It’s margins that matter – not volumes.
Several years ago, I wrote about the importance of identifying customers who cost an MSP money and those who drive profits. Today, that distinction matters more than ever. While many MSPs still focus on growing customer numbers, profitability matters far more than volume. Rising costs, tighter margins, and aging contracts make it critical to understand which customers support growth and which are holding it back.
Understanding customer profitability
The most valuable customers need minimal support. They manage their own additions, changes, and deletions (ACDs), pay invoices on time, and renew contracts without difficulty. Their resource usage stays within agreed limits, helping maintain healthy margins. Even when contract costs need to increase, a clear explanation of the reasons usually prevents major friction.
At the other end of the spectrum are unprofitable customers. They frequently contact support for routine issues, exceed expected resource usage, pay invoices late, challenge billing details, and require lengthy renewal negotiations. MSPs often overlook these soft costs when assessing customer profitability. Tracking and reviewing these factors regularly is essential.
Of course, customer profitability is not black and white. Most customers fall somewhere along a spectrum.
Knowing when to walk away
The first priority is identifying customers who have been unprofitable for a long time and are unlikely to improve. These may account for roughly 10 percent of the customer base. Difficult as it may be, declining to renew these contracts is often the right business decision. Continuing loss-making relationships only drains resources.
The next group includes customers who currently generate losses but could become profitable. This segment may represent around 30 percent of the customer base. Create reports that show overall usage and support demands. Account managers can use this data to explain excessive help desk use and highlight alternatives such as FAQs, online assistants, and user wikis. They can also encourage customers to use self-service portals for ACDs and identify opportunities to reduce resource consumption. These conversations create a stronger foundation for contract renewal discussions. Even so, MSPs should expect to lose some of these customers.
Improving margins across the middle
The middle of the curve contains customers who are neither highly profitable nor significantly loss-making. With careful management, MSPs can improve margins while retaining most of them.
Again, reporting is key. Account managers should work with customers to identify operational improvements. Greater use of automation, templated processes, and AI-driven support can reduce costs for both parties. The goal is to eliminate MSP toil, meaning repetitive, low-value work, without shifting the burden to the customer. Replacing outdated processes with more efficient approaches can improve outcomes for everyone involved.
Learning from your most profitable customers
That leaves the most profitable customers. MSPs should study what makes these relationships successful, document those practices, and apply them elsewhere.
Doing so requires the right tools. MSPs need visibility into the behaviors, processes, and efficiencies that drive profitability. Some customers may have streamlined workflows, reduced resource spikes, or adopted more effective operating models. When those practices are not proprietary, MSPs should adapt and reuse them across other accounts.
MSPs must recognize that using high-margin customers to subsidize unprofitable ones is not a business strategy. It is wasted money. It is better to have 100 highly profitable customers than 1,000 customers whose margins barely break even.
Photo: Prostock-studio / Shutterstock
This post originally appeared on Smarter MSP.