of the time you are spending with each client (and you may find it useful to read my article on Professional Services Automation).

Once you’ve got an idea of the amount of time you spend servicing a specific client, then you can work out that client’s profitability. The results can be very surprising!

For instance, I recently asked a UK-based MSP to tell me who they thought their largest client was. They answered, as most of us would, in terms of the revenue one specific “big” client brought in. But when we looked at the time that MSP was spending servicing that large client, we quickly realised that they were actually taking a loss on the contract!

In fact, when we applied the same calculation to all of this MSP’s client base, we found that one of their “smallest” clients, in terms of revenue, was actually their most profitable client!

Why? Because that client, even though they weren’t a big-ticket revenue earner, was a very quiet, undemanding client. As a result, that contract was very profitable.

Understanding profitability

It seems inconceivable that any business owner wouldn’t realise they weren’t making money from a contract. But, as we’ve examined in my example of a UK-based MSP, we often equate big revenue with profitability. The two are not one and the same.

In the case of our UK-based MSP, I gave them advice that they needed to raise their prices with their largest client in order to become profitable. The client, who relied heavily on the MSP, accepted the price increase.

This particular MSP is now in the process of raising their prices with all of their other clients who are either not profitable, or not very profitable.

Conclusion

The goal of running your MSP business should be about ensuring your contracts are profitable. Some of your clients, albeit big in terms of revenue, may not necessarily be profitable.

The only way to work this out is to measure the time you spend servicing these clients, and then calculate the cost of supporting the client vs. the revenue they generate. Ensure you are keeping a close eye on the profitability of all of your clients, as the biggest client is not necessarily the most profitable!

Photo: Yulia Grigoryeva / Shutterstock

Richard Tubb

Posted by Richard Tubb

Richard Tubb is a blogger, speaker, and author from Newcastle-Upon-Tyne in the Northeast of England. He provides expert advice to help MSPs grow their IT business, and he has helped the owners of hundreds of MSPs to free up their time, concentrate on doing what is important, and make more money.

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