One of the first things you learn in business—whether you study at Wharton or the University of Hard Knocks—is that acquiring a new customer costs five times as much as retaining an existing one. That’s certainly true in the world of managed service providers (MSPs), where “churn” is the enemy of success.
Lower churn = better business performance. MSPs with churn rates under 5% grew twice as fast as those with churn rates of 10% or higher, according to IT Glue.
The pandemic clearly increased MSP churn rate, as small and medium businesses (SMBs)—the bread and butter of many service providers—were hit by lockdown restrictions and simply couldn’t afford services. Outdated business models also hobbled MSPs when they couldn’t flex their cost structures to meet rapidly changing customer needs.
Generally speaking, however, the pandemic has accelerated overall momentum for MSP growth that will only quicken as businesses emerge from the downturn. One key driver is MSPs’ ability to deliver powerful cybersecurity solutions in an increasingly dangerous and expensive business environment. Nearly 70% of SMB executives believe working with an MSP provides a competitive edge in security as well as cost, according to a December 2020 Infrascale study.
Two titans of private equity—Apollo Global Management and Platinum Equity—showed confidence in the growing MSP marketplace in 2020 by buying distributors Tech Data and Ingram Micro, respectively, with an apparent eye toward evolving them into MSPs.
Facing this increased opportunity, would-be successful MSPs confront a triple challenge: 1) satisfying increasing customer demand for high-quality services at 2) the lowest possible cost while 3) experiencing the least churn.
In a perfect world, the formula for success would be simple: Minimize No. 3 by delighting customers with Nos. 1 and 2. But you may have noticed we don’t live in a perfect world. Churn happens, even to the best-managed MSPs with the highest Net Promoter Scores.
How MSPs Can Prosper Despite Churn
So, what’s the formula for success? Having learned a thing or two in my 20-plus years in the MSP field as both owner and customer, here are a few suggestions:
- Keep an eagle eye on pricing and value. MSPs live in the big squeeze: Customers constantly want more for less. As important as the technology offering is (see next bullet), the real make-or-break considerations are business model, packaging, and above all, pricing. The industry standard, developed by Paul Dippell’s Service Leadership consultancy, has longed pegged optimal monthly recurring revenue at $100 to $113 per month per user. Customers’ new requests for stronger cybersecurity as cybersecurity rises as a key business issue suggest it’s time for a new conversation about not only price, but value. MSPs must be more carefully innovative than ever to determine the highest price the market will bear while satisfying customers’ needs, and then package and deliver the most robust and reliable services possible.
- Leverage the cloud to continuously reevaluate the optimal stack of services, vendors, and partners. In addition to traditional IT services, winning MSPs must now provide their customers network tools, monitoring, endpoint security protection, vulnerability management, protection for applications, and more as their needs and expectations change. Software as a service (SaaS) and the elasticity of the cloud empower MSPs to remain flexible by eliminating the need for expensive infrastructure/product investments that must be amortized at the expense of agility. MSPs can constantly craft the strongest stack of services, vendors, and partners to meet customer demands while staying true to their business model. (For a more detailed discussion of optimal stack-assembling, read Tommy Wald’s The MSP CEO.)