From my time as an MSP investor, most MSPs that are for sale look like this:

• Yearly revenue below $3 million

• Owner is still involved in sales and delivery

• The biggest 1-3 customers make up over 50% of revenue

• Most the revenue is project revenue, rather than managed services or MRR

• No marketing or steady sales pipeline; all leads are inbound via referrals, and sales pipeline is erratic

• Pricing isn't consistent, and prices aren't going up; owner isn't comfortable competing for clients without offering discounts

Don't worry if this sounds like your MSP. Everyone starts like this! Even your fiercest competitors were like this at one point.

However, most buyers will pass on an MSP like this. Before $3mm, you're probably getting the typical startup MSP experience:

• A willingness to work with any client, on any project

• Inconsistent pricing and service agreements across clients

• Inconsistent tech stacks across clients

• Lack of predictable cashflow

• Difficulty in scaling sales or operations

• Employee burnout and turnover

What if I told you that there was one single strategy that could fix all of these things at once?

The answer is to focus on one industry as your niche, i.e. your "vertical." While focusing on one vertical sounds simple, the reality is that choosing a niche is the simplest way to improve your MSP.

Niches make riches.

Why does vertical specialization make money for MSPs?

Most MSP owners are inundated with people trying to give them advice on how to grow their MSPs. Like myself! In my assessment, specializing in one vertical is the single thing you can do to most improve your MSP’s long-term outlook.

Here's why.

Higher prices, faster collections & prepayments

When you specialize, you can improve your value proposition to clients within your vertical, earning higher prices on better terms.

Most MSP owners know to price based on value to customers rather than cost to themselves. But how can we maximize the value to our customers?

The key is to prioritize making 20 clients extremely happy with you, rather than making 400 clients only somewhat happy with you. The key is to create a tiny cohort of superfans, clients who couldn't imagine doing business without you.

Verticalizing means you understand the client's business problems more than any other MSP. It means you can tie your IT work to your clients' broader strategy. "Investing $X/mo with us will help you hit X KPI benchmark" becomes a credible claim if you can focus your services on their unique vertical's problems, something your largest competitors can't compete with.

Verticalizing means you're a larger fish in a smaller pond. So you can increase your rates and require payment in advance.

More cost-effective marketing and shorter sales cycles

Specializing means you don't need to fight as hard to stand out from the competition.

When other MSPs fight for prospects, they'll have to pitch features instead of benefits. Tools they'll use, analyses they’ll perform, onboarding processes they'll lead you through.

When you have a vertical focus, you can pitch benefits instead of features. You have X business goal, and I can help you get there because all my clients are in your same vertical and have the same business goal. You need to use X software that's essential for your line of business, but it's too niche for most MSPs to be able to support, but we specialize in X software because we specialize in your industry.

You can stop handing out discounts to convince new clients to switch to you. Choosing a vertical means differentiating yourself from the competition. Your prospective clients have less alternatives to consider if you specialize in their vertical and your competitors don't.

More stable cashflow, so you can hire yourself out of your job

You can't hire yourself out of your least favorite parts of your job unless you have stable cashflow. But stable cashflow is much easier to achieve with a vertical specialization, giving you the leverage to increase your prices and accelerate your cash collections.

Scaling your MSP requires hiring dedicated roles, particularly for sales and service delivery. If you're stuck doing sales or service delivery yourself, you are still working "in" your MSP instead of "on" it. You can graduate to the next level and make dedicated hires only with stable cashflows.

More M&A interest from strategic buyers and private equity

Buyers want to buy MSPs with a differentiator; you're more likely to sell your MSP with a vertical specialization.

Private equity in particular is interested in buying "platform" companies. One of the most attractive ways for them to do so is to acquire an MSP that's already specialized in one vertical.

How can you start specializing today?

The first step is to choose a vertical.

The most intuitive way to do so is to see which "line of business" applications your team already supports for existing clients.

Many verticals require a vertical-specific application, often a CRM or ERP, for companies to do business in that vertical. These are what we call "line of business" applications, or LOBs.

We can use the LOBs to evaluate the viability of a vertical as your focus:

• The more resources you need to invest to support the LOB, the more money you will make. Some LOBs are web-hosted by the vendor, making them easier for the customer to maintain and less lucrative for you to help to manage. But other LOBs require extensive training, creating a defensive moat for you and your vertical.

• The more inbound referrals you get for supporting a particular LOB, the more money you will make. Not every vertical is made equal, and inbound referrals continue to be a leading indicator for your vertical's tailwinds. Some verticals even have industry-specific distribution channels that help new clients find MSPs that support their industry.

The second step is to start orienting your sales & marketing around this vertical.

This is when your decision to verticalize starts to pay off. New client acquisition costs should go down when you have a specialty, because a vertical MSP doesn't have to work as hard to differentiate itself from the non-vertical MSPs.

You can also invest more in inbound marketing engines when you are vertical. You can target vertical-specific search keywords. You can create more marketing content for your target audience that speaks deeper to their problems. You can be more prescriptive about how your own services can help them achieve their business goals.

The third step is to scale up your service delivery around this vertical.

Choosing a vertical usually means streamlining your tool stack and being more of a consultative partner to your clients. As a vertical MSP, your clients should be leaning on your expertise to proactively invest in business-enabling technology, since your vertical MSP actually understands their vertical.

This also means your technicians require less training and onboarding, because you're saying no to more tools.

The financial ramifications are exciting. Your unit economics should be expanding: your unit revenue should increase, your customer acquisition cost should decrease, and your service delivery cost should decrease.

Summary

1. Choosing a vertical to specialize in is the lowest hanging fruit for most MSPs to break through $3 million revenue.

2. Benefits of verticalizing include charging higher prices, spending less to acquire clients, and improving service delivery efficiency.

3. Verticalizing improves your sales because you don't need to work as hard to stand out as a vertical MSP.

4. Verticalizing improves your service delivery because you can streamline your tool stack and be closer to the clients' business goals.