The rapid pace of technological innovation, focus on digital transformation across industries, shift to cloud computing, and a shortage of qualified IT professionals have led to an increased demand for third-party technical support across several sectors. Organizations need their IT infrastructure and networks to run reliably and securely so they can focus on their core business. But having full-time staff to handle those responsibilities is beyond the budget and means of many companies. For some, there simply aren’t enough skilled staff available to do it, even if they have the budget.
As a result, the IT services market, in general, is expected to experience a CAGR of 8.87% through 2026. According to some estimates, there has been an attendant increase in the MSP market, with the number of MSPs in the U.S. now surpassing 40,000. Per Mordor Intelligence, the global managed services market reached $152.05 billion in 2020 and is expected to reach $274.20 billion by 2026.
Many of these MSPs were launched to meet the demand for tech support services. However, most of the services they provide are considered commodities by customers, leaving many of these MSPs to compete primarily on price. That drives down revenues and profit margins for everybody and makes it difficult for these MSPs to grow without constantly expanding their customer base at a large scale.
Turn Customers into Clients
To grow profitably and sustainably, MSPs need to move away from selling commodity products and services. Instead, MSPs must create managed services packages that allow them to turn customers into clients, establish true partnerships with those clients, and create recurring revenue streams that help fund additional growth. There are a few strategies necessary for this transition.
Bundle solutions, limit choices. Following the tech support-only model, MSPs often let customers mix-and-match services and solutions in ways that are appealing to cost-conscious buyers. If you want to grow, you need to provide well-bundled services at a price premium that reflects their value. You may initially lose business from the bargain-hunters, but those customers are not very profitable and are even less loyal.
Providing a full suite of IT services via a handful of packaged offerings allows customers to offload the management and security of their networks and applications to your MSP. The client benefits from a turnkey, reliable solution at a fixed monthly cost, while the MSP gets a steady revenue stream with a much better margin.
You’re selling results, not products. Value-based pricing/selling is gaining traction in the market, and for a good reason. The value MSPs provide is often invisible to clients, especially if the MSP is doing a good job. That’s why the value-based approach requires several changes to the traditional model.
First, MSPs need to sell clients on the results of their efforts: network uptime, the number of security incidents detected and avoided, and reliability, just to name a few. The cost of a network outage for most companies is a lot more than the cost of a VPN solution and your labor hours. Second, MSPs should provide regular reporting to clients to demonstrate their continued value. Third, this regular contact with clients brings opportunities to sell additional services and tweak existing agreements to reflect clients’ changing needs.
Growth in managed services revenue is healthier growth. Increasing your managed services revenue will provide more significant annual growth compared to project/product-based sales revenue. Companies that were dependent on one-off project revenue suffered in 2020 because of the effect of the pandemic. Managed services revenue provides a buffer that can insulate MSPs from the impact of periodic downturns.
Security and remote work solutions are going to be critical investment areas. Security is a top priority for companies of every size, and security-centric MSPs are poised to thrive because of this. Even for companies with strong internal IT groups, security-related tasks have become overwhelming.
Remote work is a growing priority, particularly in the wake of the COVID-19 pandemic. Companies need help setting up secure remote access solutions and getting them to work reliably. Service providers focused on tech support alone are going to miss these opportunities.
Commodity tech support providers are in a race to the bottom regarding service pricing and profit margins. Growth-minded MSPs must become results-oriented service providers, who can engage with their clients regularly and provide everything they need to manage their networks, security platforms, and applications.