By Jim Lippie 1

Data from the annual MSPmentor 501 list is starting to roll in and it tells an interesting story about the evolution of the service provider market.

For several years, industry thought leaders have been telling service providers to focus more on service revenue and less on hardware revenue. That’s easier said than done, especially when a service provider is still making money reselling hardware.

It’s kind of like when your parents tell you, “if you eat too much candy you will get sick,” but the candy still tastes great and you’re not sick…yet.

Nearly 25 percent of businesses that get more than 50 percent of their revenue from hardware sales are now sick and some, really sick, based on certified revenue numbers from the MSPmentor 501.

As a kid, “sick” meant a stomach ache and maybe a day out of school. For MSPs, sick means losing revenue year-over-year and really sick means double-digit year-over-year revenue losses.

While almost a quarter of those “box pushers” are sick (22 percent lost revenue in 2015), it’s not a bleak story for everyone.

Service providers who derive more than 50 percent of their revenue from hardware grew just seven percent year-over-year.

Compare this to service providers with 60 percent or more of revenue coming from services; they grew 24 percent, outpacing providers that provide mainly hardware by 17 percent. Just 7 percent of companies with at least 60 percent revenue from services suffered year-over-year revenue loss.

So what are the numbers telling us?

In short, the data indicates that the strong companies are getting stronger and the weak companies are getting weaker. Companies that are hardware focused need to evolve their businesses to a service-centric model, and fast!

With more and more SMBs moving to hosted solutions, it is indisputable that the need for hardware will continue to decline. At the same time, there are still service-centric companies struggling too (7% lost revenue in 2015), so an all-services portfolio isn’t a panacea.

Service providers need to be focused on the right service mix strategy, not an all-services strategy.

Evolution of the services model is essential to fuel profitable growth, and MSPs in particular need to seek guidance to determine how best to evolve their business model.

Service providers attending HostingCon this July will hear me speak about “Total Service Providers” or “TSPs”. A TSP is a service provider that has at least three types of service revenue:

This services mix provides the most value to the client while allowing the service provider to demand more recurring revenue and realize higher profit margins. During my presentation, I will discuss the three tiers of a TSP and provide the algorithm to allow MSPs to run their own calculations to determine where they fall along the industry’s evolutionary process.

Ultimately, every service provider should know how they can effectively go to market with a proven and sustainable plan. I look forward to seeing you in July.

This article is brought to you by HostingCon, the Cloud and Service Provider Ecosystem event. Join us in New Orleans, Louisiana July 24-28, 2016 to hear Jim and other thought leaders talk about issues and trends in the cloud, hosting and service provider ecosystem.