How to build a profitable MSP business model
Modern organizations are reliant on IT services to deliver at a rapid pace in our increasingly digital world, presenting managed service providers (MSPs) with an opportunity for immense growth.
The statistics are telling: More than 75% of the largest venture capital investments have gone to IT infrastructure and industry-focused enterprise software companies.
To help your organization better realize this growth and success, we’ve compiled a guide on creating the ideal MSP business model. A successful business model can help your MSP become more profitable, boost your customer retention rate, and increase your recurring revenue.
Finding your position in the MSP marketplace
A profitable business model in any field should be designed around three basic principles:
- Profitability. Is the business model going to effectively be able to make more money than it spends via client sales and other forms of revenue?
- Client service. Does the business model allow for a standard of service that will keep clients satisfied?
- Growth potential. Does this business model have the capacity to scale and grow, while still maintaining success in the other two areas?
Building around an effective business model means an MSP can provide a streamlined, but effective service that supports more clients, keeps profits up, and moves towards business maturity.
With that said, you can have all the expertise and skill in the world and still fail to become a profitable business. Let’s take a look at the foundation of a successful MSP business model.
The foundation of a successful MSP business model
When building your MSP business model, certain characteristics can help elevate your practice above the competition.
Start with identifying a concrete niche and value proposition. If your goal is to help businesses reduce the overhead costs associated with full-time IT personnel, prepare to hammer that point home in your marketing materials and business pitches. A successful business model will allow you to strategically add new services to your arsenal as you grow, but being a generalist from the start will hurt your chances for success.
Picking a defined model and sticking to it also matters. The last few years have seen some change in the MSP business model, as reported in a 2022 CompTIA survey. In that year, 63% of MSPs said they took on a hybrid model, which allows them to provide managed services alongside other offerings, such as product sales. That’s up from 56% in 2021.
Why is this important? The appeal of a reliable MSP often rests on a diverse service offering. Organizations seeking a long-term MSP may want a mix of VAR, CRM and advanced cloud and cybersecurity support. To be that successful provider, it’s important you stay updated on the latest business process trends to fine-tune the MSP business model that works for you and your clients. As needs evolve, so should a forward-thinking MSP.
Lastly, it’s important that you consider some of the hurdles you may encounter, especially in those early stages of business. This may range from general operational issues to MSP-specific, solution-based issues. Knowing these early on and having a plan to address them will help set you up for success.
Creating a profitable MSP business model
How you set up your MSP business model, or cloud MSP business model, could be critical to how you maximize profit. The global MSP market is forecast to reach $354 billion by 2026—up from $242 billion in 2021. Efficient operations are critical to maintaining your competitive edge while growing revenue and profits.
With these considerations in mind, let’s review the steps to creating a successful MSP business model.
Define your MSP business strategy
When it comes to your MSP business model, the strategy is the guiding force. How you plan to best service your clients while building a profit should inform different areas of your model.
For example, in other industries, SaaS businesses may find value in offering both a la carte and bundled and tiered packages of their services. In the MSP industry, focusing on bundled/tiered packages is often recommended.
Why is this the case? Karl Palachuk, author of Managed Services in a Month and the four-volume Managed Services Operations Manual, shares his perspective that a top MSP business model should offer bundled packages and move away from a la carte offerings. He noted the “platinum” bundle should address the many needs an organization is facing, such as cybersecurity services, spam filter, storage, backup, email, and network security. He also added that a platinum package should include any unique offerings that differentiate a given MSP from the competitors.
Bundling can make it easier to streamline your clients' entire business operation framework and increase the number of client interactions. This can have a positive impact on retention rate, since you have the ability to proactively solve a host of challenges.
Your sales and business development strategy goes hand-in-hand with your product strategy. Historically, MSP sales have largely been made through referrals and word of mouth. While this is still the case to some degree, the industry has seen rising inorganic growth via mergers and acquisitions.
While building your business strategy, you may want to consider if a merger or acquisition is a long-term goal of yours or not. This may affect your relationship with other MSPs in the industry as you grow. Learn more about this path in our on-demand webinar, Mergers and Acquisitions: A Matchmaking Process for MSPs.
Determine which services your MSP will offer
On the topic of services, what types should you specialize in? As mentioned earlier, being a generalist too early on can be a mistake for many MSPs.
One of the best ways to approach selecting your service offerings is following the data. Cybersecurity is an acute need across the board, with new and familiar cyberthreats on the rise and a known gap in cybersecurity talent. This means cybersecurity can be a good starting point for your MSP.
As you grow, you can look into common cross-sell or up-sell opportunities like data backup and disaster recovery within a bundled or tiered package, as well as proactive maintenance.
Ultimately, your internal expertise and the current market demand should help inform your service offerings. You can continue to evolve your strategy as you build an initial client base and your organization becomes more mature.
Choosing the right MSP pricing model type
Another important element of your MSP business model is pricing. The right pricing model is necessary in order to maximize recurring revenue and achieve your target profit margin.
MSP pricing model types
MSPs can leverage a variety of pricing strategies to meet specific client needs and services offerings:
- Monitoring: Monitoring provides networking and alerting services and can adapt to any service level. This can help organizations with insufficient IT staffing monitor their infrastructure in a cost-effective manner.
- Per-user: A flat fee is applied to each end user per month and covers all the end users’ devices.
- Per-device: Similar to per-user, except fees are based on the number of devices supported. This allows for simpler price quoting.
- Tiered: Bundling services into packages and building in pricing increases from tier to tier based on client needs can open the door to effective upselling.
- All-you-can-eat: This model features a flat monthly fee inclusive of all remote and on-site support and services, a good fit for organizations looking to avoid fluctuations in monthly costs.
- A la carte: While some in the industry are moving away from this concept, some organizations like startups may opt for this model to address ad hoc needs without long-term commitment.
Ultimately, selecting the right pricing model for your MSP should consider you overhead, client base, and service catalog. For a comprehensive look into putting together the best pricing possible, check out our eBook, Pricing IT Services: A Complete Guide.
Design a sales and marketing strategy for your MSP
An effective sales and marketing strategy should include inbound and outbound elements. While a strong foundation of technology specialists is at the backbone of any effective sales team, effective sales and marketing campaigns can help scale your business from good to great.
You may benefit from hiring salespeople with deep knowledge on the technical nuances of the solutions you offer. When you hire an MSP engineer who is also a sales professional, it’s a win-win: your MSP benefits from having a knowledgeable sales pro who knows the technical angles of the product, and the clients you work with will be better served by a salesperson who understands their pain points.
Trust is the cornerstone of retention and recurring revenue in the MSP space. Leveraging testimonials and social proof in your marketing collateral can help you earn that competitive edge.
Consultative selling can be another effective sales strategy, which involves building a dialogue with clients to establish their unique needs and pain points. With customer success at the forefront instead of sales quotas, MSPs may experience shorter sales cycles and stronger retention rates.
Find and retain the talent your team needs
Determining a recruitment strategy can be extremely valuable for your MSP business model. Once you’ve identified the talent gaps on your team, consider what your employees can take on and whether hiring is necessary to deliver the service your clients demand.
When faced with a shrinking talent market and rising labor costs, outsourcing incident response services can be another way to deliver superior service with limited in-house resources.
Begin executing the MSP business model
Now that you’ve curated the elements needed for your MSP business model, it’s time to deliver. Operational efficiency is core to execution, but what does that look like?
When onboarding new clients, documentation and standardization are key to consistency. Assess the client's IT infrastructure and identify any specialized requirements in relation to specific technologies or vertical markets.
You want to lay out processes that allow for an easy transition for clients along the relationship cycle, from presales and sales to continual operations. Good candidates from your team to get involved in the process include an onboarding manager and client advocates.
Know when your model needs to change
Your business model needs to provide consistent client service and maintain profit while building a foundation for growth. With technology and solutions always-evolving, success can feel like a moving target. For this reason, it is important to constantly evaluate your business model to optimize for customer satisfaction, growth, and profitability.
Profitability issues are generally the first sign you may need to adjust your business model. To learn more about the best-in-class practices to maintain your profit margins, download our eBook, How ConnectWise Can Boost Your MSPs Profitability.
Find tools and solutions to support your business model and goals
Every MSP runs differently, and there is no “one-size-fits-all” solution for building a healthy and profitable business. That is why ConnectWise is here to help MSPs of all stages achieve profitability and operational maturity.
Our suite of business management solutions for MSPs can set you up for success with robust PSA, quote and proposal automation, IT documentation, and business intelligence software. Request a demo to fast-track your growth today.