Five Interesting Thoughts from…Colin Knox

Data-driven observations about MSP billing and pricing from the CEO of Gradient MSP.

Colin Knox, co-founder and CEO of billing reconciliation and pricing guidance vendor Gradient MSP, was our guest on a recent episode of Channel Mastered’s MSP Chat podcast to discuss a fascinating series of statistics he’s been publishing on LinkedIn in recent months based on anonymized data from thousands of MSPs in Gradient’s database.

Here are five of many interesting observations Knox made during that conversation. Remember as you read them that these numbers are based on what MSPs are really delivering and billing for every month, not what they say they’re doing in benchmark surveys or what vendors and analysts claimthey’re doing.

1. Just 4% of MSPs provide SaaS monitoring and management services to their clients. SaaS applications like Microsoft 365 play a huge role in how SMBs get work done these days. Yet only a surprisingly tiny sliver of MSPs offer SaaS monitoring and management services to their clients. Knox believes most MSPs have been waiting for a critical mass of their peers to jump in before doing so themselves.

“I think it’s difficult to push that initial rope of educating MSPs on a certain category of something that they haven’t sold, they haven’t necessarily done, or haven’t used, and it still needs to prove out enough and expand the technology enough to cover a broad enough spectrum of the various SaaS applications to be a fit for an MSP,” Knox says.

Vendors, too, have been waiting for a critical mass of MSPs to enter the SaaS management market before jumping in, Knox continues. Now that 8,880 MSPs (4% of what Canalys says is a global population of 148,000) are providing that service, though, momentum should start building soon.

“I’d say probably over the next couple of years and probably predominantly off the backs of what Kaseya will do with SaaS Alerts, you’ll see a gross expansion of that,” Knox says.

2. The average markup by MSPs on security products is 133.6%. That makes security their most lucrative market, according to Knox, who adds those margins may actually be too low.

“When you look at everything that you’re taking on, you’re still bearing the cost of administration to actually count, charge, invoice, collect money on that service,” he observes. “The whole provisioning of it, the monitoring of it, everything else that bakes into it, just your G&A costs on that alone, probably eat up 20 to 30 percent of that markup”.

Factor in the liability risks they’re assuming as well, Knox notes, and a 133.6% markup probably isn’t enough.

3. It’s not just security. MSPs aren’t charging enough more broadly. By some counts, as many as 40% of MSPs are losing money or just breaking even. Knox believes a hesitancy by MSPs to bill clients what they’re worth is partly responsible.

“In general, so many of these businesses are still not profiting because they’re almost scared of people thinking that they’re either gouging them or whatever else,” he says. That’s not an anxiety lawyers share, Knox adds.

“Look at how much lawyers charge just for their time compared to how much an MSP charges for their time,” he observes. “There’s such a huge discrepancy of what other professional services are able to charge for their services compared to an MSP.”

4. “Cost up pricing” is the most profitable model for setting managed service prices. There are a lot of ways to price managed services, but Knox recommends adding the profit you wish to make to your fully burdened costs.

“Start looking at what your base cost is, look at what your total bundle offering is, and add margin on that knowing what you need to be doing as a business,” he says, adding that everyone loses if you don’t.  

“When 40 percent of an industry’s either breaking even or losing money every year, that’s not a winning proposition for you as a business owner, obviously, for your business, but [also] for your clients,” Knox says. “You can’t stay in business doing that.”

5. The three most profitable services MSPs offer are website backup, Google Workspace backup, and Microsoft 365 backup. Notice a theme? A typical MSP’s three biggest money makers all have to do with data protection, something the vast majority of MSPs have been doing for as long as they’ve been MSPs. And yet Knox thinks there’s further money still to be made.

“Even though you’ve had the amount of ransomware that you’ve had out there, I think there’s still a ton of opportunity on that,” he says. “End customers still aren’t either understanding or comprehending the level of value to their business, or MSPs haven’t been educated well enough to articulate that.” To hear more of Knox’s interesting thoughts, listen to our whole interview with him here.