18 April 2024
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MSPs make money (Image by Freepik @fantastic-studio)

Managed Service Providers (MSPs) are changing how businesses handle IT needs. But how do MSPs make money?

In Channel Insider, Matthew Sainsbury reports that Australia’s MSPs expect a revenue increase of 28.43% – from $19.73 million to $25.34 million in 2023.

The business growth will be generated from expanding the MSP’s business to add new services and support new industries. 

On a larger scale, according to MarketsandMarkets, the global managed services market was valued at $275.5 billion in 2023 and is expected to reach $372.6 billion by 2028, growing at a CAGR of 6.2%​​​​​​.

The number is enormous. But, like any other business, MSPs face challenges like competition and the need for technological updates.

Yes, MSPs must address compliance with cybersecurity risks and invest in skilled personnel to support their growth and leverage emerging opportunities​​.

So, let’s get into the details of how MSPs make money in this competitive and challenging landscape.

What is the Profit Margin for MSP?

It’s important to know that there’s no single “ideal” profit margin for an MSP.

Several factors, like the MSP’s size, services, and overall MSP business strategy, can influence this number. However, we can get a sense of general trends.

While the numbers can vary, according to MSP360, typical gross margins for MSPs range between 8% to 18%.

These figures reflect the difference between the revenue earned and the direct service delivery costs.

However, it’s vital to remember these percentages don’t account for indirect expenses like marketing or office overheads​​.

To break this down, profit margins in the MSP world are divided into three main types: gross margin, EBITDA margin, and net margin.

Gross margin reflects the immediate profitability after direct costs.

While EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) offers insight into operational profitability before certain financial and accounting factors.

Finally, net margin provides the bottom-line profitability after all expenses​​.

Optimizing these margins involves strategic pricing models, focusing on high-margin services, and leveraging partner programs and efficient billing processes.

For instance, implementing scalable and flexible pricing, focusing on high-margin services like cloud migration, and utilizing strategic partnerships can significantly enhance profit margins​​.

Understanding these dynamics provides insights into how MSPs like us structure our services and pricing.

It is essential to make informed decisions whether you’re considering venturing into the MSP world or selecting an MSP for your IT needs.

It also highlights the importance of strategic planning and focusing on high-margin services to ensure sustainability and growth in this competitive industry.

Revenue Streams for MSPs

To understand how MSPs generate revenue, it’s essential to grasp the diversity of their revenue streams.

Think of an MSP’s revenue like a river with several smaller streams flowing into it.

Each stream caters to different client needs and market demands, contributing to the MSP’s financial health.

The most consistent stream is usually their subscription-based services, but projects, hardware and software sales, and value-added services all play a role in keeping the business financially healthy.

Now, let’s break down each of these streams:

1. Subscription-Based Services

This is the core of the MSP model. You pay a monthly fee in exchange for an IT service package.

This model provides consistent revenue and strengthens customer relationships.

Clients pay a regular fee for ongoing access to IT services, including network management, data backup, and cybersecurity.

This model benefits both parties; clients enjoy predictable IT costs, and MSPs secure a steady income.

It aligns with the evolving preference for ‘as-a-service’ offerings, reflecting a shift toward operational rather than capital expenditure in IT budgets.

2. Project-Based Services

MSPs also generate revenue through project-based services, addressing specific, one-time client needs.

But, unlike the recurring nature of subscriptions, project-based services are one-off, tailored engagements.

These could range from setting up a new network infrastructure to migrating a company’s data to the cloud.

They allow MSPs to address specific, often complex, client needs and can be a significant revenue source when leveraging specialized skills or technologies that command higher rates.

3. Hardware and Software Sales

MSPs often partner with vendors to sell or lease hardware and software.

Yup, some MSPs act as resellers for hardware and software. This reseller mode makes it convenient for clients to get everything in one place. However, MSPs earn a small profit from these sales. 

This stream not only adds direct sales margins but also deepens client engagement by providing end-to-end solutions.

It can include essential infrastructure, security applications, or industry-specific tools, enhancing the MSP’s role as a trusted technology advisor.

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How do MSPs make money (Image by Freepik @ozhangona)

4. Consultation and Advisory Services

As IT environments become more complex, clients increasingly rely on MSPs for strategic guidance.

Beyond hands-on IT management, MSPs also offer consultation and advisory services, sharing their expertise to guide clients’ IT strategies.

Consultation services can cover cybersecurity policies, compliance, and digital transformation strategies.

This might involve assessing your current infrastructure, recommending upgrades, or developing a cybersecurity plan. 

The consultation service generates revenue and positions the MSP as a strategic partner, potentially leading to more extensive engagements.

5. Value-Added Services

Beyond core offerings, MSPs can differentiate themselves by providing additional services such as training, enhanced support, or business analytics.

These are premium offerings tailored to client-specific needs. Advanced cybersecurity, compliance assistance, disaster recovery planning, or virtual CIO (Chief Information Officer) services are expected.

These services can improve client satisfaction and retention, create new revenue opportunities, and help the MSP stand out in a competitive market.

Tips To Maximize Your MSP Profit

Running a profitable MSP is all about making smart business decisions.

It’s a balancing act of managing costs, optimizing your services, and finding ways to increase revenue without sacrificing quality.  Let’s look at some key strategies.

1. Focus on Your MSP Business Plan

A well-structured business plan is pivotal for any MSP aiming to maximize profit.

This plan should detail your service offerings and target markets and outline your business objectives, growth strategies, and financial projections. A robust business plan helps you:

  • Define clear business goals and establish actionable steps to achieve them.
  • Understand your market positioning and identify competitive advantages.
  • Forecast revenue streams and set realistic financial targets.
  • Align your team with the business’s strategic direction and priorities.

Invest time regularly revisiting and updating your business plan to reflect market changes, new opportunities, and lessons learned. 

This dynamic document should guide your decision-making process, helping you to stay focused on profitable growth areas and efficiently allocate resources. 

Therefore, you can use a business plan template to make it easier to create a business plan.

2. Focus on Efficiency

MSP companies must minimize waste and enhance process efficiency. Increased efficiency means lower costs and improved scalability.

This can involve auditing your service delivery processes, eliminating inefficiencies, and ensuring you’re not overpaying for underutilized resources or tools.

Also, consider automating routine tasks, standardizing your processes, and investing in tools that help your technicians work smarter, not harder. 

You can significantly boost your margins by streamlining operations and focusing on cost-effective practices​​.

3. Re-evaluate Your Pricing Strategy

Regularly review and adjust your pricing to reflect the value you provide and the market conditions.

Implementing scalable pricing models that adapt based on usage can offer more fairness and flexibility, potentially increasing customer satisfaction and loyalty.

Moreover, consider the timing and approach to price increases to ensure they’re accepted without diminishing client relationships​​.

But don’t undervalue your services. Develop a pricing structure that balances competitiveness with the need for healthy profits. 

4. Upsell High Margin Services

Leverage the trust you’ve built with your clients to introduce and upsell higher-margin services.

As clients’ businesses grow and their needs evolve, you can offer more comprehensive solutions that deliver excellent value.

By positioning yourself as a strategic partner, you can uncover opportunities to provide more advanced, profitable services, thereby enhancing your margins over time​​.