How To Make Money in Your MSP Business
The IT managed services business model is actually pretty good. Subscription services provide a steady revenue that you can build on with solid customer retention and adding new business. It is a sticky business also in that once you have a customer on board it is hard to lose them. Inertia guarantees a large portion of your customers will remain unless you totally screw up the relationship.
What Is Profit?
In any business there are really two knobs that affect profict: volume and unit margin. You generate more profit by adding volume, improving unit margins, or both. In the elegant words of math:
P = V * M
Pretty simple really. Until you try to make a living off it running a small MSP business.
You increase Volume through sales. You simply sell more seats of your solutions. That is ultimately how you grow the business. But anyone who has done it knows how unpredictable that sales growth can be. You need to maximize Margin as well.
Margin is the difference between what you pay for a solution and what you sell that solution for to your clients. The problem with Margins in small MSP businesses is that when you are reselling a solution from the IT channel (think Box, Dropbox, RMM, backup solutions, etc) you can generally only mark them up a few percent and still be competitive in the marketplace.
A Path to Higher Margins
One way to address this is to actually build and own the solutions you resell. This gives you control over the cost and quality of your solution. This is how a lot of small IT businesses stayed afloat in the past when they would build their own PCs and sell them to their clients. This was a fairly simple thing to do when everyone was on desktops. Not so much now that most everyone is on a laptop.
The cloud offers an opportunity for the modern MSP to do a similar thing. Building solutions on the cloud instead of reselling similar solutions through the IT channel can result in margins approaching 10X markup vs cost as opposed to the 20% markup you might get through the IT channel.
Let’s Do Some Math
An example of this is a cloud hosted fileshare. Think of something like Dropbox, for instance. If you resell that to your clients you are going to be paying on the order of $10 per user and selling it to your clients at $12 — $14 per user. If you have 500 users on it then your monthly profit will be $2000 on the high end.
But what if we built this solution in the cloud? Well, there we aren’t paying a per user cost directly. We kind of are in the aggregate because our cost will be affected by how much data we are storing and how much is being accessed over the internet. Still we are going to be at a close to fixed monthly cost for that solution once we have it up and running.
Given that cost and given that it is largely fixed on a monthly basis, we can either sell that solution to our client on a per user basis or we can sell it on a fixed monthly cost basis. In either case we are going to markup our cost of our cloud solution in our sale to the customer. I can guarantee you the markup will be much greater than 20%. You could realistically see markups in the range of 10X your cost and still be competitive in the marketplace.
Let’s say for my 500 users that my cloud cost is $250 per month. And I’m selling it to my clients at $14 per user per month. Then my monthly profit becomes $6750. That’s $57K more annual profit for this one solution vs reselling through the IT channel.
Now your numbers are going to vary depending on the cloud solution you implement and how you implement it, but that cost is something you can control to a large extent since you have control of the resources in the cloud account.
An Example Solution
Here is an example of using a solution from the AWS Marketplace to implement a cloudhosted fileshare. This solution also includes VPN access to the fileshare to make it highly secure which is another way you can differentiate your solution from the generic IT channel solution. Differentiation can mean even higher margin.
Summary
We have looked in this article at how we can drive higher margins in our MSP business by building and owning our own cloud solutions that we then resell to our clients. We looked in particular at a cloud hosted fileshare solution implemented on AWS through the AWS Marketplace and using AWS Client VPN to make it highly secure.
There are other possibilities in your MSP business where you might be able to drastically improve margins by building a semi-custom solution in the cloud similar to what we have shown here. Look at things like backup and RMM and then look at AWS and other cloud Marketplace and see what solutions address those. Also, look at the open source market. Some open source vendors have partner programs that license you to use their solution for commercial purposes including resell.
Beyond the semi-custom solutions are the full custom solutions. Don’t shy away from this. There is a lot of developer talent available today that you can tap into remotely and easily to get your applications developed. A lot of times all you really need is a good front end that you can couple with backend resources on your cloud account and you are in business!
