March 23, 2020

How MSPs Can Build Recurring Revenue

By Chris Brunau

MSP leaders often spent a good part of their careers working as a VAR and in the systems integration business, where revenue often comes in large but sporadic doses. Transitioning to a recurring-revenue MSP model can be tough for these people since monthly services income can feel more like a trickle than a fire hose—and it can create pretty painful cash-flow challenges.

But the market is changing. SaaS and other cloud services offer customers a low-cost approach to technology implementation. So it’s important for MSPs to capitalize on this trend, rather than fighting it. Here are some tips for making the recurring revenue model work:

  • Re-Think All IT as a Service: Customers don’t want to get bogged down in the ownership of servers, networks, disk arrays, databases, software, websites, authentication systems, or even end-user devices. Instead, they want to gain specific business capabilities that incidentally require these underlying components. So figure out ways you can provide customers with capabilities on a pay-to-play basis. Data, application logic, and actionable analytics are ultimately what make the world go around—not ownership of CPUs or flash drives.

  • Price for Fully Bundled Value: Previous business models split pricing into two silos: marked-up capital goods (typically low-margin) and hourly itemized services (typically high-margin). A recurring revenue model requires eliminating the traditional notions of both markup and itemized services. Instead, equipment and labor costs are opaque to the customer— while pricing is based on total value to the customer, rather than a markup on total cost. Profitability thus depends on maximizing value to the customer while controlling costs. Undifferentiated services simply won’t support a profitable price-point.

  • Re-Structure Your Cash Flow: Because MSPs tend not to receive large infusions of capital, they have to be increasingly creative about their cash flow. This is why successful MSPs often turn to cloud services themselves to support their business. It’s also why they often take advantage of the sharing economy for capabilities that they once might have built in house—including financials, marketing, and QA.

Perhaps the most important principle to bear in mind is that a recurring revenue model forces an MSP to focus more rigorously on customer satisfaction since revenue and profits ultimately depend on retention and renewals. MSPs that don’t structure their services and staff incentives to support customer satisfaction will thus wind up having to constantly chase new customers—which is not nearly as lucrative as keeping existing ones.

If you’re looking for more tips to optimize growth and profit in the coming years, then check out our new eBook: The 7 Best Practices of Successful MSPs. This eBook features data from the best sources, including from multiple sources, including analysts, trade associations, and Datto’s first-hand experience with our highly diverse partner community. Check it out today!

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