Myth: Small clients aren’t profitable

The other day I was reviewing a buyer’s proposal for a client and one of things in the proposal that jumped out at me was the disparaging comments about the smaller companies, generally defined as 10 or fewer users, on their client list. Somehow, in our industry, the idea that small clients are bad for business has become a standard thought. It was probably first said on some stage somewhere by some “expert” who was speaking in generalizations. I hear a lot of rumors about small clients. Small clients can’t afford MSP services. Small clients won’t pay your rate. And worst of all small clients aren’t profitable. I’m here to say, that all of it is a terrible misguided myth.

According to NAICS, there were 17,677,325 businesses in the USA in February 2021. Of those, 14,323,411 had less than 10 employees. That’s 81%. Sure, there are many businesses that won’t be a good fit for MSPs like stand-up comedians, magicians, self-employed sign spinners, shade tree mechanics and the like. But there are a lot of legit businesses in this 81% that are excellent candidates for MSP services. Taking advice that says to throw out 81% of the market is business folly.

1 – 4 employees12,493,536
5 – 9 employees1,829,875
Number of businesses by employment

In my own MSP, about 50% of the clients have less than 10 computer users and they are not only my favorite type of client, but they are profitable. Let’s examine small corporations and why they can be profitable clients too.

The best small client types

It is certainly true that not all small businesses rise over the bar of being great clients but the same can be said of larger businesses too. While it’s common for MSPs to focus on certain industries, like healthcare, legal and financial, there are many industries where partnering with an MSP makes a great deal of sense. I don’t find that its useful to try to generalize them into industry groups, rather what I look at when interviewing a potential new client is an expression of great dependency on their computer systems.

During the interview process I’m listening for what applications they use, indications of regulatory and data privacy concerns, and occurrence of deadlines. I’m also interested in the current state of the users’ computers – are they old, are they cheap, are they expensive, are they new, are they running the professional version of Windows? I’m also interested in why they have sought out an IT firm to work with and if they’ve have a previous relationship with an MSP and how that went. Notice that I’m referring to this as an interview. Because it is! We are each interviewing the other to see if we’re going to be a good fit. What is usually referred to as a sales call, really is an interview. I’m not there to sell anything other than the idea that we’re going to be able to work together well.

If the potential small client says that they have deadlines to meet and need computers that are always working, then I know that they will pay for quality equipment. If they say that they work for clients with sensitive data and sometimes have to meet certain security and privacy standards, then I know they will appreciate our attention to security. If they mention that they deal with confidential data, then I know that they will appreciate our approach to educating our clients on modern work. If they’ve had a previous MSP relationship, then I know that they have paid regularly for services, and I want to know why it didn’t work out.

Often these clients are small consulting firms themselves. They could be in any industry. They are accounting, financial services, engineering, business consulting, staffing, construction, transportation, application development, logistics, plumbing, heating and cooling, electricians, excavation, landscaping, civil engineering, prototyping, interior design, fashion, marketing or architecture firms to name a few. The important point is that they are profitable professional firms just like us.

Profit per client

There are two misleading ways in which measuring whether a client relationship is valuable to your firm or not can be done. The most common way to be convinced that small clients aren’t valuable to you is to conflate revenue with profit. Small firms will obviously not generate as much revenue for your firm as a large one will. 8 people paying your per seat fee will have a smaller total bill than 50 people paying your per seat fee. Revenues are not profit. You can go broke while taking in millions in revenue if those millions don’t cover your expenses. You can also become rich by having a smaller total revenue if your clients are highly profitable. This is why the chart of accounts in your accounting program should be able to show you profit per client. If yours doesn’t then I suggest rearranging them so that it does.

The second way to devalue your small clients is to not compare relative profitability per client. Once you are looking at profit per client you then need to take the next step and look at relative profitability. Obviously, a larger client will generate more profit than a small one, but not necessarily if you look at the profit for the effort that you’ve had to put in to get it. This number above all lets you know just how profitable a client is to your business.

A third consideration is timeliness. If a small client is profitable and they pay on time and a larger client is profitable, but they pay slowly, then they are actually less profitable to you then they may seem. The timeliness of money is important to the stability of your business. My experience is that quality small business clients are more likely to pay in a timely manner than a larger client. In a larger client you can be an abstract thought to the accounting department rather than a critical player in the health of the business. This is because each person and each relationship in a small business takes on an outsized role.

Labor advantage of small clients

If you haven’t included labor in your profit per client calculations above, then it’s time to do so. Small clients can take up less labor time than large ones. They tend to be less complex. Less complexity means a more stable network. Our goal for labor is 80% efficiency and $300,000 revenue generation per technical position. This is a lofty goal to which we have to constantly strive to achieve.

To approach this goal means operating efficiently in our project add-ons. In my practice, we do a lot of projects in addition to our regular retained services. These projects have no hardware or software component, so they add to the efficient use of our labor time and the fully expressed value of that labor. We often find that we can develop something once and then deploy it several more times often from larger to a smaller client.

Doing the math

Taken together, the percentage profit and the labor efficiency gain for small clients can often push them over the profitability of a larger client. Small clients should not be turned away. The sheer number that you can add to your business increases stability of income, especially during bad times. The more clients you have the less the likelihood that the loss of one will impact your business. If your IT practice is divided among small and larger businesses spread across a variety of industries, you’ll have the most stability in income and profit. I haven’t turned away small clients and I never will.

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