Research: MSP Dependence on Hardware Sales Limits Growth

Recent MSPmentor research indicates channel companies that remain overly focused on hardware sales are struggling, while those that emphasize recurring revenue models are enjoying healthy growth.

The research is part of MSPmentor’s MSPmentor 501 Annual Survey, which has produced some noteworthy preliminary results. In an April 15 article, MSPmentor reported a growing divide between companies that still rely on hardware sales and those that focus on recurring revenue models.

“We’re seeing the haves and have-nots,” said Jim Lippie, chief advisor at Clarity Partners. “The stronger companies are getting stronger and the weaker companies are getting weaker.” Clarity Partners and MSPmentor’s parent company, Penton, work together to produce the MSPmentor 501.

To illustrate his point, Lippie alluded to an MSP that grew 24 percent in 2015 thanks to a focus on cloud services and relationships with line-of-business buyers at new customers. By contrast, he cited a company heavily focused on hardware sales and non-recurring revenue activities whose income declined 22 percent.

In a separate article, Lippie mentioned another company that experienced a 400 percent revenue jump in the first two months of the year. The company, he said, “generates 75 percent of its sales from managed services, so its numbers are not inflated by big-ticket hardware sales or sizable projects.”

MSPmentor 501 preliminary results also revealed average recurring revenue increased 8 percent year over year, and that close to 80 percent of MSPs experiencing that kind of growth added full-time employees last year.

No Surprise

The MSPmentor 501 preliminary findings confirm what managed services proponents have predicted for more than a decade – business growth is tied to recurring revenue and service models.

Going forward, providers need to keep exploring new business opportunities in cloud and managed services. If you already cover the basics, such as systems monitoring and cloud-based data backup and recovery, you should be looking at what other services to add.

Talk to your clients about the types of applications and solutions they need to support their business goals. Take a cue from the MSPmentor research findings and be sure to approach line-of-business managers, not just IT or the C-suite.

The more you invest in delivering recurring revenue-based services, the higher the chances of growth, so long as you execute properly. If your business continues to rely disproportionately on hardware sales and break/fix work, your chances of growth are limited – or negative, as the MSPmentor research shows.

This doesn’t mean you should abandon product sales altogether. Your clients will continue to require fulfillment services, but the point is to rebalance your sales mix to emphasize long-term contracts that generate recurring revenue. That’s where business growth will come from in the future. The sooner you get the mix right, the more likely you are to guarantee a successful future for your business.