7 Reasons Managed Service Providers are Failing to Grow Profitably

While I typically don’t get involved in many business model evaluations anymore, I am seeing an astonishing number of managed service providers (MSPs) that lack the confidence to invest in any marketing campaigns or other growth strategies. Why?

1. Rising labor costs – The IT skillsets required to staff up and run an MSP don’t come cheap. And with baby boomers retiring (at the pace of 10,000 a day), enterprise IT employers may continue to present more attractive employment options than small-and mid-sized MSPs.

2. Rising health insurance costs – While this may be more of an issue in the USA than in other markets, as managed service providers look to build their teams and provide competitive fringe benefits packages, including health insurance, it becomes more difficult each year to create the stable foundation for a happy and healthy workforce.

3. Vendor consolidation – The leading managed services SaaS platforms all have different owners or investors now than they did in the past. What does that mean? Because, in most cases, these vendors’ financial results were underwhelming, the new owners and more sophisticated investors are likely to command a greater rate of return. What’s one of the first places to look? Raise prices and lower the profit margins of the smaller MSPs.

4. No awareness of sales cycle stages or sales cycle length – For small- and mid-sized MSPs that don’t have full-time marketing and sales staff, the owner who wears these hats often doesn’t have a good handle on milestones in the sales process or even how long the sales process is in days, weeks, or months.

5. Lack of marketing forces price competition – When you fail to invest in marketing that attracts leads in the early stage of the buying cycle, you don’t get a chance to explain what you bring to the table in any other context besides responding to an RFP. Don’t be a commodity broker.

6. Completely unrealistic marketing expectations – Most smart MSPs are targeting businesses that generate at least $30,000 per year in recurring services.  And they know that their typical client will stick for at least three to five years. So with lifetime values in excess of $120,000, you’d think it would be a no-brainer to invest aggressively in client acquisition and growth. But many that we speak with about these issues aren’t even budgeting marketing at 10%, or in some cases even 5%, of lifetime client value.

7. Not showing up for the modern buying cycle – With 57% of the typical B2B decision-making process now over before potential clients talk to any vendor, any managed service provider that thinks that they don’t need to publish content and thought leadership is in for a rude awakening. Apparently, many MSPs think their potential clients haven’t yet discovered smartphones or Google. As the great comedic philosopher Woody Allen once said, “80 percent of success is showing up.”

With so many managed service providers selling relatively few managed services (i.e. aspirational MSPs) and the more mid-sized MSPs struggling to stay profitable, it’s really important to take a pulse on why so many MSPs are failing to grow profitably. In this post, we looked at seven really basic reasons.

Why do you think so many IT services businesses struggle so much? Let us know your take in the Comments section below.

And to build a profitable marketing, sales, and client acquisition system for your MSP company, especially if you also support SaaS or IaaS, be sure to enroll now in our free 7-day eCourse: Go-to-Market Strategy 101 for B2B SaaS Startups and Scaleups.