Cloud profitability is one of the most challenging topics for Managed Service Providers (MSPs) in today’s technological landscape.
Most companies are still struggling to optimize their cloud spend while simultaneously investing heavily to modernize their legacy systems and resolve long-standing inefficiencies caused by outdated software, systems, and applications.
After making significant efforts (and investments) to fully or partially migrate their workloads to the cloud, many organizations have quickly realized that the cloud is not the promised land their MSPs promoted. They’ve discovered that keeping costs under control requires considerable team resources and ongoing effort to maintain cloud optimization at a reasonable level.
In this article, we will shed light on how to help organizations increase their visibility into cloud profitability.
Why cloud profitability is becoming harder to sustain for MSPs
These cloud cost optimization exercises place significant pressure on organizational finances, from FinOps teams and projects to legacy application refactoring. This has already prompted some C-level executives to question cloud profitability, and we’re hearing stories of companies successfully repatriating workloads from the cloud.
Additionally, it’s becoming increasingly difficult to stay current with all the licensing, billing, and pricing changes from cloud providers, who are steadily raising prices using various strategic approaches.
In this environment, the struggle for MSPs is more real than ever. They must fight to create genuine value for their customers rather than becoming just another commodity MSP in an overcrowded market.
The shift from billing volume to value-based profitability metrics
A few years ago, MSPs based their profitability on volumes:
- Volume-driven profit: Cloud consumption drove revenue—the bigger the consumption, the better the margins. Higher volumes meant higher revenue.
- CSP incentives aligned with volume: Cloud migration programs (such as Microsoft’s former Azure Migration Programs) were volume-based. As a CSP client, you could access Microsoft funding for migration projects by committing to substantial cloud migration investments.
- Consumption-based discounts: Higher consumption levels unlocked better discounts, creating incentives for CSP clients to increase spending.
Today’s reality is starkly different, and any technologist can see that this approach is no longer viable:
- Tighter margins: Recent CSP pricing changes, reduced margins, and Microsoft’s New Commerce Experience (NCE) have made MSP profitability more challenging than ever.
- Sophisticated client demands: Clients now demand advanced FinOps maturity and cost visibility, often exposing inefficiencies created by the MSPs themselves.
- Increased competition: More competitors in the market force MSPs to adjust their pricing in an increasingly difficult landscape.
- AI-powered automation: Automated cost optimization tools using Generative AI are eroding traditional engineering FinOps teams and services that MSPs previously provided, offering capabilities at lower costs than manual services.
- Need for strategic transformation: The current landscape requires MSPs to change their approach and develop new methods of providing value to customers. Crucially, this value must be measurable through objective metrics.
The changing profit equation for MSPs
As previously explained, MSPs can no longer rely on cloud consumption volume for profits. Today, success depends on delivering measurable value, automating operations, and aligning services with client outcomes. Without this transformation, clients won’t view an MSP as their trusted advisor for managing cloud environments.
Efficiency and innovation have become essential for maintaining margins and ensuring business sustainability.
The impact of Azure pricing, CSP model changes, and client cost expectations
Client expectations regarding cloud costs are straightforward: they want lower prices. While you might argue that FinOps isn’t solely about savings or that cloud isn’t always cheaper than on-premises solutions, clients may not be receptive to these explanations.
Beyond cost reduction, clients expect full cost transparency, proactive (not reactive) optimization, and flexible services that can scale up and down as needed. Organizations that adapt quickly—by embracing automation, improving cost visibility, and aligning services with client outcomes—will be best positioned to thrive in this new landscape.
Microsoft’s recent changes to Azure pricing and the CSP program are fundamentally reshaping how MSPs operate and compete. Starting November 2025, volume-based discounts for Enterprise Agreements will be eliminated, meaning all customers will pay the same standard list price for online services. This change will result in cost increases—often 6–15%—for many organizations, particularly larger ones that previously benefited from tiered discounts. Consequently, MSPs must be more proactive in helping clients optimize their licensing and cloud usage to control costs.
Simultaneously, Microsoft is raising requirements for direct CSP partners, demanding higher revenue thresholds, advanced support plans, and stricter security standards. Many smaller MSPs will need to partner with larger distributors or shift to indirect models, potentially impacting margins and customer relationships.
It should now be clear that MSPs need a strategic transformation. To navigate these challenging waters, we propose several profitability KPIs to simplify this complex process while providing clients with measurable ways to demonstrate the value you bring as their MSP.
The metrics that define profitability
This set of metrics provides an excellent starting point for measuring profitability. In each section, we define the proposed metric and explain how to properly track and measure it.
Gross margin per managed account – profitability baseline metric
Gross margin per managed account shows the profitability of each client account, helping MSPs focus on their most valuable relationships.
Subtract the direct costs of delivering services (including cloud costs, support, and licensing) from the revenue generated by each account. Divide by the revenue to calculate the gross margin percentage for each managed account.
Gross margin per Account
Gross Margin % = (Account Revenue - Direct Costs) / Account Revenue × 100
Azure cost per customer / tenant – cost transparency driver
While this may seem like a simple metric to obtain, it’s often more complex than expected. It serves as one of the starting points for clients to truly understand their spending.
From our perspective, discounts should be properly communicated, as they represent part of the value you bring as an MSP through CSP or MCA contracts with Microsoft.
Aggregate all Azure-related costs for each customer or tenant, including any discounts or credits. Regularly share these figures with clients to build trust and highlight the value of your cost management efforts.
Resource utilization efficiency – efficiency and sustainability metric
This measures how effectively your resources (people, infrastructure, tools) are used to deliver services. High efficiency means less waste and more value delivered per unit of resource.
Consider different perspectives based on each type of resource:
- Human resources: Calculate the ratio of billable (or productive) hours to total available hours for your technical staff.
- Cloud infrastructure: Monitor the percentage of provisioned resources (CPU, memory, storage) that are actually used versus what’s allocated.
- Tools and automation: Track adoption rates of automation tools and the reduction in manual interventions over time.
Resource utilization formulas
Human Resource Utilization % = Billable Hours / Total Available Hours × 100
Cloud Resource Utilization % = Actually Used vCPUs / Provisioned vCPUs × 100 (just one quick example to accompany Rightsizing exercises)
Automation Adoption Rate % = Automated Tasks / Total Tasks × 100
Automation rate in cost optimization – operational productivity
This metric tracks the proportion of cost-saving actions (like rightsizing, shutting down unused resources, or applying patches) that are performed automatically versus manually.
Count the number of automated optimization tasks (e.g., scripts, policies, AI-driven actions) and divide by the total number of optimization activities. A higher automation rate indicates lower operational costs and faster response to cost-saving opportunities.
Automation rate
Automation Rate % = Automated Optimization Tasks / Total Optimization Tasks × 100
Forecast accuracy / budget variance – proactive FinOps control
This assesses how closely your actual cloud spend matches your forecasts and budgets. High accuracy indicates strong financial control and planning capabilities.
Compare actual monthly or quarterly spend to your forecasted or budgeted amounts. Calculate variance as a percentage. Regularly update forecasts to reflect changing usage patterns and business needs.
Budget variance
Budget Variance % = (Actual Spend - Forecasted Spend) / Forecasted Spend × 100
Forecast Accuracy % = 100 - |Budget Variance %|
Customer retention / churn rate – linked to transparency and trust
This measures the percentage of customers who stay with your MSP versus those who leave (churn). High retention indicates satisfied clients and stable revenue.
Retention rate
Retention Rate = (Customers at End of Period - New Customers) / Customers at Start of Period
Churn rate
Churn Rate = 1 - Retention Rate
Cost-to-service ratio – total operational efficiency view
This shows the total cost required to deliver services to each customer, relative to the revenue generated from that customer.
Divide total service delivery costs (labor, tools, cloud resources, support) by total revenue per customer or per service. Lower ratios indicate higher efficiency and profitability.
Cost-to-service ratio
Cost-to-Service Ratio = Total Service Delivery Costs / Total Revenue per Customer
Service Efficiency % = (1 - Cost-to-Service Ratio) × 100
Effective savings rate – cost optimization measurement
Effective savings rate (ESR) is an essential KPI for MSPs that manage Reserved Instances and Savings Plans for their Azure customers. It represents the average savings rate achieved through reserved capacity and, therefore, the discount obtained from reservations.
Reserved capacity management requires varying levels of administrative overhead, as you need to plan, review, and purchase RIs and SPs effectively and timely. This KPI also helps demonstrate the ROI of these efforts.
Calculate the total savings achieved through Reserved Instances and Savings Plans, divided by the total eligible spend. This KPI helps demonstrate the ROI of proactive capacity management.
Effective savings rate
Effective Savings Rate % = Total RI/SP Savings / Total Eligible Spend × 100
ROI of Capacity Management % = (Total Savings - Management Costs) / Management Costs × 100
Common mistakes MSPs make with cloud profitability tracking
- Lack of cost visibility: Many MSPs rely on fragmented dashboards or manual spreadsheets, making it difficult to see the complete picture of cloud spending and profitability.
- Underpricing services: Fear of losing clients leads some MSPs to set prices too low, eroding margins and making it difficult to invest in quality staff or tools.
- Not tracking true gross margin: Focusing on top-line revenue instead of gross margin by service line can hide unprofitable clients or offerings.
- Resource sprawl: Uncontrolled provisioning and poor governance result in unused or underutilized resources, driving up costs.
- Manual processes: Relying on manual tracking and billing increases the risk of errors, missed optimization opportunities, and revenue leakage.
- Ignoring accounts receivable: Delayed payments and poor AR management can severely impact cash flow and profitability.
- Mixing revenue streams: Failing to separate recurring revenue from project work or hardware sales can distort profitability analysis.
Action framework for MSPs to improve profitability
- Analyze costs per client: Regularly review the true cost of service delivery for each client to identify unprofitable accounts and opportunities for upselling or streamlining.
- Reevaluate pricing models: Shift from hourly or ad-hoc billing to value-based, flat-rate, savings-based, or per-user pricing. Benchmark against industry peers and adjust rates as needed.
- Automate and standardize: Invest in automation for monitoring, optimization, and reporting to reduce manual effort and errors.
- Enhance cost visibility: Implement unified dashboards and tagging strategies for accurate cost attribution and transparency.
- Optimize resource utilization: Regularly audit cloud resources and staff utilization to eliminate waste and right-size allocations.
- Focus on high-value services: Prioritize offerings that deliver measurable value and higher margins, such as security, compliance, or advanced cloud management.
- Strengthen AR and billing practices: Automate invoicing, track receivables closely, and enforce payment terms to improve cash flow.
- Foster a culture of financial accountability: Train teams on cost awareness and align incentives with profitability goals.
How Turbo360 helps track and improve profit metrics
Turbo360 is purpose-built for MSPs managing Azure environments, providing a comprehensive FinOps platform that goes beyond basic cost tracking:
- Unified cost visibility: Track and allocate Azure costs across clients, departments, or projects from a single dashboard.
- Anomaly detection: Instantly spot unexpected spend spikes and receive alerts to prevent budget overruns.
- Actionable optimization insights: Get AI-driven recommendations for rightsizing, reservations, and eliminating unused resources.
- Automation: Schedule resource shutdowns for non-production workloads and automate repetitive optimization tasks.
- Professional reporting: Generate branded, client-specific reports to demonstrate value and support retention.
- Quick deployment: Turbo360 integrates seamlessly with Azure, enabling MSPs to deliver FinOps-as-a-Service and show measurable savings from day one.
Conclusion
Cloud profitability for MSPs in 2025 demands a fundamental shift from volume-based growth to value-driven, efficient service delivery. By focusing on the right metrics, avoiding common pitfalls, and leveraging advanced tools like Turbo360, MSPs can sustain healthy margins, build client trust, and thrive in a rapidly evolving market.
The key to success lies in continuous measurement, proactive optimization, and an unwavering commitment to delivering transparent, measurable value to every client.
