Guide to the MSP Business Model – How MSPs Make Money

The MSP Business model is an evolution of the antiquated Break-fix model – break-fix is not scalable, the incentives are not aligned with the customer, and in many cases, it does not solve the customer’s needs. The MSP Business Model aligns MSPs and their customers and helps them deliver true value by focusing on delivering the benefits of technology rather than just making sure it works.

In this post, we go through both models and explain why the MSP model is essential in today’s market.

MSP Business Model and Business Model Design

A note on Business Models

We use the Business Model Canvas by Alexander Osterwalder to model businesses. It is a very valuable tool. You can read more about it on our blog here.

The Break-Fix Business Model

Many technology companies start as break-fix companies. The break-fix model has been a common approach for addressing immediate IT issues, and it is the easiest MSP business model to implement.

The idea is that you fix IT problems when they arise. They have problems; you fix them.

The customer segments targeted in this model are often cost-conscious individuals or businesses seeking quick and cost-effective solutions to their IT challenges.

Customer relationships in the break-fix model are primarily transactional and centered around problem-solving. When an issue occurs, the customer reaches out to the IT service provider, and the focus is on resolving the problem efficiently.

Customers communicate with the business through phone, email, and chat.

The revenue channels in the break-fix model primarily come from billing based on the hours worked by the IT technicians and hardware sales. The break-fix MSP business model relies on charging for the labor to fix the issue.

Break-fix companies also generate revenue by selling hardware components or equipment to customers.

Key activities in the break-fix model revolve around addressing problems and responding to emergencies. When a customer encounters an IT issue, the IT service provider is responsible for diagnosing the problem, identifying the required solutions, and implementing the necessary fixes. The ability to swiftly and effectively resolve issues is critical in this model.

To support the break-fix model, key resources needed include skilled technicians with the expertise to diagnose and fix a wide range of IT problems. The IT service provider also requires access to appropriate tools and technologies to efficiently carry out the necessary repairs or replacements.

Costs associated with the break-fix model typically include labor costs for technicians and the investment in tools and equipment necessary for problem resolution.

Also, see What Is A Business to learn how to build your MSP business.

Why the break-fix business model holds you back

First, the model relies on you selling your time if you aren’t working, or if someone isn’t working on your behalf, you can’t bill or make money. This keeps you firmly in the realm of continuous hustle and stuck in the entrepreneurial spin cycle.

As the business relies on IT stuff breaking to generate revenue, it also creates an incentives issue: the break-fix company has a disincentive to develop things that work. It also results in unpredictable revenue streams and challenges in scaling operations.

Also, the break-fix model attracts pain in the, um, neck customers. It attracts cost-conscious customers through lower upfront costs but does not align the service provider with the long-term goals and growth aspirations of businesses. As technology becomes more integral to operations, organizations increasingly recognize the need for proactive and strategic IT support, leading to the emergence of the Managed Service Provider (MSP) model.

The Managed Service Provider (MSP) Business Model

The MSP business model
MSP Business Model Overview

As the market evolves, the break-fix business model is giving way to the Managed Service Provider business model.

Managed Service Provider (MSP) business model is a proactive and value-driven approach to IT services. Unlike the break-fix model, the MSP model focuses on enabling business growth and helping clients achieve their goals through comprehensive IT support and strategic solutions.

Customers of an MSP may never even hear from their MSP because their stuff works and doesn’t break.

So, The value proposition of the MSP model revolves around positioning the IT service provider as a partner in the client’s success.

Instead of simply fixing problems as they occur, MSPs work collaboratively with clients to leverage technology for business advancement. The emphasis is on delivering long-term value by providing tailored solutions that align with the client’s strategic objectives.

Customer segments in the MSP business model must be more specialized, focusing on specific industries or business types. By narrowing their target market, MSPs can develop deep industry expertise and better understand their client’s unique challenges and opportunities. This allows them to provide more targeted and effective IT solutions and create an unassailable competitive advantage.

A strategic and collaborative approach characterizes customer relationships in the MSP business model. MSPs take on the role of technology leaders, guiding clients in leveraging IT to drive business success.

They engage in ongoing conversations with clients, conducting strategic business reviews to align IT strategies with the client’s evolving needs and goals. This shift from problem-solving to strategic partnership strengthens the relationship and fosters long-term collaboration.

Regarding revenue channels, the MSP model relies on Monthly Recurring Revenue (MRR) through subscriptions.

Clients pay a regular fee for the comprehensive IT services provided by the MSP, which may include proactive monitoring, system maintenance, cybersecurity, cloud solutions, and more. This predictable revenue stream enables MSPs to plan and allocate resources effectively, fostering stability and scalability.

Key activities in the MSP model extend beyond simply fixing problems. MSPs take a proactive approach by designing customized solutions that support the client’s business outcomes. They focus on strategic planning, implementation, and ongoing support, ensuring that the client’s IT infrastructure aligns with their growth objectives. Strategic business reviews play a crucial role in evaluating progress, identifying areas for improvement, and demonstrating the value delivered by the MSP.

Key Resources in the MSP model include expertise, a comprehensive knowledge base, and intellectual property development. The development of intellectual property is an essential component of the MSP model.

MSPs invest in building a deep understanding of their client’s industries and the technology solutions that best serve their needs. This knowledge base becomes a valuable asset, enabling MSPs to deliver superior outcomes and differentiate themselves in the market.

Costs associated with the MSP model encompass labor, tools, and infrastructure necessary to deliver comprehensive IT services.

MSPs must continually invest in their workforce, ensuring they have skilled professionals capable of implementing and supporting advanced technology solutions. Infrastructure, including robust monitoring systems and secure cloud platforms, is essential for delivering high-quality and reliable services.

Why the MSP business model is better.

The advantages of the MSP business model are significant. MSPs can achieve scalability and sustained growth by focusing on long-term partnerships and value-driven pricing.

The predictable MRR model provides financial stability, enabling MSPs to allocate resources efficiently and plan for the future. Additionally, the strategic and collaborative approach of the MSP model allows for competitive differentiation, positioning MSPs as trusted advisors and strategic partners to their clients.

By enabling business growth, fostering strategic relationships, and delivering ongoing value, MSPs are crucial in helping businesses leverage technology to achieve their goals. The scalability, value-driven pricing, and competitive differentiation inherent in the MSP model make it a compelling choice for companies seeking comprehensive and proactive IT support.

MSP Business Model Transformation

The market has shifted from the break-fix business model to the MSP business model for two main reasons.

The first is alignment: the MSP business model aligns better with the company’s needs.

But the second reason is an overall shift in the market. Increasingly being technically competent is not enough. Technology has become plug-and-play – or at least gives the impression of being plug-and-play, which is essentially the same thing since it is the perception that matters.

Customers want more from their MSP. They demand more thoughtful services that solve their problems. The good news for MSPs is that they can charge more for their services… the bad news is that the delivery bar is much higher.

(To help you define your MSP business check out our Managed Service Provider Business Plan pdf.)

How to transition from break-fix to MSP business model :

To successfully transition from the break-fix model to the MSP model, businesses need to undergo a significant transformation in their overall business model. This transformation involves several key steps and considerations to ensure long-term success and competitiveness in the market.

Move from labor-based revenue to subscription-based recurring revenue:

One of the fundamental changes in the business model is moving away from the hourly billing of labor and hardware sales towards a subscription-based model. This shift allows for predictable Monthly Recurring Revenue (MRR) and stabilizes the business. Clients pay a regular fee for the comprehensive IT services and solutions the MSP provides, ensuring a consistent revenue stream that supports growth and scalability.

Focus on specific customer segments to develop deep industry expertise:

To excel in the MSP model, it is crucial to identify and focus on specific customer segments. MSPs can develop deep industry expertise by narrowing the target market and specializing in particular industries or business types. This specialization enables them to understand their client’s unique challenges and opportunities, tailor their services accordingly, and deliver highly effective IT solutions.

MSP examples include verticals, say accounting or healthcare, but often get much more specific: ophthalmologists or accountants who use Thomson Reuters.

Emphasize strategic business relationships and value-added services:

In the MSP model, the focus shifts from transactional interactions to fostering strategic business relationships. MSPs become trusted advisors, guiding clients in leveraging technology to achieve their business goals. They provide value-added services beyond basic problem-solving, such as strategic planning, technology consulting, and ongoing support. MSPs enhance customer satisfaction and retention by becoming integral partners in their client’s success.

Develop intellectual property and knowledge base as a critical resource:

Building an extensive knowledge base and developing intellectual property become essential resources in the MSP model. MSPs invest in continuous learning and staying up-to-date with the latest technologies, industry trends, and best practices. This knowledge base is a competitive advantage, enabling MSPs to deliver superior outcomes and differentiate themselves in the market. It also supports the development of customized solutions that align with client needs and drive business growth.

Defining the service as a product to deliver consistent and targeted solutions:

To ensure consistency and scalability in service delivery, MSPs must define their offerings as products. This involves creating standardized service packages bundled with specific features and benefits to deliver consistent and targeted client solutions. Defining services as products enables MSPs to streamline operations, establish clear expectations, and efficiently scale their business while maintaining high-quality service delivery.

Continuously evolve the business model to stay competitive and meet customer needs:

The business model transformation is not a one-time event but an ongoing process. MSPs must continuously evolve their business model to stay competitive in a rapidly changing market and meet evolving customer needs. This includes monitoring industry trends, embracing new technologies, and proactively adjusting service offerings and pricing models. By remaining agile and responsive to market dynamics, MSPs can position themselves as industry leaders and continually provide value to their clients.

Transitioning from the break-fix model to the MSP model requires a comprehensive business model transformation.

Shifting to subscription-based revenue, focusing on specific customer segments, fostering strategic relationships, and developing intellectual property are critical steps in this transformation. By defining services as products and continuously evolving the business model, MSPs can thrive in the dynamic IT services landscape, delivering exceptional value and driving business growth for their clients.

Why the MSP business model is better for you… and your customer

The MSP business model is a better way to deliver IT services to your customers. Business alignment is better, and the shift gives customers much more value. Some customers will not like it, and that’s okay: part of the transition is accepting that you can’t serve everybody.

Enhanced customer value through proactive support and long-term solutions:

The MSP model enables businesses to provide proactive support to their clients. MSPs can mitigate risks and minimize downtime by continuously monitoring systems, identifying potential issues, and implementing preventive measures. This proactive approach enhances customer value by preventing problems before they occur and offering long-term solutions that contribute to the client’s overall business growth and success.

Increased revenue potential and scalability:

Shifting to a subscription-based recurring revenue model offers businesses increased revenue potential and scalability. With predictable monthly income, MSPs can plan and invest in their operations, attract and retain top talent, and expand their service offerings. The ability to scale operations efficiently enables MSPs to take on more clients without compromising the quality of service delivery, leading to further revenue growth.

Building a competitive advantage through industry expertise and intellectual property:

The MSP model encourages businesses to develop deep industry expertise. By specializing in specific customer segments, MSPs can understand the unique challenges faced by their clients and tailor their services accordingly. This industry knowledge, coupled with the development of intellectual property and a robust knowledge base, becomes a valuable differentiator. It helps MSPs build a competitive advantage, establish themselves as trusted advisors, and attract clients seeking tailored and practical solutions.

Challenges in educating cost-conscious customers about the long-term value of the MSP model:

While the MSP model offers significant benefits, it can be challenging to educate cost-conscious customers about its long-term importance. Some clients may initially focus solely on short-term cost savings, perceiving the subscription-based model as more expensive than the break-fix approach.

Our advice: don’t do it. Break-fix customers are expensive to support and do not tie into your new model… so let the clients who can’t see the value go.

Importance of strategic business reviews to demonstrate the value provided:

Strategic business reviews play a vital role in the MSP model, and for an MSP company. These reviews allow MSPs to showcase their value and align their services with the client’s evolving needs and goals. By regularly reviewing the client’s IT infrastructure, discussing performance metrics, and identifying areas for improvement, MSPs can demonstrate their commitment to driving business growth and ensuring the client’s technology supports their objectives. Strategic business reviews foster transparency, build trust, and reinforce the client’s understanding of the value provided by the MSP.

Wrapping up

The MSP business model is how companies will deliver valuable IT services in the future. Break-fix will still exist, but it will be for bottom-feeding customers and those who want to serve them. It won’t be a pretty place.

If you want a scalable business that allows you to live a fantastic life, transition to an MSP model.

Want to learn more about Osterwalder and business model generation? Here is a link to his website, or buy the book here.

FAQ

What does MSP mean in business (MSP meaning in business)

MSP means managed service provider and is a term for companies that provide technical services to their clients. The managed part means that they play an active role in ensuring the effectiveness of the services they implement.

Managed Services is not limited to technology but we generally mean an IT provider.

How Does an MSP make money?

An MSP makes money by charging a monthly fee for the management of services that their client needs, in this case, IT services. The advantage of an MSP model is the Monthly Recurring Revenue (MRR) which allows for greater predictability in the business while also allowing the MSP to develop intellectual property and get better at delivering their service.

Is MSP business profitable?

An MSP business can be very profitable, but profit depends entirely on the ability of the firm to generate real value for its customers. They must solve business problems, not act as IT plumbers if they want a profitable business. It is crucial, therefore, to break out of agnosticism and define a narrow customer segment or niche.

What are the 2 types of MSP

The true definition of MSP evolves. But the way most people look at it is there are break-fix and managed services companies. However, within the managed services category, there are also 3 kinds of MSP, so check out the next FAQ, what are the 3 types of MSP?

What are the 3 types of MSP

Within the MSP model there are generally three kinds of MSP:
– MSP companies that deliver broad MSP support.
– MSSP companies that focus on security.
– Specialty companies that might deliver one aspect of the MSP experience, printers, for example.

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