TLDR: You're working harder than ever, but your bank account doesn't seem to notice. That's not a revenue problem, it's a profitability problem. Here are ten reasons your MSP margins refuse to budge, and what to actually do about each one.
Here's the thing nobody warns you about when you start an MSP: you can have great revenue and still be broke. You can be busy every single day, techs slammed, phones ringing, tickets piling up, and still wonder why you're not making any real money.
Does any of this hit dangerously close to home?
If so, you're not alone. And more importantly, you're not stuck. Let's dig into the ten most common reasons MSP profitability flatlines, and how to fix each one before it bleeds you dry.
1. You're Carrying Unprofitable Clients (And You Know It)
We've all got them. The client who pays decent money but requires constant hand-holding. The one who treats every minor issue like a five-alarm fire. The "friend of a friend" you gave a discount to back in 2017 and never corrected.
Here's the brutal math: some clients cost you more to serve than they'll ever pay you. They drain your best technicians, dominate your ticket queue, and leave nothing but frustration in their wake.
The fix: Rank your clients by revenue, support hours, and complexity. Calculate actual profitability per client, not just what they pay, but what they cost. Then either reprice those contracts to reflect reality, or fire the client. Yes, really.
2. Your Tech Stack Is a Hot Mess
Software sprawl is a silent margin killer. You've got three tools that do overlapping things, two licenses you forgot you were paying for, and an RMM that doesn't talk to your PSA properly.
Every redundant tool costs you money. Every integration gap costs you time. And time, as we all know, is money: especially when it's your technicians' time.
The fix: Quarterly tech stack audits. Consolidate where you can. Ask yourself: Do we actually need this, or did we just get excited at a conference? (Not that we know anybody who did that.)
3. Your Pricing Model Is Stuck in 2018
Here's an uncomfortable truth: many MSPs haven't updated their pricing in years. The flat-rate agreement you wrote five years ago doesn't account for today's cybersecurity demands, cloud complexity, or inflation.
And scope creep? It's eating your lunch. Every "quick favor" and "while you're at it" chips away at your margin until there's nothing left.
The fix: Reevaluate your pricing models at least annually. Make sure flat-rate agreements actually make financial sense given current realities. Reinforce your SLAs: politely but firmly. Your target gross margin should be somewhere between 25% and 35%, depending on your overhead. If you're nowhere near that, your pricing is the problem.
4. You Have No Idea Where Your Money Actually Goes
A lot of MSP owners can tell you their monthly revenue off the top of their heads. Fewer can tell you their gross margin by service line. Even fewer know their profit per technician or per agreement type.
Without financial visibility, you're flying blind. You feel like you should be profitable, but you can't pinpoint why you're not.
The fix: Separate your revenue and costs into distinct buckets: product sales, technical services, professional services, and managed services. Build service-specific P&L statements. It's not glamorous work, but it's the only way to see where your money is actually going.
5. You Don't Know Which Services Are Actually Profitable
Big revenue doesn't always mean big profit. That shiny new offering you launched last year? It might be generating impressive top-line numbers while quietly hemorrhaging margin.
The fix: Run profitability analysis at the service level, not just the company level. Which service lines are your margin heroes? Which ones are dragging you down? Once you know, you can make targeted adjustments instead of blindly raising prices across the board and hoping for the best.
6. Your Sales Approach Is All Wrong
If you're leading with price, you've already lost. The moment a prospect starts comparing your hourly rate to the guy down the street, you're in a race to the basement: and nobody wins that race.
The fix: Lead with risk, not price. Talk about the cost of downtime. The nightmare of data loss. The compliance headaches that keep CFOs up at night. Sell business continuity and peace of mind, not "managed IT services." Position yourself as a strategic partner, not a commodity. (For more on escaping the commoditization trap, check out Differentiation vs. Commoditization.)
7. Your Team Is Drowning in Manual Tasks
How much of your technicians' time goes toward repetitive, automatable tasks? Password resets. Patch management. The same troubleshooting scripts run over and over again.
Every hour spent on work a machine could do is an hour not spent on high-value, revenue-generating work. That's a profitability leak you might not even notice: until you do the math.
The fix: Invest in automation. Build out scripting libraries. Leverage pre-built integrations. Free your team to do the strategic work that actually moves the needle. Your technicians will thank you, and so will your margins.
8. Your Service Offerings Are Too Narrow
If all you sell is break-fix and basic monitoring, you're leaving money on the table. Worse, you're vulnerable to competitors who offer more comprehensive solutions.
The fix: Expand into high-margin areas that align with client needs: cybersecurity, compliance, remote work solutions, cloud management. Bundle services strategically, and make sure at least one offering requires long-term commitment. Recurring revenue is the foundation of a sellable, scalable MSP.
9. You're Operating in a Vacuum
Here's a question: How do you know if your margins are good or bad? Compared to what?
Without industry benchmarks, you're guessing. Maybe your 18% gross margin is terrible: or maybe it's amazing for your market segment. You literally don't know.
The fix: Use industry benchmarking tools to compare your margins, pricing, and operational efficiency against best-in-class peers. The Service Leadership Index is one option. The point is to remove guesswork from your financial decisions. You need objective data, not gut feelings.
10. You Only Look at Financials When It's Too Late
If you're discovering profitability problems at year-end, you've already lost the game. By then, the damage is done. You can't course-correct a year that's already over.
The fix: Establish clear financial goals. Track key KPIs: gross margin by service line, percentage of recurring revenue, profit per client. Monitor monthly, not annually. Make sure your billing, PSA, and accounting systems are aligned so your financial data actually reflects operational reality.
And if you're stuck on the hamster wheel of reactive firefighting, it's time to step back and build systems that give you visibility before problems become crises.
The Bottom Line
Profitability problems rarely have a single cause. It's usually a combination: unprofitable clients and outdated pricing and poor visibility and scope creep. The good news? Each of these is fixable. The bad news? Nobody's going to fix them for you.
So here's my challenge: pick one item from this list. Just one. The one that made you wince a little when you read it. And start there.
What better day to start than today?
If you want help diagnosing where your MSP is leaking profit: and building a roadmap to fix it: that's exactly what we do at Encore Strategic. Sometimes an outside perspective is all it takes to see what's been hiding in plain sight.