Most owners never stop to measure the profitability by client for their entire business. Even when they do, it is usually narrowly defined by time and materials for the client. A broader context is needed than just tracking employee time vs. revenue and the cost of some of your clients will be better served by expanding your view of their cost to your company.
True profitability depends on understanding both the value each client brings and the cost of serving them. Ticket volume, difficulty, and complexity matter only when you capture all technician time, including emails and other exchanges that never become tickets. The analysis should also account for the effort required to support and work with each client, not just the tasks completed.
Two clients can generate the same monthly revenue and look similar on the P&L. Same revenue, similar cost of goods sold and similar number of seats and tech stack. And yet one of them can be drastically more profitable than the other because the true cost of delivering service is more than seats, hardware, and software. It includes the motivation and dedication your team brings to serving a difficult client. One client creates constant tickets and pushes scope at every turn. The other has a great attitude, easy and a pleasure to work with. Your PSA won’t show you that difference. It just shows you time and tickets.
Set and Forget, the Pricing Trap of Many MSPs
Most MSPs grow client by client. Each one gets priced individually at signing, based on whatever pricing model was in place at the time. There’s rarely a process to revisit that client later based on how their behavior. Much like the software costs mentioned in the prior post, once the client is onboarded, there usually isn’t a system in place to evaluate the more intangible parts of serving a client. Those things may be intangible in how you capture them, but they are very tangible in how they affect your team’s productivity and, in turn, your profitability.
Grade Your Clients to Understand the Full Cost of Serving Them
Grading your clients allows you to see a more complete picture of your clients, tangible and intangible, to further assess the cost of delivering your service. Since most businesses are not forced to sit and evaluate clients, this does not happen. If nobody asks your team for feedback on a regular basis, the company continues moving forward despite the friction certain clients create.
A grading system typically looks like a letter framework, “A”, “B”, “C”, “D”, “F”, the same as you would see in school. The factors should include the obvious quantitative measures: profitability, ticket volume, size, and complexity. But they should also include standardization. Does the client use your tech stack? Are they compliant with it? Do they pay on time, or do you wait 90 days to receive a check? Are they well connected in the community you want to serve, and do they refer business to you?
Then there’s the harder stuff to quantify. Do they respond to emails in ALL CAPS? Do they insult or curse at your team? Do they throw fits? While tantrums are intangible, your team doesn’t want to work with someone who behaves that way, and saying ‘yes’ to that client is saying ‘no’ to a better one.
A grading system is about creating visibility, not punishment. It gives you, the leader, insight into things you may never see, because people treat the owner differently than they treat the team.
Existing Clients Compound Over Time
There’s a real compounding effect here. A “C” or “D” client can offset the margin gains you’re getting from your best “A” clients. Your “A” clients, the ones who do what you ask, keep a good attitude, and refer you business, are fantastic. But a few difficult clients in the “D” range can undermine the culture you’re building. Your top line looks healthy while your blended margin is quietly eroding underneath it, one hard-to-serve client at a time.
Hard-to-serve clients are a drain on your team requiring more effort, initiative and humility to serve than “A” clients. This leads to expensive staff turnover and subsequent inefficient management of the service desk. These costs are hidden by reviewing the financial statements alone.
Referrals tend to follow the same pattern as the old saying “birds of a feather flock together”; your existing clients will bring you more of their kind. Managing that pattern well pays off over time, as it steadily brings the right clients into your company.
Use the Grades to Add Color to the Profitability by Client Report
Once you have a framework, the action becomes clear. “A” grades get protected and prioritized. “B” grades get monitored. “C” and “D” grades get standardized, repriced, or planned for exit. This isn’t a one-time exercise. Grades shift over time, so this should be revisited on a recurring basis, ideally annually.
Start with four to six factors that matter most to your culture. Go through your entire client base against them. Your CRM will have a record of the conversations you’ve had directly, but you might be surprised how a client treats your team. Pull in what your team says. Look at profitability based on tickets, time, and the software required to serve them. Then assign a grade.
Then comes the hardest part: create a plan for the targeted client and follow through with what you say you are going to do. If you have asked your team for their input, you can guarantee that they are watching this. This is a test of your leadership, and it will be noted, so make this a priority.
Knowing Your Clients Thoroughly is a Way to Assess Profitability
Grading isn’t just about profitability on paper. It’s about whether a client is contributing to your culture or detracting from it. If they’re detracting, there should be a cost attached to that, because there’s a true cost for your team to serve them. Call it battle pay if you want. Great clients should get better treatment, and difficult clients should pay more for the extra energy and turnover risk they create. The cost to serve these clients will show up in your gross margin but it requires more work than just the looking at time and tickets.
Your team doesn’t want to deal with difficult clients any more than you do, and they will pay for it in time and mental energy either way. Creating a grading system gives you a way to see that cost clearly and price for it accordingly.