By Sundack CPA | Reading Time: 5 minutes
Guiding your MSP (managed service provider) to success can't be done blind. You need metrics and a solid plan to help you reach your goals.
To do this, it takes tracking KPIs that give you a good idea of where your business is heading. These KPIs should answer questions like:
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How profitable your business is
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How much of your revenue goes to paying your employees and general/administrative expenses
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The cost for each new customer you bring on board
With these answers, you'll be able to see what needs to be improved, what areas are succeeding, and whether or not you are reaching your goals.
To give you a jump start in selecting suitable KPIs, here are the seven you need to know to grow your MSP business.
1. MRR (Monthly Recurring Revenue)
Monthly recurring revenue (MRR) is the amount of expected revenue under a monthly contract in your business. This KPI is relevant if you offer specific services for a recurring monthly fee, otherwise known as a subscription-based model.
Incorporating a subscription-based model in your MSP is a growing trend. Having a reliable book of monthly revenue brings several benefits.
MRR allows you to:
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Improve cash flow
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Better predict future revenue via more accurate forecasting
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Reduce the impact of low margins
Moving applicable services to a subscription model isn't easy, but implemented correctly, it comes with the stability of your organization.
2. Churn
If you talk about MRR, Churn is never far behind. Churn is the percentage of recurring customers you lose, compared to the number of clients gained in a given period (typically calculated monthly or quarterly).
The metric is best described with an example.
Company A had fifty (50) existing recurring clients on a subscription model in January. Five (10) of those clients left in April, but the company gained five (5) more. These numbers equal a net loss for the quarter of five clients or 10% churn.
These are very generalized numbers, and this performance would be abysmal for an MSP, but the exaggeration conveys the necessity of the KPI. Understanding and recognizing poor performance brings up a valuable reason for tracking relevant metrics for your MSP.
3. Service Revenue Per Employee (also known as "leverage")
This metric directly shows how much income you're making in a given period per employee at your MSP. Typically, it's calculated annually, so if you had one million dollars in revenue in a given year, with ten employees, it's $100,000 per person on the team.
While hardware and other "goods" are part of your offering, revenue per person you employ better indicates how your business is performing.
The example would put an MSP below the last reported 2020 average of $152,000 per employee.
4. Administrative Expense
So far, the metrics on the list are about revenue. Administrative expenses related to your services such as:
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Salaries for administrative, sales, and executive roles, including associated benefits and taxes (not counting tech-support staff)
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IT costs for the business itself (not those included in fees to clients)
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Other normal operating expenses
Given that an MSP provides services, these expenses are necessary to build a successful operation, but it's a good idea to keep them in check.
These costs also fluctuate.
If you're trying to grow your team, for example, your salaries may take up a seemingly high amount of your operating expenses. However, if you're entering a period of growth, hiring staff early is worth the cost before you make promises to clients you can't deliver on.
5. Customer Acquisition Cost (CAC)
CAC (customer acquisition cost) is the amount of money it takes your MSP to acquire a new customer. While this metric is usually associated with the marketing team, it provides valuable insight into how your MSP spends its money.
In most cases, the lower the CAC, the better. A low CAC compared to your competitors would mean you spend less money gaining new customers than other MSPs in your field.
Again, you can use this metric to measure productivity, compare your MSP to your competitors, and as a reference point when building a budget or measure your growth.
6. Lifetime Value (LTV)
Lifetime Value is what it sounds like --- the average total value of client accounts.
As an example, if your average client pays $3,000 each month and remains a customer, on average for 24 months, the average gross revenue LTV is $72,000. (Note: Some advocate taking out average expenses to get an idea of gross margin LTV.)
LTV is a fantastic compliment for just about every other metric on this list, especially acquisition cost.
7. EBITDA
EBITDA (earnings before interest, taxes, depreciation, and amortization) is a way to track financial performance without including accounting and financial deductions. Because it eliminates external factors, it is an excellent metric for measuring the profitability of your MSP.
You can use your EBITDA to compare your MSP to other companies in your industry. This will give you a good idea of how you stack up against the competition.
Consult with an Experienced Accounting Partner
To ensure you are tracking the right KPIs to grow your MSP, consider working with a specialized accountant like Sundack CPA.
We take the time to learn your business, determine where improvements need to be made, and help you select the KPIs you need to track to see success. Sundack specializes in assisting MSPs in making better financial decisions to grow their business. Reach out to us today to learn more about how we can help your MSP grow!