Inflation and Your Margins

Inflation is here.

And it matters if you run an MSP or manage a budget for a team.

Your costs are going up. From that new home you wanted to your dinner table to your team's wages.

Get this: since January, the average price increase on Amazon is 25%!!

Maybe it's comforting to listen to the "transitory" message from the financial wizards at the Federal Reserve. But let's be honest, we don't live in that fairy tale.

Economists expect 2022 to experience the highest wage growth since 2008.

Oh also, those Federal Reserve bankers aren't exactly looking out for you.

Ok, so even if they can play that transitory fiddle and happily cash in on (maybe, kind of) insider trading, you've got a business to run and a team to manage. And a P&L to protect!

Your Margin Matters

All of this inflation drives higher costs - from your software license costs to your employees.

Higher costs (without immediate price increases) lead to compressed margins.

According to Service Leadership, the typical MSP generates about 8-9% EBITDA margins. That EBITDA is the funny made-up acronym we use to represent Earnings Before Interest, Taxes, Depreciation and Amortization. As Buffett says, you can't spend EBITDA. But it's still valid for comparison.

"There have been a variety of inflationary pressures that we and others are seeing from labor costs to freight costs..."
Costco's CFO - Earnings Call

This means that, for every $100 of revenue, you're keeping $9 of EBITDA. To arrive at your actual net cash, you take out any interest costs and pay your taxes. At this point, you start to realize there isn't much room to absorb cost increases from your vendors or increase your team's wages.

In an inflationary world, your margin slips away quickly.

So you better come up with some solutions.

What are the solutions?

If your costs are rising, you have a few levers to pull:

• Raise your prices
• Reduce services
• Automate

Let's take these in step.

Raising Prices
Nearly every MSP hates this process - going back to clients to justify price increases when they already bug you about cutting their IT bill. This is hard. And just as importantly, it takes time.

Reducing Services
This is akin to the "shrinkflation" we're seeing at the grocery store. We hate it when it happens to us at the grocery store. And your clients hate it when it happens to them. This is essentially not an option.

Automate
This is the king of margin expansion. You don't have to go back and ask clients for more money. And you don't skimp on any services. But you do have to choose vendors well. And you do have to ensure any automation aligns with your offering.

This last point is exactly why INFIMA's Security Awareness Training is fully automated.

This automation saves you hours each month in tech time. You get to avoid the onboarding headaches and pesky service tickets when users don't get their training and phishing emails.

Automation for the win! 🏆

If you're an MSP and want to learn more, go check out how we Partner with you here. If you like what you see, book a time to chat!

Photo by Jp Valery on Unsplash