With 2022 winding down, many MSPs will be using this time to reflect on their performance during the past year and strategize on how they can improve in 2023.
There are many Key Performance Indicators (KPIs) that MSPs should be continuously tracking as part of their normal business activity to help measure the health of their organization. In this blog, I’m going to outline five of the most important ones are.
Firstly, in my October 2022 blog, one critical KPI I mentioned that all MSPs should be tracking is their MSP Burn Rate. This is the amount of recurring revenue you need to cover all of your operating expenses and overhead costs over a certain period—usually a month. At a minimum, the goal is to achieve a Burn Rate of 1—meaning that the recurring revenue generated by your managed services line of business is sufficiently covering all of your operating expenses and overheads. Once you’ve met this goal, then every dollar earned after that automatically goes to your bottom line. Every MSP should know where they stand with respect to their Burn Rate, because this will help you set your priorities and drive the decisions that are needed to improve your MSP’s organizational health.
But what are some other critical KPIs that MSPs should be tracking in addition to their Burn Rate? Here are four more KPIs you should be tracking:
1. Total recurring revenue growth rate
DEFINITION: The rate at which the amount of subscription-based, predictable revenue an MSP expects to receive monthly grows over a certain period of time.
WHY IT IS IMPORTANT: It is a direct reflection of the health of an MSP’s practice, as it should supersede all other forms of revenue an MSP generates and should be consistently increasing.
HOW IT IS CALCULATED: (Current total recurring revenue – previous year’s total recurring revenue)/Previous year’s total recurring revenue
HOW TRACKING THIS KPI CAN IMPROVE YOUR MARKETING & SALES MOTIONS: Most MSPs do track their total recurring revenue growth rate, but it would be more beneficial to separate this metric out and calculate the growth rate on:
- Net new recurring revenue generated from signing on new customers, and
- Calculating how much additional recurring revenue is being generated from your existing customer base due to upgrades or expanded services—because the selling doesn’t stop once the contract is signed.
WAYS TO IMPROVE IT: By breaking this KPI down further and measuring the net new recurring revenue growth rate versus the expansion recurring revenue growth rate, this will highlight how well your Account Management motion is actually performing from a cross-sell/upsell perspective. If your expansion growth rate is low (compared to the overall total recurring revenue growth rate), you might be missing out on some fantastic sales opportunities within your existing client base that could be stagnating your growth.
Several MSPs that I have been speaking with recently have taken a hard look at this KPI and have decided to make improving their Account Management motion their key sales initiative for 2023. Not only will it help strengthen their relationships with their existing customers to improve retention rates and reduce churn, but it will also help to uncover new revenue opportunities through the implementation of regular strategic business reviews.
2. Average deal size
DEFINITION: The average amount of money an MSP receives per signed monthly recurring revenue contract that they close over a certain time period (i.e. monthly/quarterly/yearly).
WHY IT IS IMPORTANT: Can highlight how well your marketing is working at attracting quality prospects for your MSP, how well your sales team is performing at closing deals, and where possible improvements in your program design may need to be made, helping you to make overall better business decisions for your MSP.
HOW IT IS CALCULATED: Total value of deals in a specific period/# of deals
HOW TRACKING THIS KPI CAN IMPROVE YOUR MARKETING & SALES MOTIONS: If you have noticed that your average deal size has been flat or decreasing, it could mean that you haven’t been pricing your programs accurately or you haven’t been targeting the best kind of prospects for your managed services, which is causing your sales reps to close smaller-sized deals with smaller-type clients. Tracking this KPI can help you determine where improvements may need to be made in the overall design and pricing of your monthly service offerings or where discipline needs to be exercised in the type and quality of prospects your sales team engages with. This is a KPI that you should be striving to improve with every new deal that you sign, either adding on new services and/or increasing your monthly price.
WAYS TO IMPROVE IT: If you can improve your average deal size, it means more monthly recurring revenue for your MSP. So, if you are still selling and supporting clients in a break/fix or a la carte model, creating a new suite of programs that you standardize all of your customers on will be a surefire way to positively impact on your average deal size KPI. And be sure that your marketing and sales teams are staying true to the Ideal Client Profile that you have hopefully defined for your MSP and that they are not deviating from this in an effort to close a marginal deal. Not all prospects are quality prospects, and it is important to create and maintain a high customer standard when it comes to your marketing and sales processes.
3. Customer acquisition costs (CAC)
DEFINITION: The average amount of money a company spends or is willing to spend to win a new customer.
WHY IT IS IMPORTANT: Helps to determine how efficient and how effective your marketing and sales motions are at attracting and winning new business for your MSP. It helps to determine how ‘costly’ growth is for your MSP and how easy or difficult it will be to scale. MSPs need to decide where to best allocate their marketing dollars and where to focus their marketing efforts. Tracking their customer acquisition costs can help in their decision-making. Growth is good, but it cannot come at the expense of running a profitable MSP.
HOW IT IS CALCULATED: (Total cost of sales + Total cost of marketing)/Number of new customers acquired over a specific time range (such as a quarter or a year)
HOW TRACKING THIS KPI CAN IMPROVE YOUR MARKETING & SALES MOTIONS: It can help you make decisions as to where changes may need to be made within your sales and marketing activities so you can still experience customer growth while keeping your marketing and sales costs in line with that growth. You want your customers to add value to your MSP as soon as possible, but the higher your CAC is, the longer the payback period will be, and the longer you will need to keep that customer on before you can break even in terms of what you spent working on converting them into a paying customer for your MSP.
WAYS TO IMPROVE IT: To help lower your customer acquisition costs, take a look at your retention and churn rates. If these are a concern for you, then consider enhancing your Account Management motion to improve your overall customer retention rates because you don’t want to churn these customers before you have had an opportunity to break even on them. Also, take a look at where you are spending your marketing dollars. Are you tracking leads and your closed sales by their contact method? This is another important metric to be aware of. Are your closed-won customers coming from your telesales motion, your email marketing activities, your onsite educational events, or your paid ads and SEO strategies? Track where your closed leads are coming from and where they are NOT coming from, and adjust your marketing spend as necessary to maximize its effectiveness while not blowing your marketing budget.
4. Customer lifetime value (CLV)
DEFINITION: The revenue you can reasonably expect to receive from a single customer over a given time period. Used to determine how much a particular customer is worth.
WHY IT IS IMPORTANT: When paired with your CAC metric, this can help you set guidelines around the type of customer you need to attract, as they have to generate a high enough CLV to meet your CAC. Having high customer acquisition costs is not necessarily a bad thing, but those costs have to be relative to the lifetime value you receive from that customer. If your CAC is too high compared to your CLV, then growing your MSP won’t be sustainable because acquiring new customers will end up costing you more than the revenue you will be able to generate from them.
HOW IT IS CALCULATED: Deal Size x # Months Retained x Average Profit Margin
HOW TRACKING THIS KPI CAN IMPROVE YOUR MARKETING & SALES MOTIONS: Understanding the relationship between your Customer Lifetime Value and your Customer Acquisition Cost will help you to make better budget decisions when it comes to your sales and marketing initiatives. If your Customer Lifetime Value is high, you can be justified in increasing your marketing budget and paying a higher Customer Acquisition Cost (as long as you keep it below your CLV) when it comes to your efforts to ‘win’ a new customer, as that is only going to help to fuel your growth. Also, tracking CLV and CAC costs will help you fine-tune the type of customer you should be targeting, as you want their CLV to be high enough to cover the CAC—because if their CLV cannot cover your acquisition costs, these are not the type of customers you should be targeting with your marketing and sales efforts.
WAYS TO IMPROVE IT: The longer a customer is a customer of your MSP, the more revenue they generate for you, and therefore, the greater their lifetime value becomes. So you can help improve your CLV by investing in your account management and customer support motions to increase customer loyalty and reduce churn. Happy customers are loyal customers, and happy customers tend to spend more, and it is generally much easier to sell to existing customers than it is to acquire new ones, so spending time focused on activities like customer satisfaction surveys and quarterly strategy reviews can help build and solidify loyalty.
Stefanie Hammond is Head Sales and Marketing Nerd at N-able. You can follow her on LinkedIn and on Twitter at @sales_mktg_nerd. Read more N-able guest blogs here. Regularly contributed guest blogs are part of ChannelE2E’s sponsorship program.