Transactional revenue dropped 34% for traditional VARs between 2022 and 2024. Partners still relying on hardware margins and project-based work watched their quarterly revenue swing wildly. Meanwhile, competitors with recurring revenue models posted consistent 15-20% year-over-year growth.
One-time sales models create feast-or-famine cash flow. You close a $50,000 server deal in January, then spend February scrambling to fill the pipeline. Sales teams burn out chasing new logos instead of growing existing accounts. Customer relationships end at implementation, never deepening into the kinds of partnerships that compound over years.
Recurring revenue for MSPs works differently. A customer paying $3,000 monthly for managed services generates $36,000 annually and $180,000 over five years. That same customer buying a one-time $15,000 project contributes nothing after delivery unless you chase them for another deal. The math extends beyond revenue predictability. Investors value recurring revenue businesses at 6-8x annual revenue compared to 2-3x for transactional businesses. Banks extend better credit lines when your income stream is predictable. Your business becomes sellable at multiples that make the years of work worthwhile.
Partners operating VAR recurring revenue models report 40-60% higher customer lifetime value compared to project-based competitors. The shift from transactional to recurring isn’t a question of whether anymore—it’s how quickly you can execute.
Step 1: Evaluate your current revenue streams
Pull your revenue reports for the past 24 months. Categorize every dollar as either one-time or recurring, then calculate what percentage of revenue repeats monthly without new sales effort.
Hardware resale, implementation projects, and break-fix support fall into one-time categories. Managed services contracts, software subscriptions, co-managed IT, and security operations center services count as recurring. Most VARs discover they’re sitting at 15-30% recurring revenue when they need to be at 60-80%.
Look for services you’re already delivering on an ongoing basis but billing transactionally. Network monitoring that you perform monthly but invoice per incident. Security patching you do every week but charge per project. Backup management you handle continuously but only bill when someone requests a restore. These represent quick wins for MSP business transformation because you’re already doing the work—you’re just not capturing the value as recurring revenue.
Map each customer relationship next. How many touch your business only once versus monthly versus weekly? Customers you interact with frequently are prime candidates for managed services contracts because you’re already embedded in their operations. You’ve been acting like their MSP without getting paid like one.
Step 2: Redefine your value proposition
Customers buying projects think in terms of cost per implementation. Customers buying recurring services think in terms of outcomes per month. The language shift matters more than it sounds.
Your old value proposition: “We’ll implement your new firewall for $8,000.” Your new value proposition: “We’ll keep your network secure 24/7 for $1,200 monthly, including firewall management, patch updates, threat monitoring, and quarterly security reviews.” Same technical work, completely different framing.
Frame conversations around business continuity rather than technical specifications. CFOs don’t care about gigabit throughput speeds—they care about zero downtime during tax season. HR directors don’t care about backup technologies—they care about recovering employee records within two hours if ransomware hits.
Document the ongoing work you do that customers don’t see. Monthly security patches, daily backup verification, weekly system health checks, quarterly capacity planning reviews. When customers understand the continuous labor protecting their infrastructure, monthly fees shift from feeling extractive to feeling reasonable.
One California VAR made this shift from selling firewall appliances to selling managed security services. Their average customer value jumped from $12,000 one-time to $2,400 monthly recurring—$28,800 in the first year alone. The firewall hardware cost stayed the same. They just repositioned it as part of an ongoing service rather than a one-time purchase, which changed how customers perceived the entire relationship.
Step 3: Choose the right recurring revenue model
Pure subscription model: Customers pay monthly for defined service levels regardless of usage. This works well for standardized offerings like user-based Microsoft 365 management or per-device endpoint protection. The revenue stays predictable, billing stays straightforward, and scaling becomes manageable.
Consumption-based model: Customers pay based on actual usage—storage consumed, bandwidth used, support tickets opened. This works for cloud infrastructure management or backup services. Revenue fluctuates monthly but aligns perfectly with customer costs, which makes the value equation transparent.
Hybrid model: Base monthly fee for core services plus usage charges for add-ons. Most managed services recurring income models follow this structure. $2,000 monthly for network management plus $150 per user for advanced security monitoring. This provides baseline predictability with upside potential.
Co-managed model: Customer maintains internal IT staff, you provide specialized services they can’t handle in-house. Security operations, cloud architecture, compliance management. Pricing runs higher because you’re augmenting rather than replacing, which changes the sales dynamic entirely.
Most successful VARs start with pure subscription for standardized services. A small business managed services package covering 10-50 users with fixed monthly pricing builds recurring revenue quickly while you develop more sophisticated hybrid offerings for larger accounts.
Geographic and customer size matter here. Microbusinesses with 5-15 employees want simple per-user pricing. Mid-market companies prefer tiered packages with room for customization. Enterprise accounts often need fully custom hybrid models. Start with the model that fits your current customer base rather than the one that sounds most impressive.
Step 4: Standardize and package your offerings
Create three service tiers: Essential, Professional, Enterprise. Customers overwhelmed by choices pick nothing. Customers given three clear options pick the middle one 60% of the time, which makes your pricing strategy significantly easier.
Essential covers basics: help desk support during business hours, patch management, antivirus, cloud backup. Professional adds 24/7 monitoring, proactive maintenance, security incident response, quarterly business reviews. Enterprise includes everything plus dedicated account management, priority response times, advanced security services, strategic IT planning.
Define exactly what’s included at each tier. “Unlimited support” means nothing and creates unrealistic expectations. “Unlimited support tickets with 4-hour response time during business hours and 24-hour response after hours” sets clear expectations that protect both parties. Vague service descriptions create billing disputes six months down the line.
Package services customers buy together. Companies needing network monitoring also need backup management and security patching. Bundle these into a single monthly fee rather than selling separately. Customers prefer one invoice over five, and your operations team prefers delivering integrated services rather than managing fragmented point solutions.
Resist the urge to customize packages for every prospect. Customization kills scalability, which kills profitability. A Massachusetts MSP reduced their service catalog from 23 different packages to 4 standardized tiers and cut their operational overhead by 30% while increasing customer satisfaction because everyone received consistent service quality.
Price each tier to create clear differentiation. Essential at $99/user/month, Professional at $149/user/month, Enterprise at $199/user/month. The gap must be large enough to justify the upgrade but not so large that customers see Professional as overpriced, which requires some trial and error to nail down.
Step 5: Adjust pricing and contracts strategically
Cost-plus pricing kills margins in recurring revenue models. Calculate your fully loaded cost of service delivery—labor, tools, overhead—then add 40-60% margin for healthy subscription model for VARs businesses. If delivering a service costs you $80 per user monthly, charge $125-145 to maintain profitability after churn and contract renegotiations eat into your margins.
Value-based pricing works when you can quantify customer outcomes. Preventing one ransomware incident saves a 50-person company $250,000 on average. Charging $7,500 monthly for comprehensive security services represents 3% of the loss you’re preventing. Frame pricing around risk mitigation and business continuity rather than hours worked, which shifts the conversation away from cost and toward value.
Annual contracts with monthly billing provide the best balance. Customers commit for 12 months, reducing churn, but pay monthly, easing cash flow concerns. Offer a 10-15% discount for annual prepayment to improve your cash position without significantly sacrificing revenue.
Build price increases into contracts from day one. A 5% annual increase tied to inflation protects margins as your costs rise. Customers accept predictable increases better than sudden renegotiations. Lock this into the initial agreement so it’s not a surprise conversation years later.
Minimum commitments matter more than most partners realize. A 10-user minimum prevents unprofitable micro-accounts from consuming disproportionate resources. Some MSPs successfully serve smaller businesses by adjusting service levels rather than minimums, but most find 10-15 users represents the profitability threshold where the relationship makes financial sense.
Contract auto-renewal with 60-90 day cancellation notice protects revenue continuity. Customers who must actively cancel renew at 85-90% rates. Customers who must actively renew drop to 60-70% rates, which means your default setting shapes your retention dramatically.
Step 6: Integrate automation and billing systems
Manual invoicing for recurring services wastes 10-15 hours monthly per administrator. Automated billing through platforms like ConnectWise, Autotask, or BMS eliminates this overhead while reducing billing errors that damage customer relationships and delay payment.
Select a Professional Services Automation (PSA) platform that handles recurring billing, contract management, and automatic renewals in one system. These platforms generate invoices on schedule, process credit card payments automatically, send renewal reminders, and flag accounts approaching contract end dates before they become problems.
Integrate your PSA with your RMM (Remote Monitoring and Management) tools. When your RMM detects you’re managing 55 endpoints for a customer contracted for 50, the PSA automatically adjusts billing. This prevents revenue leakage from scope creep and ensures customers pay for actual usage without awkward mid-contract conversations.
Payment automation increases collection rates significantly. Credit card auto-pay achieves 98% on-time payment compared to 70-75% for manual invoices requiring checks. ACH transfers hit 90-95% on-time rates. Offer a 2-3% discount for auto-pay enrollment to accelerate adoption, which pays for itself in reduced collection overhead.
Contract management features track renewal dates, price increase schedules, and service level agreement compliance. A dashboard showing which accounts renew each quarter lets you plan capacity and forecast revenue accurately, which transforms how you run the business.
One Arizona MSP implemented ConnectWise Manage in Q3 2024 and reduced their accounts receivable aging from 45 days to 12 days within six months. Automatic billing eliminated the “forgot to send invoice” gaps that previously cost them $30,000 in delayed payments annually—money they were already owed but couldn’t collect because of administrative chaos.
Step 7: Train sales teams to sell recurring value
Project-based salespeople chase quick closes. Recurring revenue salespeople build long-term relationships because their compensation depends on renewals, not just new sales. This fundamental shift in incentives changes everything about how they approach prospects.
Restructure compensation plans to reward recurring revenue acquisition and retention. Base salary plus 5-8% commission on annual contract value, with bonuses for accounts that renew and expand. If a salesperson brings in a $36,000 annual contract, they earn $1,800-2,880 upfront and additional bonuses when that customer renews at $40,000 the following year. This aligns their incentives with business health rather than deal volume.
Train salespeople to conduct business outcome discovery rather than technical needs analysis. Ask prospects: “What happens to your business if your network goes down for four hours during your peak season?” instead of “How many servers do you have?” Customers buy managed services to avoid business interruption, maintain compliance, and enable growth—not because they need patch management.
Develop case studies showing customer outcomes from recurring services. “Company X eliminated 12 hours of monthly downtime, saving $48,000 annually” resonates more than “We provide 99.9% uptime SLAs” because it translates technical capabilities into business impact.
Role-play objections specific to recurring revenue. When prospects say “We can’t afford $3,000 monthly,” train salespeople to respond with “You’re currently spending $2,200 monthly on reactive break-fix plus another $8,000 annually on emergency projects. That’s $34,400 yearly. We’re offering $36,000 for proactive management that prevents most of those emergencies. You’re spending the money already—we’re just helping you spend it more effectively.”
Replace product-focused sales materials with outcome-focused service catalogs. Fewer pages about firewall specifications, more pages about how network security services protect customer data and prevent breach-related losses that could shut down their business.
Step 8: Strengthen customer success and retention programs
72% of recurring revenue businesses that implement dedicated customer success programs maintain annual retention rates above 90%. Partners treating renewals as automatic lose 20-30% of contracts annually, which means they’re running on a treadmill where new sales barely offset churn.
Assign customer success managers to own retention and expansion. Their job isn’t technical support—it’s ensuring customers achieve desired outcomes, identifying additional needs, and preventing churn before it happens. CSMs conduct monthly check-ins with key accounts, quarterly business reviews with all accounts, and annual strategic planning sessions with enterprise customers.
Proactive issue resolution prevents cancellations before customers even consider leaving. When your monitoring detects recurring problems—slow application performance, increasing security events, approaching capacity limits—your CSM reaches out before the customer notices. This transforms your team from reactive support into strategic partners who see around corners.
Track customer health scores using concrete metrics. Ticket volume trends, feature adoption rates, payment promptness, and business review participation indicate account risk. A customer who stops attending quarterly reviews and whose ticket volume tripled likely faces internal pressure to cut costs. Early intervention saves these accounts, but only if you spot the warning signs early.
Build expansion plays into customer success workflows systematically. When a customer hires 10 new employees, your CSM proactively proposes adding those users to the managed services contract. When you notice a customer’s backup storage growing 30% quarterly, your CSM initiates a conversation about upgrading their backup tier before they hit limits.
One Florida MSP assigned dedicated CSMs to all accounts over $50,000 annual recurring revenue in 2024. Their enterprise account retention rate jumped from 78% to 94%, and expansion revenue from existing accounts grew 35% because CSMs identified upsell opportunities sales previously missed while chasing new logos.
Create a formal onboarding program for new recurring revenue customers. First 30 days: complete technical onboarding, train customer staff on support processes, conduct initial health check. First 90 days: optimize service delivery, address early issues, hold first business review. Customers who successfully onboard renew at 95% rates compared to 75% for customers who struggle through implementation, which means your first 90 days determine the next three years.
Step 9: Track KPIs and continuously optimize
Monthly Recurring Revenue (MRR): Total contracted recurring revenue per month. Track both new MRR added and churned MRR lost. A healthy MSP adds 5-10% new MRR monthly while keeping churn under 2%, which compounds into significant annual growth.
Annual Recurring Revenue (ARR): MRR multiplied by 12. This number defines your business valuation and borrowing capacity. Focus management attention on ARR growth as your primary success metric because it’s what potential buyers and lenders actually care about.
Customer Acquisition Cost (CAC): Total sales and marketing spend divided by new customers acquired. If you spend $50,000 quarterly on sales and acquire 25 new customers, your CAC is $2,000. Compare this against customer lifetime value to ensure profitability, because acquiring customers at a loss only works if you’re venture-funded.
Customer Lifetime Value (CLV): Average monthly revenue per customer multiplied by average customer lifespan in months. A customer paying $2,500 monthly who stays 48 months generates $120,000 CLV. Healthy businesses maintain CLV at least 3x higher than CAC, which means every dollar spent on acquisition returns three dollars in profit.
Churn Rate: Percentage of customers who cancel monthly or annually. Calculate both logo churn (customers lost) and revenue churn (dollars lost). Five small customers canceling represents 10% logo churn but might be only 3% revenue churn if they were low-value accounts. Keep monthly churn under 2% for healthy growth.
Net Revenue Retention (NRR): Revenue retained from existing customers including expansions minus churn. NRR over 100% means your existing customer base grows revenue even without new customers. Top-performing MSPs achieve 110-130% NRR through consistent upselling and low churn, which creates compounding growth that’s nearly impossible to compete against.
Revenue per Employee: Total revenue divided by employee count. Managed services businesses should target $175,000-250,000 revenue per employee. Lower numbers indicate operational inefficiency or underpricing that’s killing profitability.
Review these metrics monthly to spot trends before they become problems. MRR growth slowing? Analyze whether sales pipeline weakened or conversion rates dropped. Churn ticking up? Investigate whether specific service tiers, customer sizes, or industries churn faster than others.
Benchmark against industry standards. MSPs typically maintain 5-8% monthly revenue churn and 15-20% annual logo churn. If you’re outside these ranges, dig into root causes rather than assuming it’s normal.
Common pitfalls to avoid when transitioning
Over-customization: Every customer wants slight modifications to your standard packages, and agreeing to all of them kills operational efficiency. A Colorado MSP customized service packages for 85% of customers and discovered their technicians needed internal documentation for 47 different service variations. They standardized packages, accepted that 15% of prospects walked away, and improved gross margin from 32% to 51% because delivery became consistent and trainable.
Pricing too low: Partners undervalue recurring services because they fear customer rejection. A managed services contract priced at $80 per user monthly when industry average runs $120-150 signals low quality to prospects and trains customers to expect unsustainable pricing. You’ll churn eventually because you can’t afford to deliver proper service at those rates.
Under-communicating value: Customers who don’t understand what you do monthly will question why they’re paying monthly. Send monthly service reports showing tickets resolved, patches applied, threats blocked, and system health status. Make your work visible because invisible work feels worthless even when it’s preventing disasters.
Neglecting existing customers during transition: Partners get excited about acquiring new managed services customers and ignore their legacy project-based accounts. Those customers feel abandoned and leave, which destroys the revenue base you need to fund the transition. Migrate existing customers to recurring models through targeted campaigns offering discounted transitions.
Expecting overnight transformation: MSP business transformation takes 18-36 months, not quarters. You can’t flip a switch and convert your entire business. New recurring revenue compounds monthly while old project revenue gradually declines. Plan for an 18-month period where you’re running two business models simultaneously, which strains operations but is unavoidable.
Poor contract management: Letting contracts expire without proactive renewal outreach creates unnecessary churn. Implement 90-day renewal processes: 90 days out, CSM confirms customer satisfaction. 60 days out, send renewal paperwork. 30 days out, finalize contract signatures. This structured approach prevents the “oops, they canceled because we never asked” losses.
Ignoring cash flow implications: Recurring revenue provides long-term predictability but creates short-term cash flow challenges. A $36,000 annual contract billed monthly generates $3,000 monthly revenue but you incurred $10,000 in sales and onboarding costs upfront. Many VARs fail during transition because they run out of cash before recurring revenue scales sufficiently. Maintain 6-9 months operating expenses in reserves to survive the valley between models.
Conclusion: Future-proofing your VAR/MSP business
Partners operating with 70%+ recurring revenue weathered the 2023-2024 economic uncertainty with single-digit revenue declines while project-dependent VARs saw 25-40% revenue drops. Recurring revenue provides resilience during downturns and accelerates growth during expansions, which is why it’s become the dominant model in the channel.
The transition requires rethinking how you sell, deliver, and measure success. You’re shifting from one-time transactions to ongoing partnerships, from selling products to selling outcomes, from project profitability to customer lifetime value. Each of these shifts feels uncomfortable at first because it challenges everything that made you successful in the old model.
Our expert network includes MSPs and VARs who’ve successfully completed this transformation. They’ve navigated pricing strategy, rebuilt sales compensation plans, implemented customer success programs, and achieved 80-90% recurring revenue ratios. We’ve facilitated over 400 consultations between partners mid-transition and those who’ve already built thriving recurring revenue businesses. Whether you’re evaluating service packaging, optimizing retention programs, or forecasting cash flow during transition, our network connects you with specialists who’ve solved these exact challenges and can share what actually worked beyond the theory.
Start with one standardized service package, migrate your best 10 customers to recurring contracts, and prove the model works before scaling. The partners who dominate the next decade are building recurring revenue engines today while their competitors are still debating whether to start.
