Did you know that the global managed services market is on track to reach $731.08 billion by 2030? That’s a staggering growth rate of 13.6% annually from 2024 to 2030. Despite this impressive trajectory, many software companies are beginning to deprioritize managed services, instead focusing solely on software sales.

It’s understandable why some companies might question the profitability of managed services. However, this perspective can overlook the significant value managed services can bring. Software companies risk missing out on long-term growth and customer satisfaction by writing off this opportunity.

In this blog, we'll explain why some software companies are moving away from managed services and why you should reconsider this approach. You'll discover how managed services can offer sustainable revenue, deepen customer relationships, and give you a competitive edge in the evolving software industry.

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Why Software Companies Might Deprioritize Managed Services

You might wonder why some software companies neglect managed services even as the market grows. Several factors contribute to the perception that managed services are less profitable than software sales.

High Initial Investment

Building a managed services practice from the ground up requires a significant upfront investment. You’ll need to allocate resources to infrastructure, hire skilled personnel, and establish robust processes. For smaller software companies, or those aiming for rapid growth through core software offerings, this investment can feel daunting and may strain your resources.

Complex Cost Structures

Managed services encompass various cost components, including labor, infrastructure, and ongoing support. Calculating profitability can become complicated, making it challenging to determine your return on investment (ROI) compared to the more straightforward margins of software sales. This complexity can make managed services less appealing, especially when your primary focus is on quick wins.

Perceived Lower Margins

Managed services often entail recurring expenses to ensure ongoing service delivery and support. Unlike one-time software licenses or subscriptions, these ongoing costs can give the impression of lower profit margins. This perception becomes even more pronounced if your company lacks efficient service delivery mechanisms or a solid pricing strategy.

Focus on Core Software Business

For many software companies, the primary goal is to build and sell software. Managed services can seem like a distraction from this mission, leading to underinvestment and a lack of strategic focus. If your company is dedicated to software innovation, it’s easy to see why managed services might not be prioritized.

Competition From Specialized MSPs

The managed services market is saturated with specialized Managed Service Providers (MSPs) that offer a wide array of services. Competing with these established players can be challenging, especially when your software company doesn’t have a well-defined managed services strategy. Differentiating your offerings can feel like an uphill battle.

Profitability Challenges

Although the managed services market is growing, profitability remains a significant challenge. Research indicates that approximately 30% of MSPs generating 30% or more of their revenue from recurring services continue to struggle to achieve consistent profits. This financial uncertainty can make investing in managed services feel like a high-risk move, especially if your company is focused on stable, predictable revenue streams.

Shifting Customer Preferences

Customer preferences are evolving, with some moving away from managed services entirely in favor of co-managed IT models or transactional IT spending. This shift can further diminish the perceived value of managed services, particularly if your customer base prefers more flexibility and control over their IT environment.

Related: What are Managed Services? Definition and Overview

Why You Should Reconsider Investing in Managed Services

Despite the challenges, managed services offer substantial opportunities for software companies. Here’s why it’s worth giving managed services a second thought.

Recurring Revenue Stream

Managed services can provide a predictable and recurring revenue stream, which is essential for long-term financial stability and growth. This consistent income helps balance fluctuations in software sales and provides your company with a more stable financial foundation. The top 15% of managed services providers boast an impressive 99% recurring revenue retention rate.

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Increased Customer Lifetime Value and Customer Satisfaction

When you offer managed services, you create stronger, long-lasting customer relationships. By providing ongoing support and value-added services, you keep customers satisfied and more likely to remain loyal to your software in the long run. This not only boosts customer loyalty, but also maximizes customer lifetime value.

Managed services enhance customer satisfaction by providing proactive support, resolving issues more quickly, and continually optimizing software. Your customers will appreciate knowing that their systems are in good hands, leading to increased loyalty and positive word-of-mouth recommendations.

Competitive Advantage

Managed services can set you apart from the competition in a crowded software market. By offering a comprehensive solution that includes software and ongoing management, you cater to customers seeking a fully managed experience. This added value makes your offering more attractive, especially in industries that rely on consistent support and maintenance.

Access to Valuable Data and Insights

When you manage customer environments, you gain access to valuable data about how your software is being used. These insights enable you to enhance product development, introduce new features, and effectively address customer pain points. By leveraging this data, you can align your software with your customers’ needs.

Enhanced Scalability

Managed services enable your company to scale more efficiently by giving you access to skilled resources and standardized processes. This is particularly useful if you’re experiencing rapid growth or entering new markets. Integrating cloud computing into your managed services can enhance scalability, reduce costs, and improve performance.

Reduced Risk

Proactively managing your customers’ environments helps you mitigate risks associated with security breaches, downtime, and compliance issues. This reduces the potential for financial and reputational damage while giving your customers peace of mind.

Monetizing Service Efforts

Many software companies offer customer support or professional services at no cost or break-even prices. These services, while valuable, can drain your resources. By providing managed services as a paid feature, you can monetize these efforts and generate a new revenue stream, improving your overall profitability.

Addressing Increasing IT Complexity

As technology evolves, IT environments become more complex. Your customers may struggle to manage this complexity independently. Managed services position you as a trusted partner who helps them navigate these challenges, ensuring optimal software performance and security.

Aligning Pricing With Value

One of the most important aspects of managed services is aligning your pricing with the value you deliver. When you focus on value-based pricing, you demonstrate the tangible benefits your services bring, which helps enhance profitability and build long-term customer relationships.

Related: The State of Managed Services 2025

Types of Managed Services You Can Offer

As a software company, offering managed services can help you better meet your customers' needs. According to TSIA research, there are two main approaches to managed services:

• 1.0 MSPs: These providers focus on customized solutions tailored to individual clients.
• 2.0 MSPs: These providers offer standardized services with consistent delivery operations.

Here are some of the most common types of managed services software companies can offer.

Cloud Services

Managing cloud infrastructure, applications, and security can be a valuable offering for your customers. Cloud-managed services might include migration, optimization, and ongoing support. For example, if your company offers a cloud-based CRM solution, you could provide managed services that cover deployment, maintenance, and security—thereby taking the burden off your customers.

Security Services

Many businesses prioritize cybersecurity. You can offer managed security services to help your customers detect threats, manage vulnerabilities, and respond to incidents. For instance, if you develop enterprise resource planning (ERP) software, offering managed security services can help protect sensitive financial data and ensure compliance with industry regulations.

Support Services

Customers value reliable support. Managed support services can include technical assistance, troubleshooting, and issue resolution. You could set up a 24/7 help desk, offer proactive monitoring, or even provide on-site assistance. This level of support enables your customers to maintain smooth operations and resolve technical challenges promptly.

Application Management

Your customers rely on your software to run efficiently, so managing and optimizing performance is crucial. You can offer managed application services for updates, patches, and customizations. For example, if you offer HR software, your managed services might include keeping the system up to date and ensuring optimal performance.

Data Analytics

Helping your customers understand their data can give them a significant competitive edge. Managed data analytics services might involve setting up dashboards, generating reports, and providing insights into software usage. By providing expert analysis, you enable customers to extract the maximum value from their software investments and make informed, data-driven decisions.

Addressing the Challenges of Managed Services

Managed services can offer significant benefits, but they also come with challenges. Understanding and addressing these challenges is crucial for delivering consistent and high-quality services. Here are some common hurdles and suggestions on how to overcome them.

Support Delays

Providing timely support can be challenging, especially as remote work becomes the norm. To address this, it’s essential to establish clear Service Level Agreements (SLAs) that outline response and resolution times. Investing in remote support tools and infrastructure can also help you maintain fast and practical support, keeping your customers satisfied even from a distance.

Insufficient IT Expertise

A common issue in managed services is the shortage of skilled IT professionals, which can lead to downtime and subpar service quality. To avoid this, ensure that your team includes certified and experienced professionals who can effectively manage the complexities of customer environments. Regular training and upskilling are also crucial to staying ahead of evolving technologies.

Cybersecurity Threats

Security remains a top priority when offering managed services. To protect customer data and systems, you’ll need to implement robust security measures, including:

• Firewalls to block unauthorized access
• Intrusion detection systems to identify potential threats
• Endpoint protection to secure individual devices

By proactively managing cybersecurity, you can build trust and reduce the risk of data breaches.

Resource Limitations

Complex IT projects, such as cloud migrations, can strain your resources. To minimize disruptions, assess your current resource capacity and identify potential gaps. Plan your projects with scalability in mind, ensuring you have the right tools and personnel to handle unexpected challenges. This approach will help you maintain smooth operations, even during resource-intensive tasks.

Pricing Managed Services for Profitability

Setting the right pricing strategy is essential to making your managed services profitable. You must choose a model that reflects your value while aligning with your customers' needs. Here are some of the most effective pricing models to consider:

• Cost-plus pricing: This traditional model involves adding a markup to the cost of service delivery. While straightforward, it doesn’t always capture the value your managed services bring to your clients. As a result, you may undervalue your offerings, which can ultimately harm profitability.
• Value-based pricing: Value-based pricing focuses on the benefits your managed services deliver to customers, such as increased efficiency, reduced risk, and enhanced performance. By aligning pricing with value, you can better demonstrate ROI and justify higher rates. This approach often leads to more favorable outcomes compared to cost-plus models.
• Consumption-based pricing: This model charges customers based on the amount of services or resources they utilize. This flexible approach ensures that costs are directly tied to actual consumption, making it easier for customers to see the correlation between usage and pricing. It’s a great way to accommodate varying customer needs while maintaining transparent pricing.
• Outcome-based pricing: An emerging and innovative model that ties your charges to specific business outcomes achieved through your managed services. For example, you might set pricing based on increased revenue, cost savings, or improved operational efficiency. This approach aligns your success with that of your customers, fostering stronger partnerships.

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Which Model Works Best?

Research shows that value-based and consumption-based pricing models deliver better results and higher gross margins than traditional cost-plus methods. Selecting a pricing model that aligns with customer value enhances profitability and fosters long-term customer loyalty.

Balancing Profitability and Strategic Value in Managed Services

When evaluating managed services, it’s essential to look beyond short-term gains. While profitability is crucial, focusing solely on immediate returns can cause you to overlook the long-term strategic value that managed services can deliver. Here’s how you can strike the right balance.

Recurring Revenue

One of the most significant advantages of managed services is the predictable and recurring revenue stream they generate. This steady income contributes to long-term financial stability, helping you weather fluctuations in software sales. Building a reliable revenue foundation enables you to plan for growth with greater confidence.

Customer Retention

Providing managed services means offering consistent support and added value, directly impacting customer satisfaction. Clients who know they can rely on you for proactive support and optimization are likely to stay loyal to your software. This improved retention not only strengthens relationships, but also reduces churn.

Competitive Differentiation

In a highly competitive software market, standing out is crucial. Managed services can set you apart from competitors by offering a fully managed experience that customers appreciate. Positioning yourself as a partner who goes beyond selling software makes your offering more attractive to businesses looking for comprehensive solutions.

Balancing profitability with strategic value is key to sustainable success in managed services. By focusing on financial outcomes and long-term customer relationships, you create a managed services practice that generates revenue and builds lasting value for your business.

Related: Elevating Customer Experiences and Driving Business Value in Managed Services

Positioning Your Software Company for Success With Managed Services

It’s true that managed services can sometimes seem less profitable than software sales. However, focusing solely on short-term gains can cause you to overlook the long-term strategic benefits that managed services can offer. As IT environments become increasingly complex, cybersecurity demands rise, and cloud computing becomes the norm, the managed services market is poised to continue expanding.

Investing in managed services enables your software company to capitalize on this opportunity and gain a competitive advantage. Offering a comprehensive solution that combines your software with expert management and support drives recurring revenue and enhances customer satisfaction. This holistic approach positions you as a trusted partner rather than just a software provider.

How To Successfully Implement Managed Services

To make the most of managed services, consider these key steps:

• Assess your needs and capabilities: Determine which managed services best complement your software offerings and address your customers’ challenges.
• Develop a clear strategy: To create a structured approach, define your target market, value proposition, and pricing models.
• Invest in resources and infrastructure: Build a skilled team and invest in the tools and technologies required for effective service delivery.
• Focus on customer satisfaction: Prioritize delivering exceptional service and fostering strong relationships to boost customer loyalty.
• Adapt to evolving trends: Stay current with emerging trends, such as co-managed IT and the increasing demand for cybersecurity, and adjust your offerings to remain relevant.

By following these steps, you can overcome the everyday challenges of managed services and unlock their full potential for growth and profitability. Taking a strategic approach enhances your bottom line and fosters long-lasting customer relationships, ultimately helping your software company thrive in a competitive industry.

Your Key Takeaways

• Managed services offer long-term value: Despite perceptions of lower profitability, managed services provide recurring revenue, increase customer satisfaction, and position your software company as a trusted partner.
• Choosing the right pricing model is essential: Value-based and consumption-based pricing models are more effective than traditional cost-plus methods, helping you better align pricing with the value you deliver.
• Strategic planning drives success: To maximize the benefits of managed services, focus on balancing profitability and strategic value, fostering strong customer relationships, and remaining adaptable to market trends.