How well do you know your MSP business in numbers?
There has been much debate recently about what makes a successful MSP. From recent events and in conversations with our own MSP partners, several common traits became clear – and I want to share a couple of these with you.
The inspiration for this first blog ‘How well do you know your MSP business in numbers?’ came from a CEO and an Inbay partner who was speaking at the recent MSP Trailblazers series of event. Through his presentation and in follow-up questions, he displayed a thorough grasp of the numbers that underpinned his business – from feeding the sales funnel right through to apportioning service costs.
Tracking a range of metrics gives a visibility into your business that is essential for successful growth. If you just focus on one or two, you may be missing important signals that could inform this growth.
Here are eleven ‘numbers’ that we could all benefit from tracking.
Top-line revenue is an obvious number to measure and you will undoubtedly be able to quote this verbatim.
2. Revenue growth rate
Another obvious one – you will certainly track year on year revenue growth and it’s not difficult to turn this into a growth rate percentage:
Revenue for this year – revenue for last year
Revenue for last year
Example: £5m – £4.3m = 16.3%
And don’t stop at the previous year. Tracking longer-term consistency of growth is also important: over 3 years, 5 years, even 10 years. It can help you to identify where and why organic growth has stalled.
3. Revenue by product/service type
Some IT services generate much higher revenues than others. Security services is a case in point as shown in the chart below taken from Autotask’s Metrics that Matter 2017 benchmarking study
The Autotask study reveals that from being a focus for a small minority of MSPs in 2013 to the number one priority in 2017, security-related services are in big demand – and they command a premium price.
4. Monthly recurring revenue (MRR)
The largest part of MSPs’ revenue comes from selling recurring services – although one-off paid projects and product sales are obviously contributors too.
MRR is an easy metric to track: you add new clients and upsell/cross-sell to existing clients – and your MRR goes up. You lose a client – or they reduce the number/scope of services taken and your MRR takes a hit.
But you should be drilling down further into your MRR figures.
SaaSMetrics suggests that the following should be tracked:
- New MRR
Being the total each month of new revenues paid by new clients.
For example, you add three new clients each worth $1,500 MRR per month.
New MRR = $4,500
- Expansion MRR
Resulting from upselling or cross-selling additional products and services.
For example, four existing clients add new services worth $500 MRR each per month
Expansion MRR = 4 x $500 = $2,000
- Churn MRR
This is revenue lost when clients leave, downgrade or reduce use of your services.
For example, two existing clients downgrade services worth $250 MRR each and one client
paying $1,000 in MRR cancels:
Churn MRR = (2 x $250) + $1,000 = $1,500
- MRR Growth
To calculate your net MRR growth, SaaSMetrics suggests the following formula:
Net New MRR (i.e. MRR growth) = New MRR + Expansion MRR – Churn MRRSo, using the example figures here:MRR growth = New MRR ($4,500) + Expansion MRR ($2,000) – Churn MRR ($1,500)
MRR growth = $5,000
Tracking multiple aspects of MRR provides a good insight into the type of business you should be focussing on.
Plus, MRR projections are essential when planning for and managing growth.
You can increase revenues by selling more services, but if you’re selling at too low a price or the costs associated with delivery are too high your margins will suffer.
Margins can vary considerably between MSPs.
According to a recent 451Research report, the most successful MSPs claim that they consistently achieve gross margins of over 50% in their managed services offerings, with some MSPs regularly exceeding 60% margins.
This certainly tallies with figures quoted by some of our own successful MSP partners.
Margins are also likely to vary by service type: another of our partners has a gross margin of 55% on his MSP services – but 70% on his MSSP offerings.
An easy way to calculate gross margin as a percentage is:
Total services revenue – Cost of goods/services sold (COGS)
Total services revenue
But gross margins can quickly be eroded if the next metric is not monitored and managed carefully.
6. TRUE Cost of service delivery
You need to know how much it’s costing to deliver your services to make sure you are operating profitably and setting prices appropriately.
MSPs tend to use COGS (cost of goods/services sold) as a starting point here.
Note – COGS should only include the direct costs of delivering your service, such as staff costs (probably the highest for MSPs, particularly when benefits are taken into account) and technology (for example if you need to buy additional software licences or equipment to support a new client).
Overheads must be counted – but separately from COGS as they don’t directly relate to delivering a specific service. These would include non-billable staff, rent, rates, sales/marketing, utilities, training, cleaning costs, office supplies and so on.
But don’t forget the ‘hidden costs’. You should be identifying and tracking these to calculate the true cost of service delivery. Examples are:
Low staff utilisation rates
Recruitment costs – particularly heavy if you have high staff churn
Misuse of technician’s time on routine tasks
Project/service scope creep
If you are not sure which metrics you should be using to determine your true cost of service delivery, Our simple 3-step guide can help you to:
Calculate the full hourly burden rate
Take account of staff utilisation rates
Calculate service margins
7. Profitability by client
This is an important metric. You need to set the revenue received from each client against the cost of servicing them. Most PSAs, such as ConnectWise and Autotask, allow you to track this figure automatically if set up correctly.
As your business grows, you may begin to realise some customers are just not profitable. Their requirements and expectations fall outside those of your ‘ideal’ customer profile: they may be too small, or too big; they may not have the necessary budget; they may not be open to change; or not looking to grow.
They may simply be too ‘noisy’; a constant drain on your resources for little return.
If you find a client is over-utilising your resources, then you can try to sell them an upgraded service or additional support hours, if they are going through a particularly busy time. Eventually, you may even decide to ‘cull’ them. To make an informed decision as to the action needed, you must have access to the full range of metrics.
8. Feeding the sales funnel
The managed services recurring revenue model depends on continually adding new customers and on retaining existing accounts.
Knowing the numbers here means you have worked out how many leads you need to pour into the top of your sales funnel to produce the number of signed contracts at the bottom required to meet your MRR targets.
If you are not already doing this calculation, here is a step by step methodology to help.
9. Putting a figure on your capabilities
It’s one thing setting growth targets, but this must done in line with your ability to onboard new clients effectively – and without disrupting service to existing clients. Another one of our MSP partners restricts the onboarding of new clients to two per month – because he knows he can achieve that and do it well.
After all, there is no point bringing in new clients if you’re losing established clients by impacting their service levels.
10. Customer satisfaction in numbers
That brings us on to the importance of measuring customer satisfaction levels and tracking feedback – not as a one-off activity but as an ongoing part of the customer management process.
Many of our MSP partners use the customer tracking built into their PSA tools or dedicated tools such as Client Heartbeat.
It’s important that when you have the figures (good or not so good) then you use them – perhaps with a follow up call from the service manager to find out what you could have done better.
EBITDA (earnings before interest, taxes, depreciation and amortisation) measures your operating performance and is a key metric in valuing your business. The typical MSP is valued at between 5 times to 7 times annual EBITDA – according to this Channel e2e article, which also provides a useful worked example. Assume:
$5 million in annual recurring revenues.
10 % margins.
Annual EBITDA roughly $500,000.
At five to seven times annual EBITDA, your company is worth roughly $2.5 million to $3.5 million.
There are, however, many ways of evaluating an MSP’s worth – this is just one school of thought.
It is important to track all of the metrics that will inform your growth.
Unfortunately, many MSPs still only focus on two or three to measure how well they are doing – as shown in an Autotask study, even though all of these KPIs listed would provide valuable insight.
For example, your most profitable clients may not be those you send the biggest bills – or those who give you the highest satisfaction ratings; your most valuable technicians may not be those with the highest utilisation rates, but those who generate most new business; and the individual services you offer will have different levels of profitability – indeed some may actually be losing money.
Business numbers tell a story – and if you are missing some of them, you could be making business decisions based on an incomplete or inaccurate picture.
Read about MSPs we have helped to grow successfully.
Contact us to find out how we can help your managed services business.