If you are an MSP, you know how good you are at managing your clients’ systems. But how do your numbers look when it comes to managing your own business? Have you analyzed your growth and your profits or the lack thereof?
To become profitable, MSPs need to understand what drives their business and what doesn’t. And to do so, they must measure a few important metrics that when analyzed can help the MSPs achieve their business goals.
8 Important Metrics Every MSP Must Monitor
1. Monthly Recurring Revenue (MRR)
As the title states, this is the monthly revenue that when measured continuously, can forecast future revenue patterns that can act as a starting point of your expansion plans.
With the help of MRR, you can predict financial security based on which you can take decisions that can help you scale exponentially.
MRR = Average revenue per account × Total number of accounts.
2. Profits
Measure the profits of individual customers rather than overall profit. This way you can recognize which services/customers benefit you and which do not. Create a baseline with the data analyzed and price your services accordingly to keep your business floating.
Profit = Revenue – Cost of goods/services sold (COGS)
3. Overhead
This is the sum of all the operating costs whether fixed or variable which will provide you an insight into how much revenue you need to bring in to cover your costs and to not lose your money. This includes billable staff and non-billable items like – rent of your office, utility, training, cleaning, fuel, etc.
Overhead = Fixed costs + Variable costs
4. Utilization
To effectively track utilization of a resource, you need to track the real-time hours committed against a contract. Track individual utilization to ensure that every resource is accountable to their goals.
Utilization Rate = Hours worked on customer/Total hours worked
5. Earning before interest, taxes, depreciation and amortization (EBIDTA)
This is one of the most important metrics to measure the efficiency and profitability of a MSP business. EBIDTA is measured to evaluate the worth of a business. It is mostly used to compare companies against each other and industry averages. However, Investopedia notes that EBITDA’s calculation can vary from one company to next, hence it shouldn’t be used as a one-size-fits-all, stand-alone tool for evaluating corporate profitability.
EBIDTA = Net profit+ Interest + Taxes + Depreciation + Amortization
6. Customer Lifetime Value (CLV)
This is the total worth of your customer over the entire period of the relationship. As the cost of acquiring a new customer is definitely more than retaining an existing customer, for a growing company, it is necessary to increase the CLV of its customers to become profitable. You can increase your CLV by switching the billing cycle from monthly to annually or by providing added value with better and higher-priced service bundles.
Meeting your customer’s requirements and keeping them happy is the key to increasing CLV.
CLV = Revenue from the customer – The cost of acquisition
7. Product Margin
For an MSP business, product margin is similar to profit margin, the difference between the cost at which the product/service is provided and the actual cost of the service. The greater the difference, the higher is the margin. A good profit margin varies based on the industry. However, generally, a 10 percent net profit margin is considered “average”, whereas 20 percent is considered “good” and less than 5 percent would be “low”.
As per Investopedia, Gross profit margin = (Net sales – Cost of goods sold)/Net sales
8. Managed Services Agreement Profitability
The profitability of your managed services contracts is one of the most important metrics you must track. It involves measuring elements like
- Client Contribution (CC) – This indicates how much an MSP earns from each client excluding the cost of obtaining the client
- Client Effective Rate (CER) – This indicates how much an MSP earns from each client based on the time spent servicing them.
CER = Monthly fixed fees/Hours spent with the client
(Learn more about ensuring the profitability of your managed services contract here.)
Diligent tracking of the above metrics is required to grow your business, to remain profitable and to mitigate any financial damage that arises. To learn more about increasing the profitability of your business, download our eBook MSP Guide to Higher Growth: Pricing for Profitability.
