Understanding Small MSP Growth - An Analysis of 100+ Market-Leading MSPs
4 months ago, I dove headfirst into marketing for MSPs, taking a position of marketing manager at a startup MSP called Techfive.
Although I have experience in B2C scaling websites to millions in organic traffic, B2B & MSP marketing were almost entirely fresh to me.
To better understand what I was getting into, I immediately started my research process.
I spent a week solely focused on understanding our place in the market, who our competitors were, what they were doing, and why each was the size they are.
And the result of my research was… mostly confusion. To me, there seemed to be some kind of “magic formula” that I was just missing.
On the surface every MSP I researched seemed identical. They had the same service offerings, the same copy, the same value props, the same logos, the same etc.
I needed to dig deeper.
Since then, I have spent 100’s of hours researching, organizing, and breaking down over 100 market leading MSPs. I wanted to understand why one MSP is worth $50mm and the next one over is worth $500k.
I wanted to know what was really driving an MSPs growth.
And that’s where this research report comes in.
Throughout my research I have identified what I believe to be the “magic formula” of MSP growth.
Let’s dive in.
- Marketing is everywhere
- The Jenga tower of MSP Growth
- Founders
- Funding
- Business Location
- Time in Business
- Pricing & Services
- Marketing & Sales
- Strong Brand
- Obvious differentiation
- Demand generating education content
- Locally optimized SEO
- A constant flow of customer insight
- Consistency & Patience
- The Magic formula for MSP growth
- Afterword
Important Note:
To maintain as objective an approach as possible, I have cross-analyzed 100’s MSPs, doing my best to remove bias and focus exclusively on data.
The raw data for that analysis is downloadable.
This research has revealed some interesting findings, but data only tells part of the story. I would love to hear experiences from others in the industry. This will greatly help me to further validate (or invalidate) my findings.
Marketing is everywhere. Good marketing is very rare.
Of the analyzed MSPs, 98% are actively marketing right now as of February 2022.
As an MSP scales, their commitment to marketing typically increases in a linear way. As you decrease in scale, marketing becomes less and less prevalent (and often takes a substantial dip in “quality”.)
What do I consider “good” marketing?
Marketing, in my opinion, is good when it drives business results. That means marketing that translates not to “leads” but to qualified pipeline, direct revenue attribution, etc. (These metrics can change as a company scales)
Measuring this externally is obviously difficult (most companies don’t seem too keen on handing over their P&Ls). We can, however, get an indication of business growth and cross-compare that historically with their marketing to get an idea on a business’s growth trajectory.
Most businesses today publish pretty much everything online somewhere. I analyzed that public information, examined those businesses estimated growth trajectory and cross compared the two.
It’s not a fool-proof system (and has a reasonably high margin of error) but I’m more interested in the signals rather than the hard numbers.
Often times, “good marketing” comes after an MSP surpasses $1-2MM ARR. At that point, a business can invest in marketing in a substantial way.
Before reaching that $1-2MM mark it can be very difficult to create a sustainable marketing strategy. Typically, the money just isn’t there (unless funding is part of the equation, which we will discuss more later.)
You can’t forget either, marketing probably won’t generate them any results for at least 6 months from kick-off.
The majority of small businesses give up well before they even give their marketing a chance to work.
For businesses missing any one component, it becomes increasingly difficult to market in an effective way. (This is part of the reason why staff turnover is so high in small-business marketing gigs, but that’s a topic for a different day.)
Marketing is only one component of MSP growth though, to fully understand what is going on, we need to zoom out.
The Jenga Tower of MSP Growth
Let’s imagine for a moment that your MSP is a Jenga tower, and each piece is a vital component of the business.
Towards the bottom are your founders.
Towards the top is your marketing.
No one piece Is necessarily more important than the other, but the top could fall, and the bottom may survive.
As you build the tower up, each foundational component lays atop the one before.
The tower looks something like this:
- Marketing & Sales
- Services & Pricing
- Funding
- Time in business
- Business Location
- Founders
From my research, these are by-far the 6 most important components that determine an MSPs growth.
They all build upon the last, enabling the one above itself to do better and be better.
These 6 components together make up what I am calling the “magic formula” of MSP growth.
Let’s break them all down, bottom to top.
The Founders
The founders in any business are the foundation of that entire enterprise.
Throughout my research I have identified 4 traits that almost every top-performing MSP founder shares.
Here are those 4 traits:
- They are well connected (or become well connected over time)
- They are aggressive enterprisers
- They are consistent & dedicated
- They are intentional with scaling their operations
Note: These characteristics are universal across all industries, MSPs don’t seem to vary much from the status quo.
We won’t dig too much into founders here as it is outside the scope of this write-up (and my realm of expertise).
With that being said, if you are considering joining an early-stage MSP startup, I would look out for founders with the characteristics listed above.
The Business Location
Of the 100+ market leading MSPs analyzed, 98% of them serve a metro area with a population exceeding 500 thousand. Often, they are located in adjacent towns nearby these metropolitan areas.
Because the services provided by MSPs are often viewed as a commodity, growth often becomes a game of relationships, visibility (and price).
This means for MSPs in much smaller population areas, it is nearly impossible to cultivate enough meaningful, relevant visibility to become a market leader.
There just isn’t enough desire for an MSPs services.
For a rough example, let’s say you are expecting 10% of all targeted leads to sign up for your service (which is generous).
There are 100 businesses that fit your ICP in your smaller city.
This means, at maximum, you will be able to serve 10 companies before needing to expand outwards.
Even if those are good contracts, this will likely only result in $300,000 – $600,00 ARR.
And then that’s it
At that point our hypothetical MSP has reached the peak of their growth potential. The obvious next move is then to expand to larger cities, right?
Yes and No.
What that MSP will find in the larger city is 1-10 larger incumbents that are much more well equipped and “dug-in”.
To overcome this, the MSP then needs to be strategic and take a marketing-first approach.
The problem is that most companies don’t have “really good marketing”. Most don’t even have marketing…
Your marketing has to mature before you can try to fight head-to-head with your much larger competitors (who are probably already in the M&A game, meaning lot’s of cash is on the table).
And because 99% of MSPs fail to differentiate themselves in any substantial way, they are forced to directly compete with businesses who have:
- More money
- More people
- Better marketing
- Better sales
- More connections
- A better reputation
This leaves most MSPs to crawl forward at a snail’s pace in growth, bringing on very few new contracts year over year.
These MSPs growth is being actively hindered by their location.
Or at least it appears that way on paper. The obvious 1+1=2 conclusion is that being an area with limited opportunities means that limited growth will occur but there may be more to explore here.
It is hard to ignore the hard data though.
99% of top MSPs serve a metro area exceeding 500,000 in population.
Of every factor considered, the MSPs location is by far the most consistent indicator of scalability.
Just check out this map. As you can see, nearly every industry leading MSP serves a major population center, most of which are focused on the West and East coastlines.
As a results of M&A’s as well, MSPs get access to substantially more opportunities when they expand to new markets. This helps them to further scale their operations.
So now that we know how important the MSPs location is, our magic formula is starting to come together, here’s where we are at so far:
Intentional founders + Proximity to a population center + x + x + x + x + x = magic
Time in Business
The MSP space is stuffed full of 20+ year veteran businesses. The majority of larger MSPs have been around a minimum of 15 years, the average age of the analyzed MSPs is 21 years old.
MSPs that rapidly scale in very short timespans (less than 5 years) have 1 thing in common:
They have a bunch of money, i.e. They got significant outside investments and are acting as a consolidator.
If you want your MSP to get big, your best bet is probably to grow sustainably over a 20+ year period. This allows for operations to scale comfortably, and this type of growth should typically only require being an active member of your community and cultivating referrals. No marketing required.
You only need to bring on a few new contracts each year if your goal is to get “big” in 20 years’ time.
For those of us in marketing, if we told our clients that the marketing was going to pay off in 20 years… I don’t think they would be too happy.
But nevertheless, a consistent theme is that most large MSPs have been in business for a long time.
That means our formula now looks like this:
Intentional founders + Proximity to a population center + 20+ years of growth + x + x + x + x = magic
Funding, Mergers, Aquisitions
MSPs need a lot of money to grow quickly.
MSPs also have some significant operational limitations to rapid growth early on. Most of these limitations originate from lack of staff.
The solution to this problem is to have more money.
Of the 100+ MSPs I analyzed for this research report. Over 50% of them have been acquired, merged with, or have acquired other MSPs.
The most rapidly scaling MSPs today are all in on acquisitions. Large private equity firms are purchasing MSPs at exuberant rates as soon as they hit the market. Then, often, those MSPs are making acquisitions of their own.
As such, the MSP market is rapidly consolidating.
The thought process is PE firms can purchase large swaths of MSPs (with $2.5MM or more EBTIDA) and consolidate those businesses. They can apply best operating principles unilaterally and begin driving substantially more revenue than that same privately held MSP would have done before.
Remember, most MSPs are missing several of the 6 foundations mentioned above.
PE money can make those problems disappear.
These rapid mergers are attracting large buyouts from larger PE firms so consolidation with peers makes sense for founders if they are seeking an exit.
For example, a private MSP with EBITDA between $500k – $2.5MM could attract valuations from 2x to 4x EBITDA. A PE backed MSP in the $2.5MM – $5MM range could expect a 3x to 7x EBITDA valuation. The market leaders in the $15MM+ range can expect valuations up to 10x EBITDA.
The larger MSPs are attracting significantly higher valuation multiples because they are much more lucrative to large PE firms.
So, a major component of our magic formula is money.
This money is coming from a variety of sources and is playing a major role in the rapid expansion of certain MSPs.
You can sustainably scale an MSP with marketing & sales, or… you can skip the hard part and pay-to-play.
Paying to play is the much faster option.
Plus, we know that “stealing” clients from competing MSPs is inherently difficult. Why take the time to convince a client to change providers when you can just merge/buy your competitor?
So, with founders, location, time in business, and funding out of the way, our magic formula now looks like this:
Intentional founders + Proximity to a population center + 20+ years of growth + M&A’s/Funding + x + x + x = magic
Pricing & Services
I’m not an MSP pricing expert so I reached out to Techfive’s founder, Jason, to see if he could offer some additional insight. Jason is a 20 year IT veteran, has owned (and sold) multiple small businesses and has been the owner of Techfive (an Oklahoma based MSP) for roughly 7 years.
Here’s what he had to say about pricing your MSP services:
“MSP pricing is typically done one of two ways, per endpoint and per user pricing. Per endpoint being the standard for many years but has become difficult with more mobile devices. The average user now has around 5 devices they would like to get supported.
Per Endpoint typically starts at around $55 and an additional $175 – $250 per server and other charges per network/site and an additional charge for offsite backup by the Gb. Also, if there is a NAS onsite there is a charge for that. MSPs typically include all license costs in their packages so about 30% of what we charge is pass thru charge to various vendors. With internal IT that charge is separate outside of labor costs. Per mobile device is typically $12.50 per device.
Per User simplifies this by charging $100 – $250 per user depending on services offered for every user in the company, however per user falls apart on things like manufacturing/construction companies that have lots of employees that may not use computer or be mobile only. For office workers per user makes the most sense.
Margins on MSP contracts we like to see is typically 60% or more with 80% being the goal, this is determined greatly by the size of client and what services we can offer. Also, ticket load. Margins can be calculated a few different ways but typically its revenue – software and labor costs.”
It’s important to get your pricing right from the get-go.
Something I see all the time working with small business owners is that they don’t feel like they “deserve” full price.
You do. But it’s not all about the money. It’s about your brands perception.
Cheap services make your business appear less capable. Appropriate pricing is a must, especially for managed service providers.
With pricing covered, here’s where we are at with our magic formula:
Intentional founders + Proximity to a population center + 20+ years of growth + Access to capital + Appropriate pricing + x = magic
Marketing (and Sales)
Note: I will cover relevant parts of MSP sales when it makes sense but I’m not a sales expert.
Marketing can influence nearly every component of our magic formula in some way. From the core of the business brand to how products are priced and why.
This means that marketing is infused into nearly every part of the business growth process (whether it is directly called “marketing” or not).
So, despite marketing laying atop our hypothetical tower, it’s influence can be felt top-to-bottom.
“Good” marketing can be the primary growth agent of nearly any business on the planet. Especially MSPs, since there is relatively little competition digitally.
Despite that, marketing is not a requirement to grow an MSP.
It is, however, a requirement to grow one sustainably without constant human intervention (sales). If you want to scale your inbound leads funnel 10x you can hire 10 salespeople or bring on 3 new marketing hires that understand the principles of generating demand.
When marketing works it’s a lot like an unstoppable engine of growth, the demand for your services literally can outpace your capacity 10 to 1 (or much higher).
So, what does good MSP marketing look like?
In my experience, an effective marketing strategy for MSP growth has 6 primary components:
- A strong brand
- Obvious differentiation
- Demand generating educational content
- Locally optimized SEO
- A flow of deep, qualitative customer insights
- Consistency and patience
Let’s break it down a bit further.
A Strong brand:
Branding is how your business is perceived by customers. That means that everything from your logo to your customer service is part of your branding.
If something affects customers perception of your business, it is branding.
Creating great branding means cultivating an excellent customer-first culture within your business AND being detail obsessed.
Potential customers make decisions about brands within 1 second of seeing them for the first time.
They are not going to give you the time of day unless you make a great first impression.
Most businesses miss here big time.
Because you can’t control how your potential customers see you or interact with your brand first, you must be obsessed with details, making sure every component is up to the high standards you set for your brand.
If not, your buyers will filter out before you even know they exist.
Everybody does research before moving forward with a business purchase, especially one where the contract is worth $10,000s.
We have all become subconsciously excellent at weeding out illegitimate businesses, if your brand makes you appear:
- Underfunded
- Unsuccessful
- Unintelligent
- Incapable
- Unaware
Then you are failing at branding. A strong brand is the foundation of a successful business.
Obvious Differentiation:
If your service offering isn’t different (in a better way) you are going to lose most customers before you even know you lost them.
If there are zero compelling reasons to choose you over any other business, then you simply are relying on luck.
Being different doesn’t mean you have to offer a completely different product. It does mean that you must demonstrate your unique capabilities to potential customers.
6 successful ways this has been done in the past are:
- Niche into specific verticals & demonstrate expertise
- Offer specialized tools/experiences
- Have PROVEN better customer service
- Offer additional services (security training, pen testing, etc.)
- Serve customers other businesses can’t/won’t
- Be distinct in your branding (with a purpose)
- A million other options
Saying you are different and actually being different are not the same.
If you are committed to differentiation, make that difference part of your core brand, and build systems around it.
Demand Generating Educational Content:
There is a fundamental difference between creating leads and changing the way people think and perceive your brand.
Generating demand aims to flip the balance of power in favor of the business, where potential customers are reaching out to get the chance to work with the brand. Rather than the cold-call status-quo.
Successful brands do this by demonstrating consistent expertise and constantly feeding relevant educational content to their customers.
This content serves as a community builder, slowly growing this brands presence over time.
When you deeply analyze the concepts of demand generation, they really are just the fundamental requirements of building influence in the digital age.
A good way to think about demand gen is like this:
Say you create YouTube content, but nobody watches it. If you are committed to building an audience, you re-tool your content until it resonates with your viewers. Once you get that first sliver of success, you double down and create content until you have built a substantial audience.
(I have grown a YouTube channel to 10,000s of subscribers so I am speaking from my own experience.)
Now let’s flip it over.
Let’s say a business creates content that nobody watches. Instead of thinking: “there is probably a misalignment of my content with my audience” and re-approaching. Businesses typically opt to slam that same content down the calendar for months on end with no change.
Then when that doesn’t work, they just throw money at the problem and surprise… It still doesn’t work.
You can’t force people to be interested in your content, if it’s boring, untargeted, and irrelevant then no one is going to care.
Important Note:
There is literally an infinite stream of great content for people to interact with.
In the modern world, you are competing with the entire digital world for attention.
As a small brand, your content can’t just be as good as your much-larger competitors. It MUST be better. You don’t have the inherent advantage of being a brand people like.
Human psychology is actively working against you and your business.
As a quick thought experiment, consider the next time you are served sub-par content from a brand you are not familiar with.
How do you react? Do you give the brand the benefit of the doubt and read on? My guess is no. It’s not a bad thing, it’s just how things are.
Now remember that everyone else does the same thing to your content.
You need to be creating great content constantly. Day after day, month after month, year after year.
Locally Optimized SEO
As an MSP most of your client’s are going to be local, it’s worth it to be visible when they search for you. The obvious benefit is that you may pull in a few clients this way.
The less obvious benefits are:
- Another brand touch point
- Improved perception of your brand from potential client
- Enhanced presence
There are a million best practices for doing local SEO. Rather than covering them in detail here I’m going to recommend you read Brian Dean’s Definitive Guide to Local SEO. It’s the best resource I have found on the topic so far.
A Constant Flow of Deep Qualitative Customer Insights
Marketers aren’t psychics (and should stop trying to be). You need to find a way to get direct insights from customers.
The standard approach is to interview your customers. Both current and prospective.
I’m going to shout out Ryan Paul Gibson on LinkedIn here. In my mind, he is one of the de facto experts on qualitative customer research.
To understand what type of content resonates with your customers, you should ask them.
To understand how your customers buy, you should ask them.
To figure our who your customers favorite influencers are, you should ask.
And so on.
By keeping in constant touch with customers you can get insights YEARS before marketers who focus solely on quantitative insights can extrapolate the same things.
Oh, and a lot of those quantitative tools we know, and love are probably going to go away (or be greatly limited) as government regulations on privacy become more stringent.
If you aren’t talking to your customers, you are flying blind.
An alternative approach is to build a community that delivers deep insights directly to you every day by interacting with your content.
Committing to building this type of community is a BIG investment but the potential pay off is MASSIVE.
Consistency & Patience
The reality of marketing is that it takes time and consistent effort. Especially for fresh businesses (or those with minimal exposure).
No one wakes up one day and is a thought-leader in their niche.
People don’t change their perceptions of your brand after seeing one LinkedIn post.
You must commit to your strategies from here on out, being inconsistent is your enemy. If every 30 days you give up, you’re not even giving yourself the chance to be successful.
You must be creating content and putting it out there for the world to see as often as possible, without sacrificing quality.
Note: You should spend as much time (if not more) distributing your content as you do creating it. You can make the best, most advanced, awesome guide on the planet but if nobody sees it, it doesn’t matter.
Take the time to distribute every piece of content intentionally across every relevant channel.
And please re-tool that content on a per-platform basis. Mindlessly spamming blog post links on Facebook is not a good content strategy.
To become an expert you first must be a lost novice. It’s the natural cycle of self-improvement.
With that being said, committing to a losing strategy for too long can be disastrous. You should follow best-practice for when to adjust your marketing strategies.
Here’s the rough guide we follow here at Techfive:
- Make tweaks as often as needed (daily if required)
- Measure and adjust based off that data monthly
- Track revenue impacts quarterly
- Adjust overarching strategies every 6 to 12 months
The Magic Formula for MSP Growth
With marketing covered, we have reached the final version of our MSP growth magic formula.
Intentional founders + Proximity to a population center + 20+ years of growth + Access to capital + Appropriate pricing + Great marketing = magic
There you have it. That is what it takes to grow an MSP business according to the data.
When all these components come together you get something amazing.
Those companies that achieve all 6 are the ones that the rest of us gawk at and try to copy because they are just so awesome.
Make no mistake, getting there is difficult. It requires multi-talented teams, resources, executive buy in, and so much more.
But it is possible.
Do any businesses come to mind that you think fit these criteria? I’d love to know if they do (so I can research them too…). Shoot me a message on LinkedIn and let’s talk. I’m building a community of MSP marketers there and I’d love for you to join.
Best of luck reaching your magic status! Let me know if I can help.
Some of you are going to take the time to further research Techfive and what we are doing. I appreciate your curiosity.
We are early in our process of working towards this “magic formula.”
So, if while reading this you notice that some of “negative” things I point out Techfive is guilty of, just know that it is a work in progress.
I’d love to team up with other MSPs and share our best growth strategies, I’m working on making my LinkedIn the place to do that.
So if you work in or own an MSP, I would recommend taking a second to connect with me. My goal is to provide highly valuable, actionable content to help MSPs solve their growth challenges.
I’m not going to try to sell you anything. I work in an MSP too.
Up Next
At Techfive, we are all-in-one strategic partners for cyber-aware companies. We offload time-consuming tech management and help our partners become more cyber aware and secure.
"Always prompt on response whether in person or by phone! Very nice and friendly employees and very helpful!"
Ashley Harrison