10 Managed Services KPIs for VARs and MSPs
Which KPIs (key performance indicators) and business metrics are most important for VARs that are moving into managed services and MSPs that are seeking to further drive their business success? Here are 10 of them, based on a range of sources and pundits.
10. Churn Rate
What percentage of your customers fire your business, halt services or disappear each year? The best SaaS companies have an annual retention rate of 90 percent or more. MSPs should shoot for similar figures.
9. Net Promoter Score
Survey your customers. On a scale of zero (not at all likely) to 10 (extremely likely), how likely are your customers to recommend your business to another another customer? If your overall Net Promoter Score, is about a 6 or below, your current customers are basically detracting from your business with silence or negative word of mouth. Take these steps to improve your NPS:
- Customers Who Rank You 0-4: Either fire them… or figure out why they’re so negative on your business… or both. Move those you retain toward promoters (ranking you 7-10 on that scale) by addressing their top one or two concerns.
- Customers Who Rank You 5-6: Determine their “single biggest want” or “need” from you, specifically as it relates to customer satisfaction. See if the wish list is consistent across these neutral customers. Then, execute on at least one common big need to move these customers into the 7-10 category.
As you raise your net promotor score, your churn rate should decline. And potentially, your per-cost customer acquisition could drop since positive word of mouth may lead more customers to your door.
8. Monthly Recurring Revenue (MRR)
But don’t just look at the MRR top-line. Within the MRR figure, make sure you also track new sales, up-sells, renewals and churn each month as well.
7. Days Cash on Hand
Let’s assume you’re a small business with $20,000 cash on hand. Your annual operating expenses are $80,000 and you have equipment depreciation of $4,000.
To calculate days cash on hand use this formula:
Cash On Hand ($20,000)
($80,000 operating expenses – $4,000 depreciation) / 365
The Result: $96 days cash on hand
But how many days of cash on hand should a small business have? In many cases it depends on your business type, stage and size. The most conservative organizations — nonprofits — tend to have six months cash on hand, likely far more than the typical VAR or MSP.
6. Customer Life Time Value (CLTV) vs. Customer Acquisition Cost (CAC)
If your customer acquisition cost (CAC) is higher than your life time value (CLTV) of that customer, you’re losing money on every engagement.
Less than 1:1 ratio – You’re on the road to oblivion, and fast, says Ometria
1:1 – You’re losing money from every customer acquisition
3:1 – The ideal ratio.
4:1 – You’re potentially too profitable. Instead, invest more in marketing to grow faster.
Source and deeper info: Ometria
5. Inbound Qualified Lead Velocity
This pinpoints the rate at which your qualified, inbound leads grow month-over-month.
4. Revenue Growth Rate
You know the basics but a reminder for those who are rusty. The formula is:
(Total Revenue Current Year – Total Revenue Previous Year)
Total Revenue Previous Year
Example: Let’s assume you have $4 million total revenues for 2015 and $3.5 million total revenues for 2014.
The formula would be:
($4.0 – $3.5)
Answer: 14.29 percent growth rate.
3. EBITDA & EBITDA Growth Rate
Annual EBITDA: Your annual earnings before interest, taxes, depreciation and amortization (annual EBITDA) is critically important to your company’s valuation. A typical MSP is worth about 5 to 7 times annual EBITDA. So, if your annual EBITDA is about $200,000 then your business is likely worth roughly $1 million to $1.4 million to a buyer.
Annual EBITDA Growth Rate: Still, MSPs can fetch higher valuations (say, 8 or 9 times EBITDA) if they have incredibly fast growing EBITDA.
2. Average Price Per Seat (AISP)
This one comes courtesy of TruMethods: “What’s the average price per seat that your business supports? To determine your AISP, or all-in seat price, start with your monthly recurring revenue. Divide that number by the seats you support to get your average AISP.” Why is that so important? Keep reading and we’ll tell you in a few lines.
1. Average Monthly Recurring Revenue (MRR):
This also comes from TruMethods. “You also need to determine your average MRR, or monthly recurring revenue per client. Take the total amount of monthly recurring revenue you earn each month and divide it by the number of customers you support. That’s what your average customer pays your company per month, or your average MRR.”
During a recent lunch with TruMethods CEO Gary Pica, he went into deeper detail on the AISP and MRR KPIs. Instead of relying on my notes from the conversation, you here’s Pica’s deeper dive on KPIs and what you should charge for managed services — directly from him.
Are you leveraging different KPIs? Tell me about them: Joe@AfterNines.com.