MSPs have become a vital service pipeline for companies as they manage increasingly complex technological infrastructures, bridging the provider-user gap. For some MSPs, this has been the sure path to success, while others have faced a long and winding road. Notably, 27% of MSPs are losing money, while four out of 10 are in the bottom-bracket, single-digit profitability. Those MSPs on the road to success are seeing a huge influx of revenue or selling at record profits, but what about those who are struggling? Why are they floundering while others soar?
Dave Cava, partner and recruiting director for Encore Strategic, and Shawn Walsh, senior consultant with Encore Strategic, help MSPs understand how they can grow business, be more profitable and improve quality of life by shifting their business focus to product, prices and people. They call this their pumpkin plan.
Take Your MSP Back to Foundations with the Three Ps
Struggling MSPs often miss the mark when it comes to the basics. The race to innovate sometimes means that certain foundational elements get lost in the effort to become sensational. It’s the classic cart-before-the-horse scenario. Cava recommends that MSPs return to their roots and focus on core elements.
Your Product
As an MSP, your product is managed services. Ask yourself the following question: Can you bill for your work before it’s done? If the answer is yes, you are providing managed services. If the answer is no, you’re selling something else.
MSPs often make the mistake of trying to offer anything and everything to boost business. But, without a clearly defined set of offerings with established outcomes and expectations, no one understands what they’re getting for their money. Cava recommends that MSPs identify which outcomes tie to dollars spent, creating monthly recurring revenue (MRR). Muddying those waters only creates difficult client relationships and generates less revenue. “Get out of the business of doing reactive work and increase your utilization,” says Cava.
Your Price
Inflation is up 23% since 2020, but many MSPs haven’t adjusted their pricing structure. Cava notes that most MSPs compare their offerings to competitors and set their prices accordingly. While this may make you competitive, it doesn’t guarantee that you will actually be profitable. The simple equation for profit is as follows:
Revenue – Cost = Profit
Using this simple equation, you deduct your business’s costs from what customers are paying you. The unfortunate truth is that most MSPs don’t actually know their own costs, leading them to deflated profit margins. “If you don’t know what your costs are, you don’t know what to charge and you do not have a plan for profit,” warns Cava.
Your People
Finally, do you have the right people, both from a client and employee perspective? Cava recommends the prospect litmus test to see whether clients are a good fit for your MSP:
- Will they buy your product?
- While they pay your price?
- Will they run your stack?
If you can’t answer yes to these questions, you may be casting too wide of a net which will result in an inability to scale.
When it comes to employees, Cava notes that successful MSPs have the right balance of entry-level and senior talent and that they operate according to a pyramid style with lots of entry-level talent at the bottom and less senior employees as you move up.
How to Pumpkin Plan Your MSP: Seed, Weed and Feed
Understanding why your MSP isn’t scaling is a step in the right direction, but MSPs also need to understand how you can move towards growth. Cava and Walsh like to use the Pumpkin Plan analogy as a roadmap for MSPs. They suggest a seed, weed and feed approach to client acquisition.
Seed to Find Your Best Clients
Identify your ideal client. Take a hard look at who they are and what they need. Then redirect your marketing and sales efforts to tailor to those businesses specifically. Lay the seeds that will grow the right relationships.
Here’s what you need to know:
- How long has your ideal client been in business?
- How old are most of the leaders and decision-makers?
- How much revenue do they generate?
- What is their employee makeup?
Additionally, you can gain an edge by understanding these psychographic details:
- Who is their client base?
- What causes do they support?
- Where do they like to hang out?
- What organizations are they passionate about?
- What grabs their interest?
These details will help you to adjust your strategies to reach top clients.
Weed Out Others to Focus on What Will Grow
Now that you’ve broadly identified what your dream client looks like, it’s time to pick the ones that will fit your MSP. Take a hard look at the prospect pool and weed out the ones that raise red flags.
Ask yourself:
- Do they pay on time?
- Do other MSPs not want to engage with them?
- Are they profitable?
Walsh warns MSPs that liking a client isn’t enough to keep them. Should the case arise that you have a good working relationship but aren’t profitable, you need to discuss raising your rates with clients. Most will understand and those who don’t weren’t helping you grow.
Walsh also recommends that MSPs find a way to disrupt the industry. “Figure out how to sell oranges when everyone else is selling apples,” he says. You don’t need new tech or a huge investment, you just need to change your delivery. He points to Liquid Death as an example, a beverage selling still and carbonated water, alongside teas and other carbonated beverages. They didn’t break the industry with a new offering. Instead their offerings come in aluminum cans, a more sustainable option which is bolstered by their edgy approach to marketing. The results are $2.7 billion in revenue. “The key is not to copy,” says Walsh. “You need to do original work.”
Feed What You’ve Created with Process
Walsh notes that most MSPs stop growing around the $1 or $1.5 million mark because entrepreneurs are responsible for doing everything in the company and that is the point they reach their capacity.
“An entrepreneur’s job is to create jobs, not to do jobs,” says Walsh. “Working on the business 100% of the time and working in the business 0% of the time and using process is the way to get there. Systemization is the key to scalability.” The only way to grow is to hand things off to others and you can’t do this without repeatable, documented processes. That’s your secret sauce.
Successful MSPs may have one or two of these ingredients, but you’ll need all three to truly grow.
Cultivate a culture of process efficiency.
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