Episode 53: Prepare for Sprawl
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Did you know that the average MSP bundle includes 13 product categories? Erick and Rich discuss that and a host of other research insights in this episode with Colin Knox, CEO of Gradient MSP. They also dive into the hype and reality of agentic AI and three critical nuances to delivering co-managed IT services. And finally, one last thing: proof that generative AI is the slimiest marketer on Earth when it comes to designing websites.
Discussed in this episode:
Colin Knox’s research LinkedIn posts:
ChatGPT was tasked with designing a website. The result was as manipulative as you’d expect
Transcript:
Rich: [00:00:00] And three, two, one, blast off, ladies and gentlemen. Welcome to another episode of the MSP chat podcast. Your weekly visit with two talking heads, talking with you about the services, strategies, and success tips you need to make it big in managed services. My name is Rich Freeman. I’m the chief content officer and channel analyst and channel mastered to the organization responsible for this show.
I’m joined side by side as I am every week by your other cohost, our chief strategist and channel mastered, Erick Simpson. Erick, how you doing? I’m
Erick: doing good, Rich. I’m about halfway through my Christmas shopping. So I’m ahead of the game here as we start this show in the very beginning. Of December.
You
Rich: know what?
I might be past halfway and I’m normally a last minute person. Like I cry, but I can’t come up with good gift ideas. It just goes on and on, but I made huge progress on the weekend after black Friday, actually, so I’m in better shape than usual, except of course for my waistline, which cause of all the eating and so on, but plenty of time to burn those calories off.
Erick: I’m sure you and I will be in a waistline competition by the end of this year with all the holiday meals that we’re having.
Rich: Absolutely. We are now deep into a holiday cookie season. Ignore the way it’s flying. Eat the cookies, people is my advice. Let’s dive into our story of the week here.
And it comes to us from know before one of the foremost names in security awareness training. They announced a new set of features a couple of days ago. As we’re recording this, they are calling it AIDA as in the opera. And that’s an acronym, obviously standing for artificial intelligence defense.
And it’s a set of four agents, AI based agents, agentic AI that they’ve put into their security awareness training platform. One of them is they’re calling it an automated training agent. And so it creates a personalized training program user by user in the company based on an individual risk score and some other variables it looks at.
There is a template generation agent. That creates a phishing templates using generative AI for you automatically. There is a knowledge refresher agent that according to know before delivers quote unquote, bite sized knowledge refreshers at optimum, optimal intervals, and then a policy quiz agent that delivers quizzes based on a company’s given security policies, all really good stuff.
And all really intelligent from my perspective, intelligent uses of artificial intelligence for a vendor like no before. Here’s the thing, though, that kind of struck me when I was reading this a couple of days ago, Erick, is that they are calling those four features that they have added to the product.
AI agents. And I’m looking at this and thinking, what is it exactly? That is agentic. That is different about these features from other things that vendors like Nova 4 have been doing with AI for the last almost, or approximately two years at this point. Now, as we know agentic AI is the hot topic within AI right now.
And Salesforce just a few weeks ago made a big splash when they introduced what they’re calling agent force, which is this whole set of features and functionality that generates agents for businesses that work Salesforce platform. There are a lot of other companies suddenly talking about agentic AI, but what agentic AI.
Is exactly how it differs from generative AI more broadly, why is valuable to vendors and also to MSPs is all a little squishy right now. And I bring the story up not to to, to bad mouth, no, before. But simply to point out this story out as an example of a phenomenon that I’m already seeing and that I expect to see more and more in the weeks and months ahead in which everybody, just as everybody was trying to say, we’re doing generative AI shortly after chat GPT came out, you’re going to see everybody saying we’re doing agentic AI.
And I think people on the receiving end of that message are going to need to be a little discerning. About what does that mean? And is it hype? Is it buzz? Or is it something real and different and valuable?
Erick: Notwithstanding what they’re calling it, Rich, I think how they’re using it is really interesting and effective.
I think the more stories that we cover, About vendors integrating AI, generative AI, agentic AI into their platforms, we’re starting to see a little bit of a trend, at least from where I’m sitting, I’m seeing, the things that typically take. a user a lot of time to do that are [00:05:00] repetitive or things that allow us to assess and analyze large sets of data and provide outputs and controls.
These are the early I think opportunities that I think every vendor is looking at is how do I integrate this To make my user experience better, richer to display data better, to have them in know before’s case learn better bite size or, reminds me of the fun size Snickers when you said that bite size chunks, right?
Fun sized little ways to remind us of training and tips. So I wonder Rich, at what point does the term generative AI or AI just become one of those things that we. Oh, no, here it is again, a thing like, the trusted advisor term, right? Sometimes it gets a little bit tired. I think we’re on a trend.
I think we’re on a wave and folks that are using these terms to generate SEO and buzz the one, one thing that I recall, someone way smarter than me in marketing said at one point said two companies competing in the market, one may have a better product, but it’s the company that out markets the other.
That wins the market share,
Rich: it raises an interesting question about what is or isn’t good marketing. I just earlier today, I was looking at a LinkedIn post by somebody who was calling out vendors in general for just pasting AI onto whatever it is that they’re doing. And, and just saying, you’re not fooling us.
Basically that you’re not fooling the buyers. It either is legitimate innovation or it’s just you doing some marketing spin. And so I, that we’ll see if it’s a smart thing for vendors to be just calling everything AI, or in this case in particular, to be calling everything agentic AI.
I’ll say this too. This is a sneak preview on the next episode of this podcast. Our interview guest is going to be Nadir Merchant who runs the IT operations suite, the R-M-P-S-A documentation suite at Kaseya. He’s also in charge of their artificial intelligence strategy over there.
And one of the things I intend to ask him about Erick, is AG agentic ai. What are you doing with it? But also. What is it? How do you guys define it? And hopefully he can help us bring some clarity to that question. But that is for next week for this week, let’s get into your tip of the week which has to do with something else that was maybe much buzzed about and hyped about once upon a time, but is very real and very profitable for a lot of MSPs today I’m talking, of course, co managed IT.
Erick: So let’s dive right in. Now, let me. Let’s close our eyes for a second, Rich, and think back before COVID and the lockdowns where, business was a lot different than it is today, there were employees going to a building and working, there was internal IT that were serving the mid and enterprise markets that saw MSPs as threats they didn’t want to let them in.
They feared, that there was a risk for their jobs or positions. As long as we started letting these. These MSPs and my role here is not guaranteed. All that’s changed Rich? Now we have folks that are adopting more of a hybrid workforce or work from anywhere policy.
Now, I know that a lot of enterprise organizations, large organizations are Doing the back to the office, mandates and boy, that’s having, different effects depending upon who that is. I think a lot of folks are rebelling against it a little bit, but that’s just one area.
Home managed IT was this, golden, goose kind of opportunity. Very few MSPs were successful at selling and delivering these services before the pandemic. But remember, Rich. During the lockdown, everybody was working from anywhere, from home, from a remote location. They were not going to the office because of the mandates and the lockdowns.
And this was what created this huge opportunity for MSPs to write in and save the day because the internal IT departments. We’re caught flat footed. They just were not prepared or trained, didn’t not have the platforms or solutions to support this, distributed workforce now and MSPs did. And so that opened the door for more and more MSPs to succeed in selling their co managed IT services during the pandemic.
Fast forward to today, more and more MSPs are looking to build more of their revenue. From these co managed IT services. So that’s what today’s tip of the week is about rich. It’s three things to think about when you’re considering really going after this co managed IT service opportunity. The first thing rich is to understand that we no longer.
In these relationships are typically dealing with the ultimate business owner decision maker, [00:10:00] right? We’re MSPs where we’re doing fully managed. We’re typically owning the entire responsibility for the infrastructure or a large majority of it and cyber security and all these things. We are the de facto virtual CIO or CTO.
We have kind of budget influence and things like that. In a co managed IT situation, we’re typically reporting to. A director of I. T. Cyber security. We are a cog in the machine. We are not the machine. So it’s important to train our staff around the nuances of working alongside other I. T. Teams who may still have a little bit of, maybe a little friction there in collaborating with them.
So the nuances of being part of a team, you We’re not really directing it. We probably have a very specific and defined scope of work, and these are the things that we are executing to serve the larger vision or direction of the IT department and the goals and milestones that they’re trying to achieve.
Number two, we’ve got to understand the rules of engagement. Everyone needs to know their defined role and responsibility, not just for our team. If I’m the MSP, it’s for everyone. The the IT department and their team, we need to understand whether we’re leading in some areas where, whether we’re following, are we a team leader, a team player, and understand the boundaries and how we collaborate and communicate together and measure progress because chances are rates that they’ve already got KPIs and ways to track performance.
And so we’ve got to now incorporate and adapt our. Processes to meet their internal needs, KPIs, platforms, things like that. The third tip Rich is we’ve got to get really good at what we were just talking about marketing, right? The organization that markets those co managed it services the most effectively will win.
In competitive situations, that’s, of course, understanding that we have value and we can deliver that value during a sales presentation. And our pricing is within the budget range and things like that. So highlighting the flexibility of our team, the cost efficiency of having us integrate within a larger team.
And this is another kind of a side a side effect you know, having those discussions that show that, that. Effectiveness instead of having that internal I. T. Team that struggles with the same challenges that M. S. P. S. Have in hiring highly skilled technical resources that wants, commensurate salary to come in and say, Look, we’ve got these experts on our team and we can deliver these services in a co managed fashion.
Much more cost effectively for you. That’s attractive. For some of these internal IT departments as well.
Rich: So three really good points there, and it occurs to me a lot of what you were talking about stands things we’ve talked about on the show on its head a little bit. So you were talking about the nuances of working.
With a corporate IT department as the provider of co managed IT support. And, some weeks or months back, Erick, we did an episode of the show in which we were talking about the business justification for outsourcing some of your work perhaps to an overseas help desk. And we were talking about extending your company’s culture to that outsourced team so that it’s all one team to the end user.
Now you as the MSP are on the flip side of that, right? If you’re going to be the co managed IT provider to a corporate IT department, you need to understand their culture and fit yourself into that. So that you, there is no, or a lot less friction there than there would be otherwise. In terms of metrics and KPIs and so on, it’s funny because we so often tell MSPs, You’re going to be dealing with business decision makers, business owners that are not interested in speeds and feeds.
And when you’re doing the quarterly business reviews, you got to talk business value. It doesn’t work that way necessarily when you’re working with the corporate IT department. They actually are quite into the speeds and feeds. You’re going to be delivering a different set of metrics and reporting data.
And again, you want to understand what’s important to them when you’re figuring out what to track and how to report it. And then from a marketing standpoint I guess my key point about the marketing thing would just be remember, because you are dealing with people who do what you do and may or may not be threatened by what you, because I, for years and years, Erick people were aware of the CO-managed IT opportunity, but most MSPs stayed far away from it.
’cause it just rarely worked out. The IT department would just shut down the idea. Cause I thought if we outsource any of what we do the boss is going to think what am I paying me for? So you just need to be mindful of the fact that you are selling to people who might be a little intimidated by the service that you provide.
And just anything else in marketing, understand who you are selling to. It’s not the, it’s the [00:15:00] it people and not the business decision makers understand what’s valuable to them and build the marketing message around that.
Erick: Oh, you’re right. She brought, a lot of really good points around these tips and I’ll save it.
Many try, but few succeed in this endeavor. You have to really level up your game, to be considered on par with these internal IT departments. I remember back when I was in my enterprise days, it was shirt and tie every single day. We were in the, in the Datacom department, we were dressed professionally.
We, we spoke in a certain way. We interacted with the users in the environment in a very specific manner. And it is very different than what, we migrated to in, in just serving smaller SMB organizations. So there’s that cultural. Point that you made very important and then also working alongside the team, the internal I.
T. team and making sure that they are the heroes in, in, at the end of the day. So we are not trying to outshine or outperform anybody. It’s a lot more of this head down. Focus on what we’re focused on and making sure that, we are in the shadows almost, right? Because we are supporting that internal it team.
We don’t want to make a lot of noise. We don’t want to stand out. So there’s a lot of that. And like you said, when we are delivering these services, you better bet your bottom dollar rich that these it directors or managers that we are reporting to they want to know exactly what solutions we are providing, what platforms we’re using, right?
Can you imagine just coming in and saying, Oh, don’t worry we’re going to, enforce stricter security. So it’s going to protect your users the way we do with SMBs. And have a conversation, all a lead balloon with the it director and say what’s in it, what are the solutions you’re using?
What vendors are you using? And then having them analyze and figure out whether that’s appropriate for their environment or not, or if it’s something that they’ve already got covered and you’ve got to be really good at understanding. Who that buyer is when you’re marketing and when you’re selling to them.
So a lot of little differences there and those sales cycles could be much, much longer than what we experienced selling to the SMB as well. There may be multiple levels of approval, budget, budget delays, agreement, analysis by attorneys, all that kind of stuff.
Rich: So the good, there was a lot to learn.
This is not managed services as perhaps you are delivering it today. A lot of differences, a lot of things to learn, but it’s all learnable. So as long as you go in mindful of the fact, this is going to be a different kind of interaction with the client, a different set of customer relations skills required.
This is all stuff that anyone in the audience here can handle, but but you do need to understand that it’s. It’s different from what you’ve been doing before. And last play, Richard,
Erick: it can be very lucrative. We, it can be very lucrative. But it’s not a race to the bottom. It’s not always these folks that are trying to get the cheapest thing.
They want what they want from their internal IT team. They want the best, they want the best results and they’re willing to pay for it. It just takes a little navigating.
Rich: But like you say, it very much, or certainly can be very much worth the effort. So with that, folks, we’re going to take a quick break.
If you are a regular member of our audience if you are a regular reader of my blog, Channelholic, you know that I just love my stats. I’m into, research reports and data and statistics. And recently I’ve been coming across a whole series of really interesting LinkedIn posts. Packed with statistics written by Colin Knox, who is the CEO of Gradient MSP.
And I invited Colin to come on the show and join us to talk about some of those posts, because it is very interesting stuff. Colin will be with us when we come back from the other side of the break, which we will do moments from now. Stick around, folks. We will be back. We’ll be right back.
And welcome back to part two of this episode of the MSP Chat Podcast, our spotlight interview segment. If you are a regular member of our audience or a regular reader of my blog, Channel Hulk, you know that I am a serious, a hardcore stats geek. And therefore you’re going to understand why I have been itching to have this week’s interview guests on the show ever since he started posting these great posts on LinkedIn sharing data that he and his company have been collecting all sorts of really interesting stuff in there that we will get into in a moment.
But I’m speaking of course, about our guest, Colin Knox, co founder and CEO of Bradium MSP. Colin, welcome to the show.
Colin: Yeah. Happy to be here. Thanks for having me.
Rich: Now I’m going to guess a lot of folks in the audience are familiar with you and certainly familiar with gradient, but for those who aren’t tell folks briefly, just a little bit about yourself and a little bit about Brady on MSP.
Colin: Yeah. Coming up on I think [00:20:00] I’m completing my second decade in the managed services market now across working at MSPs, having my own MSP jumping into the vendor side of things. Ooh, 11 years ago or more now. Founded and did a cybersecurity company called Passportal. I did that to Enable, worked at Enable for a good while after.
And now at Gradient, helping to ease and make MSPs more money. Make the business of being an MSP a little bit easier and a little bit more clear.
Rich: So before we get into some specific instances of the data that you’ve been sharing on LinkedIn, and I’ll say at this point, by the way go to the show notes for this episode.
If you want to actually read those LinkedIn posts, I’ll have links to a bunch of them for you there. But before we start getting into some of the specifics, talk a little bit about where that data comes from and where you’re at in the evolution of gradient MSP, such that it makes sense to start publishing and sharing these statistics.
Colin: Yeah, absolutely. So we are about four years into our endeavor as a business now. And part of what we really wanted to be able to do for the industry was add a layer of transparency and understanding as to what’s actually going on in the industry. We’ve got tons of media outlets in the industry, a lot of core platforms that do their.
Annual industry benchmark reports and information and stuff and obviously tons of coaches in this space. But everything that we found that we read about was mostly all just survey based, right? So if you look at the, foot footer disclaimer section of every industry report. It was done in partnership with this research firm and they surveyed X number of MSPs or what have you.
And as everybody, I think knows every survey needs to be taken with a little bit of a grain of salt because there’s only so much validity to it or. Ability to verify things. So part of what we wanted to be able to do is to create a source of. Spruce, for the industry that is, how is the industry actually performing?
How is stuff happening for MSPs? What are they actually selling? What type of growth are they seeing? Things like that. How we went about it is we built as our core platform or offering for MSPs is an integration platform where we tie to nearly a hundred different channel vendors to collect consumption information.
Help MSPs reconcile that consumption and variability in that consumption back to their PSA so that they can do what’s probably one of the most important things as their business or related to their business. But things that they hate doing, which is invoice their customers accurately every month for all these myriad of solutions that they’re reselling.
And so that’s what really started to feed this data set is, a whole bunch of connections out to different channel vendors, a whole bunch of MSPs tying in their those vendors to their PSA with our platform and allowing us to be able to watch what’s flowing through the system, right?
How much are the end customers consuming of which services, as part of, doing the invoicing, we’re obviously aware as to what are MSPs paying for certain things, what are MSPs charging their customers for certain things, and starting to just be able to see and observe what’s happening.
Obviously. Very private and sensitive data. So we de identify everything that flows through our platform. So we can’t come back and tell anybody, Oh, it’s this MSP. Doing whatever, this vendor, we categorize everything. So we bound all of our data by revenue band, by volume, by geography, and we aggregate everything.
All of the products and vendors and different solutions that are flowing through our system, we just drop those into base product categories and subcategories so that you’re never going to hear a gradient come out and say, Hey, this vendor is better than this vendor. Or this product is more profitable than this product because.
As we’ve all known over the last decades in this industry, it’s not always apples to apples. There’s very different features that come in. There’s very different partner enablement and support programs and experiences that come in behind things. But in general, we wanted to be able to collect a mass amount and a meritable amount of data to give us some indication as to what’s happening.
And so at this point in time, we’re somewhere in neighborhood between seven and ten billion dollars in annual cumulative revenue. That’s going through our platform today across thousands of MSPs. We’ve got a good enough cross section of data that, we’re fairly confident in watching how that all flows and see what happens from, what product categories are MSPs selling?
How many of them are they selling on average? What does that margin look like? What’s the average? Customer adoption look like [00:25:00] what’s retention look like and then being able to even subset down from there looking at things like how much of an MSPs growth is coming from upsell, cross sell and organic growth of their customers versus selling and bringing on new customers and what pace is that type of stuff happening at?
Just so that, as an industry, we can see What’s really going on.
Erick: Colin, there’s a lot of interesting data that you’re publishing. And, one thing that jumped out at me was, you mentioned the seven and a half to 10 billion worth of revenue more that’s what we expect.
You’re measuring growth in different areas that MSPs are introducing or expanding with their existing customer bases. We know that the move to the cloud and SaaS applications has been accelerated since, COVID and things like that, yet your data indicates that only about 4 percent of the of your total fracking indicates that I’m sorry, that 4 percent of MSPs that you measured are actually providing SAS monitoring.
Yeah. What, does that surprise you as much as it did Rich and I? And do you expect how do you explain it? And do you expect that to grow?
Colin: Yeah, a hundred percent I expect it to grow. I think. As an industry, a lot of the observers in the space have been wanting to see what’s that next generation of RMM, right?
We already know that the amount of physical assets under management and hardware devices is on a bit of a decline here. And you’ve got the advent of, virtual desktops and virtual microservices and hosted microservices and SaaS applications growing. But. I’d say probably only in, yeah, about the last four years, you’ve seen this advent of strict SAS monitoring solutions come into the space and.
They all came in relatively close to each other, right? You had SAS alerts came on the scene. You had augment coming into the scene. What were they originally called? SAS Leo, I think that was acquired by Auvik. Just the spattering of different vendors that kind of came in to see this.
Broad spread of different SaaS applications and stuff in use. And I think what’s interesting is, yeah, I was a bit surprised by the 4 percent number. I figured, hey, that’d be a little bit bigger. But again, when you start to look at what did I name off three or four different vendors there in a space where, you know, depending on who you talk to, we’ll try to stick with fairly stripped MSP, some in the neighborhood of 130, globally, right?
So 4 percent would indicate that you’ve got somewhere in the neighborhood of 6000 plus MSPs have adopted this. I’d say that’s really what we’ve experienced over the last couple decades as What the typical early adopter group of MSPs is, you hear it on a variety of different categories But once you hit this level of, 2, 000, 5, 000, 6, 000 or so MSPs That’s that early adopter group that seems to have it and I think you start to see moves like, core, core large platforms in the space That typically watch for that early adopter phase to be hit before now we’re really jumping in and doing something about it.
And, I posted that when I think it was the day or day after Kaseya announced the acquisition of SaaS alerts. And I think it’s indicative of all that. And I wouldn’t be too surprised if you don’t start to see more of that stuff starting to happen now, as the Kaseya, the ConnectWires, that even enables really getting into this space.
Thanks. And now starting to take out that, initial risk that all these companies that are creating this category for MSP, it de risks it for them. Hey, we’ve hit product market fit. There’s a problem market fit. We’ve hit the early adopters. Now our proven growth game and growth engine can explode this and take it further, right?
Because yeah as an emerging category, I think it’s. 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 SAS applications to be fit for any MSP.
So I think, we’ve, it’s probably taken four to six years for it to hit that I’d say probably over the next couple of years and probably predominantly off the backs of what Kaseya will do with SAS alerts, you’ll see a gross expansion of that over the [00:30:00] next year or two, two to three years.
Rich: That statistic and your interest, it’s a perfect illustration of why the data you’ve been publishing is so interesting to me, because Like you said, there are a bunch of vendors that are doing this and have been for years.
There’s a ton of talk about the need for SAS monitoring. And so it’s very easy for somebody like myself in particular, who’s talking to all those vendors a lot to feel like there’s a big footprint out there of MSPs who are actually doing it. And when you actually look at what they’re billing, what they’re paying for and what that, that’s when you discover, oh my goodness, we are just barely getting started in SAS monitoring.
So here was something else another couple of numbers actually that I thought were really interesting. And I’m curious to get your impression about you said that the average markup on security products is 133. 6%. And so for all the different kinds of product categories, you were looking at security products, highest markup, 133.
6% on average within security. The number one security solution category was DNS protection, which averages a 190% markup. Do those numbers surprise you as high or as, as you look across the MSP landscape and you look at numbers like that, do MSPs understand how lucrative security generally DNS protection specifically is, and are they billing appropriately for that extremely important service?
Colin: Yeah, so I think it’s interesting that post in particular got a lot of attention from a whole myriad of different opinions in the industry and even beyond the industry. Um, I think there’s a whole lot that, that goes into When an MSP applies markup and whether it’s gross margin markup percentage, whatever Because it’s more than just passing a product along right?
These aren’t just retail shops that hey you come in we’re making some money for holding something on a shelf and Doing the transaction for you and we bought in bulk, obviously they buy at a certain level of volume but there’s the supplemental value added services that they pass along from, the implementation, the ongoing administration, monitoring and management of these tools and solutions and stuff.
But, I think in general, the unit economics of MSP. Need to shift right? It’s an industry that you know, if you look at by what we see 50 plus percent of an MSPs revenue is really predicated off of the resale of various products and services. Now still, they have their value added, pluses and add ons and everything else that they’ll put into what they’re offering and what they’re selling.
But in general, if you look at even how typical distribution companies have been valued from a business value metric, you have You know, public market cap of companies like KD Cinex, Negro Micro and stuff when there’s not your own technology or your own intellectual property that you’re selling, you generally get a smaller multiple and it ends up coming on profitability and, volume and quantity and, magnitude of what you’re doing.
So as an MSP, when you start to look at. M& A being such a hot topic for this industry and, what’s my MSP worth and, how many multipliers do I get of my EBITDA, what size and what all goes into it. 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, right?
But at the end of the day, you’re in business to make money. And if you are the place that somebody can get something from, whether that’s because it’s exclusive to you, it’s, some other experiences, stuff that you put on, MSPs need to be charging for that. You look at other industries, you have, legal, look at how much lawyers charge just for their time compared to how much an MSP charges for their time.
Now we went through a vastly different education system and, having to bear the cost of their own compliance and being able to maintain their bar status and everything else. But. There is such a huge discrepancy of what other professional services are able to charge for their services compared to an MSP.
If a big part of your business is the resale of products, absolutely you need to be building margin into that. Because you’re also accepting the liability of the base end of when that service is available. Has a failure, has an outage, is unable to do something, is unable to deliver something or you have to make up for the gaps of what it can’t offer or pull things together.
So I think, I think when you’re looking at an average markup of [00:35:00] 133% I’m not even sure that’s enough, right? 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. 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, right?
Then you look at everything else that you’re delivering and doing it’s a game of kind of just stacking and bundling and putting things together. Security has such a high level of value for every end customer that, that each MSP has that. Yeah, it’s worth it to them because the point of risk, the point of liability that’s there is so worth avoiding and medicating any potential from something going wrong.
Erick: Oh, and I love what you’re saying about, you, a couple of things jumped out of me, markup versus gross margin, right? That’s, that, that is very different. So the stat here was average markup, right? So I just want to be clear about that. And the, I saw a stat, I believe it was earlier this year that I believe.
And it said something like 40 percent of MSPs are unprofitable, right? So speaking to exactly what you’re talking about and when you take, a point product or solution like security or service like that and say the average is 133. 6 percent markup, but how many other. Services or deliverables are in that portfolio of services where that blended margin drags it down, right?
If we’re unprofitable on a bunch of things, then it’s the, it happens the opposite way, right? Do you have a comment on that? And then I have a question for you.
Colin: Yeah, so I think, we track, I want to say it’s 85 different product subcategories across the full spectrum. I’d say what we see most commonly occurring is 37 particular product categories that MSPs resell.
And that then boils down to about 17 is what the average MSP is reselling on an average basis to their cross section of customers. Um, I think what you said a good point there, there’s some other notably low margin services that get offered out there. Some of that because the price has been highly publicized.
You have things like, Microsoft Office, Microsoft 365. Any consumer can go out and see the pricing for that and acquire that product and whatever else. So there’s only so much margin. Your only margin is how much volume am I doing and what’s my distributor or if I’m a direct CSP, what’s the best deal I can get there.
And, Microsoft talks a lot and you have the likes of, our friend Jay McBain over at Canalys and stuff talking about this. multiplier effect that all these channel vendors have now where, Microsoft in particular recognizes relatively low margin in the services and products that you’re able to sell as a reseller.
But hey, you can get whatever their number is today, six, eight, nine dollars per dollar of, products sold for Microsoft and supplemental services. I think in a lot of cases from, You know a straight systems integrator point of view or some other things you have that optionality there Whereas as a managed it service provider You’re eating some other costs so that you get this recurring contract on a regular basis or you know All in it services.
So I think In general, this is where you’re starting to see a lot of just straight bundling the all in, one line item MSP, which, I think I have some other thoughts on that in general as an approach. But, I think the next side of it is, we’re trying to unveil and talk a lot about too, is you always hear.
Oh somebody can charge X dollars for something if they’re in California, I can’t charge that over here in Ohio, right? And what’s that discrepancy of things in general? But, I think as you start to look at the total picture of the services that you’re offering as an MSP, geez, when I was VP of community over at Enable, I was spouting over there, cost up approach to your pricing, Erick, you’ve talked about stuff like this for years.
Start looking at what your base cost is, look at what your total bundle offering is, and add margin in that, knowing what you need to be doing as a business, because 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 for your clients either, because you can’t stay in business doing that.
Erick: Oh, you mentioned, Rich, I was going to kick it over to you, but I think you, you answered this next question. I was going to touch on that 17 product categories that MSPs that your data shows they typically are selling it’s a Goldilocks question. So the, your answer could [00:40:00] be. That’s just right, or not enough product categories, or too many.
What do you think?
Colin: Yeah, I think it’s interesting, and I think it’s only going to get larger, those numbers, right? You’ve got more and more categories that get uncovered. Latest category of browser based security solutions now that are coming on market. I think I’ve seen three launch out of beta or with their first offering in the last, six months alone, I think it’s going to, the problem is just going to continue to grow and grow of how many solutions.
So I think at the end of the day. It’s going to come down to just offering a broad solution for your customers, because you want to avoid this nickel and diming and going on solution based selling, right? And trying to figure out and set, guardrails within your agreements and the terms and everything else about what all you provide for a certain dollar amount.
But almost back to some of that precious metal stuff, because these. And customers don’t want every single QBR that somebody walks into saying, Oh, I’ve got another new solution for you. Oh, I’ve got another new solution for you. And their expectation in general is that everything’s just handled.
Over time, I think there’s going to be a gradual evolution as to how MSPs are doing stuff. But, who knows? There’s this may turn into. The next generation MSP could very well be like their own little mini micro marketplace. Look, come and choose. Here’s our, 500 different solutions that we can offer.
And here’s the benefit to them all pick and choose which ones you’re going to consume and, we’ll make sure that those are delivered or whatever else. But. Yeah I just, I don’t see it slowing down at all, and I think just staying on top of it all and, and just especially in the security category just getting more complicated to manage.
Rich: Just super quickly before we move on, I was curious, Erick, to get your take on that number. Given all the MSPs you work with did that average solution per bundle number strike you as high, low about what you would expect? Thank you.
Erick: I think it’s representative of what I see. But man, you’re scaring me a little bit, Colin, because, I just messaged rich the title for today’s for this episode, prepare for more sprawl.
Holy cow. That’s it’s it’s interesting, right? So I think that I see MSPs battling that today and trying to consolidate trying to. Maybe switch over to vendors that have packaged solutions, the Swiss army knife a thing. There’s good and bad to that as well, right?
Folks want something that is, distinct and unique and not like everybody else. So it’s challenging. I’m always curious to see, what MSPs are doing, what they’re adding to their stack. And most importantly, Colin, like you mentioned, when I’m coaching and consulting with them, it’s all about understanding what their true cost of service delivery is all in, and then adding the margin on top.
Because that after, 12 month agreement and doing the backward analysis and figuring out how much money we left on the table, Is sobering.
Colin: Yeah, absolutely. You look at, something we’ve been talking about. Now we don’t track it ourselves, but you look at stuff coming out of service leadership, even, when you’ve got an average cost to acquire a customer in the neighborhood of anywhere between, I think it was 26, 000 and 42, 000 to acquire a customer as an MSP, a staggering numbers when you then start looking at, Hey, what’s the average gross margin on a deal.
For the average MSP and recognizing that at those gross margin numbers, I think average deal size was about 2, 500 per month. And the average gross margin was something like, 32 percent or something. You’re talking nearly three years to get out of your CAC debt on the sale of a new customer.
And now you just said 12 month deals, right? Which is true. Average deal for an MSP is 12 to 24 months. So you haven’t necessarily paid off possibly even a third of what it costs you to acquire a customer because of how you have to charge and what your margins are and everything else by the time they may decide to not renew their contract.
That’s a fairly losing proposition there, which, again, how can we help elevate the standard here to have MSPs getting paid fairly, have them being in a profitable state and just. I don’t know, better understand the total unit economics of their business in general, so that they have a longstanding quality business that’s sustainable.
Rich: Okay. I’m going to combine statistics from two different posts [00:45:00] here cause the discrepancy struck me as interesting. So first I’m going to list off the top three MSP services by margin, according to your data in order. One, two, three. Website backup, G suite backup. Microsoft 365 backup top three by margin.
Now here are the top three by adoption email security and 365 backup, which we just heard before and content filtering. What’s your first impression basically about the difference between where the margins are and what MSPs are actually adopting and delivering.
Colin: Yeah. So I think, it’s definitely interesting.
Continuity is such a broad category that’s so well established for MSPs and they are so well trained on selling it. Coupled with, a lot of natural disasters occurring that continue to drive and customer awareness. And it’s one of those caveats almost that until something has gone wrong for an SMB, they’re almost not willing to invest in it.
But almost any SMB these days has been hit depending on where they are by, a hurricane. earthquake, major power outage from, winter storms, whatever else that’s taken their business offline. A whole bunch of things that way that’s made backup, this crazy valuable service to them.
And 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 security side where, 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 in the wait and see type of fashion that people had with continuity, but, it’s been interesting.
I think what we’ve seen a lot of though, and this is under Microsoft’s credit, everybody uses email and almost everybody is using, an M365 or some productivity platform. That’s in the high 80, I think it’s 89% is the average adoption of a productivity platform by MSPs clients.
So a lot of these things that circle around. Email do very well, they get high adoption, they get relatively high margin, and this is part of where Microsoft is maybe seeing that, and we don’t have to give you all the margin here, because you’re going to add backup on top of that, you’re going to add email security on top of that, you’re going to add on whatever else on top of that, right?
So I think the only thing that wasn’t strictly around email and that from the top adopted services was the content filtering. But again, everybody uses the internet. I think everybody’s had a bad experience of going to a wrong website or seeing something happen or being concerned that employees are doing non business things during business hours.
You get back to this, big brother type content filtering stuff, but in general, it’s these high adoption. So if you start to latch on and start to see. What are the commonalities across all of my customers? What do they all do? What’s something that they all have to do, and what do I stack onto that, right?
Hey, everybody is doing email. Now I can create bundles around email as a total, right? Hey, everybody’s out using the internet. All their employees are on the internet. Here’s how I can do things about that. But I think that’s some interesting stuff is. Backup continues to drive huge margins for MSPs in general, because, and customers are willing to pay that to keep their business running, be able to recover their data, see the value in that.
I think we need to translate as an industry to help educate MSPs better on how can they articulate that same value across. The rest of the security stack and the rest of everything else that they’re offering.
Erick: Oh, and what a fascinating conversation. I want to thank you for putting together, and aggregating this data and some analysis around allowing us to parse through some of it with you.
What are your plans to continue delivering this kind of data and sharing it with MSPs?
Colin: Yeah, so we, back in August, we launched an MSP pricing benchmark assessment where, same thing, any MSP can stop by this benchmark. meetgradient. com, use their product category, fill in a form and get a report back to them as to how they compared to industry with a bit of insight on that.
You’ll see the next iteration of that from a more transparent standpoint. More all inclusive approach starting in Q1 of 2025 with a whole lot of [00:50:00] trending built into that and just other supplemental bits to just help MSPs be more successful across various categories. But let’s say over the course of 25, you’ll start to see us move deeper into general MSP benchmarking as well.
Which, is a an area that’s been. Relatively well dominated and held by connect wise with their service leadership program. I think, we’re not looking to necessarily compete with that, but complement what they’re doing. And they share a lot of stuff about best in class. Our data set allows us to go a broader spectrum with some geographic segmentation and even by revenue band, I think, something that’s long been my.
My own little bellwether for a long time is a report CompTIA put out in 2016, which broke down the average demographics of MSPs of, how much revenue they were doing and how many employees they had, everything else. And at that point in time, 88 percent of MSPs. We’re less than 10 employees, but that’s as far down as it went.
And so I know when I was running community at enable, we had 22, 000 partners at the time, trying to figure out what’s that, segmentation, how big are these people and, where’s the right factor to go from, I think we want to be able to show that be able to help the industry understand what the breakdown of this massive managed services market is.
And help every each participant in this industry clearly understand how they’re performing compared to where they’re at and compared to that next level of where they can be and what’s different there, yeah, we’ll continue, on, on this path that we’re on and continue sharing more data and hopefully driving more and more value into the industry.
Rich: I’m a huge service leadership fan. I love their reports. But it strikes me as you’re talking, that the difference between them and you is they are dependent on what the MSPs tell them. And so they have this massive database, that. Everything is based on what the MSPs tell them, whereas in a certain sense Colin, your numbers can’t lie because it’s not self reporting.
It’s just what they’re actually doing. So I can imagine a future MSP chat episode, which, we will have you back. Maybe we’ll get Peter Kujala from Service Leader Trip on and we can hash out some of these. Differences, because I imagine there will be some really interesting conversations topics to dive into.
Colin: Yeah, absolutely. Absolutely. And like you said, we don’t make the numbers, we just tell them, don’t don’t jump at us if somebody disagrees, but yeah that’s the main point for sure. I’d be happy to do that.
Rich: So as I said before we we have links to a bunch of these LinkedIn posts Colin has been publishing in the show notes for the episode here.
I would encourage everybody not just to read those, but to follow Colin, to connect with him on LinkedIn. So you keep getting these as they continue to appear Colin for folks in the audience who want to. Get in touch with you, learn more about you, learn more about gradient, where should they go?
Colin: Yeah, absolutely. Best thing for me, LinkedIn. I think the handle is just reality knocks, but search me up. You’ll find me there. And for gradient, it’s. It’s www. meatgradient. com.
Rich: Okay. Awesome. Colin Knox, thank you so much for joining us on the show. Folks, we’re going to take a quick break here.
When we come back on the other side, Erick and I will share a few final thoughts about this very interesting conversation with Colin. Have a little fun, wrap up the show, stick around. We will see you next time. We’re going to be right back
and welcome back to part three of this episode of the MSP chat podcast. You know what thanks once more to Colin for coming through for us. Like I said, when I was setting the interview up, I’ve been looking forward to this a while because the data he’s been sharing is is so interesting. And honestly, Erick I’m not just saying this to be like that conversation was, Better than I was hoping for, because not only did he provide some more context and perspective on the data that he presented, but this was a guy who’s been in and around MSPs for many years.
He was an MSP himself, even before the past portal days. And he just actually shared a lot of really interesting thoughts about what this data means. For the MSPs in our audience. And the only thing, other thing I’ll just say. I guess I’ll reiterate that I’m super curious going forward to see how the gradient MSP data, which, as we said, is just it’s.
What lands in their database, it’s not what an MSP tells them it’s true, it’s what they’re actually doing. So I’ll be really interested to see how that compares to what other benchmark reports out there are showing. And learn more about where those discrepancies are coming from. And then I would just very much encourage people in the audience to pay attention to benchmarking data where they can get it.
Whether that’s from gradient MSP or service leadership, we talked about, there are other people out there doing that. I think you will probably be surprised more often than you [00:55:00] expect about how your service bundles, your pricing, your profitability, et cetera, compares to other MSPs. There, there’s no substitute in terms of making business decisions for your company for really measuring yourself against real world data.
Erick: Yeah, Rich I really enjoyed the parts of the discussion where we were talking about. Profitability and how, and the and the juxtaposition or the difference between what the most profitable services are that MSPs can sell and how many of them are selling those as a priority, right?
So looking at your mix of services and solutions in your portfolio, are you leading or making sure that you’re including the most highly profitable services into your bundle? To overcome some of the services solutions that you, including your bundle, they’re not quite as high margin, right? So that blended margin, is higher than it typically can be.
We talked about, some stats where, it might be like 40 percent of MSPs are unprofitable. And, it was interesting how Colin, like you said, provided context around that and irrefutable. data because it is actually being collected by the agents and the platforms that the MSPs are using.
So it’s got a high level of confidence, but I was surprised that some of those statistics, it, I had no idea. Just how low some of those percentages were for the general audience. And I hope that our listeners take heed. And start evaluating their services and their portfolio and making sure that they’re including some of the higher margin services along with.
In their go to bundles of services to their clients.
Rich: So he our guest was Colin Knox, K N O X. Welcome up on LinkedIn, give them a follow. There’s going to be more of this data coming along in the future. And I know I, I’m going to be looking out for it. Hopefully you will too. And that folks leaves us with time for just one last thing on this episode of the show and appropriately, we kick things off talking about AI.
Erick, we’re going to come back to that. Cause it turns out you just can’t trust that chat GPT. This is based on a research study done by some researchers in Germany and Scotland basically they went out and they asked chat GPT. And actually they did this with Claude and Gemini as well, and got the identical results across platforms.
They basically. Did the kind of thing that is these tools can do that. So powerful for people out there without a lot of technical skills they basically said, create me a website. And this was all, based on a uniform set of prompts, very neutral in terms of the objectives we are in, thus in such a business, build me a website that advertises our products.
And then they looked at the website that these artificial intelligence tools created automatically. And they found a lot of what they call deceptive design patterns. Or sometimes in the marketing world, these are referred to as dark patterns. So these are hit subtle. Hidden things sometimes in a website that are meant to manipulate a user in one way or another, maybe you position a product that you want to steer them towards in a way that’s just a little bit different from the other ones and makes it easier to see and click or you that control the size or the color of a button to unsubscribe from something in a way that makes it a little bit harder to see Maybe you have pre checked some sort of opt in checkbox somewhere for somebody so that they have to notice that and by golly, artificial intelligence was doing all of this stuff without being asked to, and or, it just basically, based on what it has learned about websites, it has mastered the art, Of creating deceptive and manipulative websites.
And if you just asked it to build a website for you, it’s going to create one that is really good at at manipulating visitors.
Erick: Oh, rich another role that AI is going to either enhance or compete with, right? We’re always talking about, what AI is good for and the folks that fear it.
Fear that it’s going to negatively impact them. The folks that welcome it, see it as a way to enhance what they’re doing or what they’re trying to achieve. In a recent conversation we had, we discussed the opportunity for folks to skill up, right? Let AI do some of that noisy stuff and then you upskill so that you can compete for better roles at higher pay.
Web developers and website designers are on notice now as well as podcasters. We did that show, remember Rich where you ran you, you had the what platform was it that you had to read something and create a podcast? Oh, the Notebook LM? Notebook LM, yeah.
Crazy, right?
Rich: Yeah. One thing that AI did when it was building these websites that I’m quite [01:00:00] confident pretty much anyone out there would spot right away is it apparently generated a lot of fake reviews and fake testimonials. I think people would realize, I’ve never heard of this. Company before but be mindful folks, be mindful trust, but verify when it comes to putting AI to work buyer, beware buyer, beware.
Wealth bed. Folks, that is all the time we’ve got for you this week on the MSP chat podcast. We thank you for listening. We will see you again in a week’s time with another episode. Until then, I will remind you that this is both an audio and a video podcast, which means that if you are watching us on YouTube, but you’re into audio You can go to Spotify, Google, Apple, wherever it is.
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