Even though MSPs are growing in popularity now, their business models emerged in the late 1990s. It started as a simple product but has now evolved into what we see now.
The rise in popularity for MSPs is largely due to small and medium businesses working to grow into enterprises or to reduce costs. MSPs are now being called on to offer service like remote monitoring and management, cloud consulting and migration as well as cybersecurity.
Their overall appeal now have even made them attract investors. All of this making it clear that the future growth of these models will only continue to grow the more customers rely on it.
Of course, with the state that the industry is in, many people are looking to build their own MSP business model. While you could start one up blindly, reading through this article will provide some guidance to avoid common missteps, give you new considerations, and identify problem points that you can address in the creation of your business model.
Benefits & Challenges
Whether you’re an entrepreneur looking to launch an MSP business, or an investor looking at MSPs, it’s always worth it to look at the pros and cons of these businesses.
- These businesses are predictable and provide recurring revenue. Managed services are often structured as subscription-based services where customers pay a monthly fee. This keeps the MSP solvent since every client guarantees them a monthly income. It’s a big boost compared to the unpredictability of one-off projects. This stability also means it’s good for investors while also ensuring that entrepreneurs don’t need to come up with an exit strategy (though one is always nice to have on the basis of knowing one exists.)
- Much higher margins. A lot of players who are now MSPs were originally resellers. Those companies worked to have higher profits in services as they started to see the margins from hardware were declining. Thanks to MSP business management software and automated tools, MSPs are able to support multiple customers at a time and boost profits.
- Opportunity for services to expand. MSPs that have had successful launches are prone to provide additional services after a while. For example, an MSP that provides IT strategy consulting could eventually expand to offering backup and recovery services. The additional services are nice for existing clients since they no longer need to look for another provider to cover that need. Furthermore, with additional services, an MSP can charge a higher price bumping profits per month and per customer.
- Use of mature technology. Those early in MSP had to turn to building their own tools or using what was available. Now, MSPs are have wide range of software products that manage their businesses. Those tools are: Remote monitoring and management (RMM) and professional services automation (PSA).
- Pricing. An early task for any MSP is figuring out how much to charge. There are several pricing models around and those can provide some assistance in which one is ideal.
- Getting the team. MSPs are still faced with the same talent shortages as other technology businesses. The problem becomes more acute if you’re looking to build an MSP that offers services in high-demand like cybersecurity and cloud engineering.
- Marketing the services. A lot of MSPs rely on word-of-mouth and customer referrals to kick off the ground. While that is a budget option, the MSP will eventually reach a plateau. In order to overcome it, MSPs will eventually need to develop a marketing plan to promote their business and keep the company growing.
- Dealing with vertical markets. As MSPs expand, they may choose to focus on one or more vertical markets. If that’s the case, an MSP will need to look into specialized industry knowledge or develop expertise in those areas themselves.
- Adjusting to the market. The market itself is rapidly changing while it’s growing. Service providers have to constantly refine their business plans in order to stay relevant. For example, when cloud computing was introduced, a lot of MSPs had to reinvent their services entirely. They also have to adapt to macroeconomic patterns and unpredictable events like the COVID-19 pandemic.
How To Build An MSP Business Model
If you like the benefits and don’t mind the ongoing challenges of running an MSP, below are summarized steps that you’ll want to do to set up an MSP business.
Define Your Strategy
The questions you want to be asking yourself first are where, what and how. The answers to those questions will help in devising the core of your strategy. Some good starting questions are:
- Where geographically and areas will the company pursue?
- What services will the MSP plan to provide?
- How will the MSP deliver the services?
When looking to start out, it’s smart to focus on a line-of-business technology, suggested MSP veteran Dave Sobel. By doing this, the MSP delivers business value with an offering to a specific vertical market from the start.
What’s also nice about that strategy is that you can then extend it out to how the MSP plans to work with customers and teams within businesses. It creates a co-managed services approach which creates a connection between the team it’s working with and the MSP itself.
Determine Your Price Model
Pricing is a big thing and shouldn’t be done quickly. It deserves special attention since this is the part where you outline how the company will survive. On top of this, having a proper pricing plan will make it clearer for customers to assess and consume the offers of a provider.
An MSP right now has at least six highly popular pricing models to work with. These range from simple plans to all-encompassing packages. Whichever model works for a company will depend largely on the scope of the services you want to sell and the customer base you’re working with.
For those starting from scratch, you’ll have a clearer path when adopting a pricing model. Those that are transitioning to an MSP business model will likely need to revamp their pricing to make revenue flow more predictable.
Also, once a model is established, MSPs have to learn how to stay competitive without slashing prices. You’ll need to use techniques like being aware of labour costs and working on climbing a vertical market or technical specialization. All in all doing things that creates more value in the eyes of customers.
Creating And Offering An SLA
An MSP has to offer a service-level agreement or SLA. This governs the relationship it has with clients. The SLA outlines the services it provides, defines the standards of delivery and establishes the means for redressing issues.
MSPs can also go and create a master service agreement too. These set forth general terms and conditions for client work. It can even incorporate the SLA by reference.
Even if you don’t plan to make a master service agreement, an SLA is crucial since it’ll help manage customer expectations and provide customers with tools for comparing offers with other MSPs.
Making A Sales And Marketing Strategy
This step is not the strongest one for several reasons. The biggest reason is that many MSPs rely on word-of-mouth and customer referrals in order to get their business off the ground. It makes sense.
Engineers and technicians launch these companies and due to being specialized and in high-demand positions, will often gain new customers and referrals.
If an MSP is built as a lifestyle business, they may not need to grow past a certain point.
This step is only really important for those who wish to expand more since that will demand a proactive sales and marketing approach.
To get this started, you’ll need an MSP sales process which requires an MSP salesperson. People with that experience are tough to find so you may end up hiring a salesperson and train them in the fundamentals of the technology you’re in and the MSP business. Alternatively, you can have a MSP technician in a sales engineering role work with a salesperson on customer calls.
All in all these strategies rest on two essentials: the knowledge of self and the knowledge of customer.
An MSP should know its strengths in order to craft a go-to-market message. From that insight, a service provider can also develop a profile of their ideal customer and focus on selling in that direction.
Some other options you can consider are:
- Using consultative selling. This focuses on identifying a customer’s pain points and addressing them.
- Ensure website copy speaks to the customers you want to be targeting.
- Building a brand around the core services.
- Having one person on the team in-house performing marketing duties.
Have A Recruiting Strategy
An MSP that launches with a core group will eventually require more talent in order to serve customers as it grows. For an IT recruitment strategy, you’ll want to have a balance between looking for required skill sets and personality traits that fit the culture of the organization.
Even though technical experience is important, if the person doesn’t mesh well with the team, it’s going to cause disruptions. When looking to bring more people on, you’ll want to consider their ability to cope with pressure, learn on the go and adapt to unexpected situations.
Consider Your Type
Starting from the ground floor, an MSP will typically start with base services like network monitoring and management. However, even if you’re starting at that level, it’s never too early to think about the trajectory of your growth.
To do this, you’ll want to assess customer needs as those can dictate which steps to be taking. Should you provide backup and disaster recovery? Or maybe general cybersecurity services?
You get to choose but a huge swing factor is what are clients needs.
Some other types to consider are:
- Vertically focused. An MSP is looking at acquiring experience in one or more verticals. This results in an MSP that’s industry-specific.
- Platform-oriented. An MSP that focuses on a specific platform like public cloud infrastructure or SaaS.
- Consultative MSP. Early stages tend to focus on the technical aspects of support. Providing consulting services though puts MSPs into a position to address those issues directly. Instead of just advising and informing you’re now performing.
- Managed security service provider. Short for MSSP, these models offer a range of services to help customers address security, privacy and compliance. They’re specialized in security beyond your typical MSP.
- White-label service provider. This is where an MSP reaches a point in its development that it offers its infrastructure to smaller MSPs. It provides a wide range of offerings which include network operation center services, staff augmentation and cybersecurity.
The MSP market is constantly changing and even the specific branches of it are subject to change as well. Companies need to continuously evolve over the years in order to stay ahead. It’s not out of the question for an MSP to rework, tweak, or transform their business model every few years.
Transformation can be expensive and disruptive as well to everyone involved and so it’s a crucial final step to be aware of this and take measures to ensure everything turns out smoothly.
Executing The MSP Business Model
Once you are done planning, you’ll then need to execute the plan itself.
The client onboarding process is key to bringing this model to life in the first place. As such, MSPs should watch the process carefully and document and standardize that process to make it consistent. Even if you’re looking to bring in a handful of clients and stay small, it’s still smart to have a process that people can refer to and consistently use.
Bringing a client on board also involves a number of things like assessing a client’s IT infrastructure and tools, and identifying specialized requirements. The process is aimed to make the transition smooth for the customer.
Do note flexibility within the MSP operations. Having that is key as technology changes and unforeseen events could challenge the existing model.
Beyond that, noting trends like managing multi-cloud environments, evolution of cybersecurity needs and demand for automation ensure that your MSP can prepare for changes and embrace them to remain competitive.
About MSP Corp
MSP Corp understands you’ve worked hard to build your business and you want to protect it. With a mission to be a world-class business partner for MSP owners across Canada, we actively seek to acquire and partner with owners looking to secure the value of the business they have built and provide a seamless exit process that ensures business continuity and employee and client stability.
Contact us today to learn more about selling your business and maximizing its value.