In part 3 of our journey in the land of MSP marketing, we look at MSPs with full specialization. In this scenario, using mining lingo, you have a very narrow specialization focus. You mine only for diamonds and are willing to forgo anything else.
The good news – relative to general mining (Part 1) and precious metal mining (Part 2), you need only a small crew and a limited range of equipment. To further reduce your risks, you do very thorough surveying before buying the land, your operation is highly focused, and you have very little competition. General mining companies can’t even touch you and you never lose opportunities to precious mining companies only once in a blue moon.
Because of your small (yet highly effective) operation, your gross revenue may not look impressive on the surface, but your profit margin is enviously high. The MSP equivalent of this “We are in the diamond mining business” is “We provide A, B and C IT services to ONE specific industry.”
Becoming a vertical market specialist with a limited range of offerings
Often referred to as special operations marketing, your firm is an industry specialist with a limited range of offerings to one specific industry. In modern-day parlance, this is account-based marketing, and contrary to conventional wisdom, it’s not a new concept.
David Ogilvy practiced this in the ‘50s and ‘60s. But, at that time, it didn’t have a fancy name. He would study the target market and cherry-pick a few cream-of-the-crop companies that he wanted to have as clients. Then he would mount customized marketing campaigns to acquire them. David’s books, Ogilvy on Advertising (1983) and Confessions of an Advertising Man (1963), are still worthwhile reading for MSP owners to get a better understanding of marketing strategy.
Similar to David’s approach, special operations type MSP marketers don’t wait for random buyers to contact them of their own volition. They select specific companies from the top echelon of their target markets and mount highly personalized campaigns to acquire them as clients. In a sophisticated way, MSPs manipulate the circumstances so their selected companies initiate contact with them.
Now, please note that while I use the word “manipulation,” but attention to the context. You don’t manipulate clients, but the business climate in which your target market operates. Researching and selecting the right trade publication in which you publish your content is one form of ethical manipulation. For example, if your target market is funeral homes, you can publish in Script from the Crypt, the monthly (fictional) trade magazine for the funeral industry and freelance gravediggers (I know, my past is haunting me, but we’ve all done oddball work to pay for our education).
Driving profit margins with premium work at a lower volume
This model is based on a low volume of high-margin premium work and the main objective is to acquire better clients with bigger and better deals at a higher price point. With special operations marketing, your client load and service delivery time go down, while your cost almost stays the same. There is an infinitesimal fluctuation, but it’s negligible. As a result, your profit margin is on a steady rise.
In your buyers’ perception, your MSP firm is either a low-priced fungible vendor (bottom left quadrant) or a premium-priced respected industrial authority (top right quadrant).
If you want to become a true “high-margin, low volume” MSP firm, then you must be a business strategist in the top right quadrant. In that position, you’re vertically positioned, specializing in a specific industry, and have a very good understanding of that industry’s expensive problems, business model (how it makes money), language and other industry-specific nuances.
This understanding allows you to present your solutions in the C-suite in the context of your buyers’ most expensive business problems and biggest business goals, NOT technical tasks to be performed. If you are a technical strategist or business tactician, you must work very hard to move to the top right quadrant, but it’s doable.
But if you’re in the bottom left quadrant as a technical tactician, performing break-fix services, then it’s almost impossible to get to the top right. So, which method to choose? Good question.
To help with the answer, let’s consider an old, but still applicable, a study by McKinsey & Co. [1]
In an MSP business, there are four levers you can pull to improve performance.
- 1 percent increase in average prices leads to 11.7 percent increase in operating profit.
- 1 percent reduction in variable costs leads to 7.3 percent increase in operating profit.
- 1 percent increase in sales volume leads to 3.7 percent increase in operating profit.
- 1 percent reduction in fixed cost leads to 2.7 percent increase in operating profit.
So, it’s price and variable costs. Yet, most MSPs focus on increasing sales volume and reducing fixed costs.
I think, it’s time to start yanking on the other two levers.
The real profit lies in special operations marketing
So, which method to choose? Good question.
Here is a little help…
In 2006, under Bill Ford’s (The great-grandson of company founder Henry Ford) leadership and owning several world-famous brands, Ford was about to lose $17 billion, although it’d made $170 billion in gross revenues. Then Alan Mulally took over leadership. He quickly sold Jaguar and Land Rover to Tata Motors, Aston Martin to a private equity firm, Volvo to China and closed Mercury. Although kept Lincoln, he really started focusing on the Ford brand. When Mulally retired in 2014, Ford made $17 billion in net profit, although gross revenue was a far cry from its 2006 gross revenue record.
Mulally focused on generating net profit regardless of gross revenue. The same applies to MSPs. Offering only a few services of top quality may not give you impressive-looking gross revenues, but your net profits will make you happier than a gym bag on a tomato field.
And as the saying goes, gross revenue is vanity, net profit is sanity. Yes, attrition marketing, which is heavily tactic-based (make more cold calls, respond to more RFPs, or hire more salespeople) without an overarching strategy, is easy to implement and you can generate impressive gross revenue. But even if it leads to victory, it is a pyrrhic victory because the cost of generating that impressive gross revenue can eat up all your profits. Your marketing cost can be high, and your profit margin can be low.
So, in my experience, it’s worth investing the time and effort in special operations marketing. It’s not as instant as attrition marketing, but it’s where the real profit margins lie.
I can’t remember the source, but I’ve read that typical professional service firms, like MSPs, generate 250 percent of their net profits during a fiscal year, but by the end of the year, problematic clients waste 150 percent. So, firms end up with 100 percent. Do you go for high gross revenue or high net profit regardless of gross revenue?
[1] McKinsey Quarterly February 2003: The Power Of Pricing By Michael V. Marn, Eric V. Roegner, and Craig C. Zawada
Photo: Bjoern Wylezich / Shutterstock
