Worldview

How To Improve Partner Profitability in 5 Steps

Why settle for 5 percent profitability when 30 percent is (relatively) doable? Here's how to get there.

• By Per Werngren
• May 15, 2017

Way too many Microsoft partners accept low profitability. Thinking that 5 percent is decent is fooling yourself and your employees as it does not build a sustainable business.

That low profitability worldview is indeed global. I have met a lot of partners from all around the world with poor bottom-line profits. But we also know that there are many partners that are great role models for doing the opposite.

An achievable target for bottom-line, pre-tax profits for a lot of managed services providers (MSPs) is about 30 percent. Here are five tweaks to help get there:

1. Look at your practice areas. Gather your leadership team and try to view your business through your customers' eyes. Where can you offer extraordinary performance, decent margins and double-digit growth year-over-year? This is where you should focus your business. It will be hard and emotional, but you also need to consider dropping practices with less potential.

2. Focus on growth with low marginal costs. That means that when you add more revenue, a very large portion is pure profit. Think about an airline business -- if it sells one more seat on a flight, the airline will likely get a contribution of 99 percent to its bottom line, as we all know that peanuts and soft drinks are its only direct cost. When you do it right, you'll be able to increase revenue without necessarily increasing your cost.

3. Concentrate on the cost of customer acquisition. For many partners -- though not all -- you can find a way to lean less on highly paid sales people and focus more on digital marketing. In the modern world, marketing and sales are more integrated than ever before. That means that your customers will conduct a large portion of their buying process by reading on the Web. Let's make sure they're learning from your Web site and not from someone else's.

Being a thought leader and sharing knowledge is great for attracting traffic. You'll need to assign people to do digital marketing, and you'll most likely also need a marketing automation system. Don't be shy about spending time and money on this area as it will pay off. Also, don't outsource everything as this will be core to your company, and your own marketing people need to take ownership of digital marketing.

4. Build recurring revenue. Instead of constantly having to sell new projects, you should deliver a service that customers subscribe to and pay for monthly. Recurring revenue gives you a base of subscribers that will constantly increase in value if your service is relevant to your customers. It also gives you an opportunity to sell more services to existing customers. Recurring revenue is the holy grail, and investors will pay a premium for a company that develops it.

5. Raise your prices. Don't get stuck holding your prices constant year after year. One of the first steps that venture capitalists take with companies they buy is to try to raise prices -- it does wonders for the bottom line. To avoid having a conversation every year with your customers about raising prices, write it into your contracts that prices are adjusted on an annual basis based on an official index (I like the labor cost index better than the consumer price index). The increase every year will be modest, but after five years or so, the adjustments make a difference to the bottom line.