You recently onboarded a few new customers, your top line is up, and your newest employee seems competent and happy. So your MSP business is healthy and growing, right?
Your metrics might tell a different story.
Let’s dig deeper. While you did acquire new customers, you lost some too. And although your revenue grew, it was at a pace that’s way below best in class. Finally, your new worker is great, but that’s what you thought about the tech who just lef t…
Surprised? Taking a metrics-based approach to running your MSP business can help you avoid surprises and make better decisions about your service offerings, your clients, and your staff to drive both revenue and profits. Just as analytical decision-making has revolutionized professional sports (see Billy Beane, the Genius Behind Moneyball, Shares His Winning Data Strategy for MSPs), you can become a winning MSP if you use the right metrics to guide you.
Here are the top 10 metrics successful industry veteran Jeff Farr uses to steer his companies, USA Cyber, an MSP/MSSP, and Sera-Brynn, a compliance advisory and assessment firm.
1. Annual Revenue Growth (YoY%)
Tracking revenue growth seems straightforward, but Farr says the vast majority of MSPs don’t know this number. “If I ask them, they’ll say, ‘I don’t know. It was maybe 10%.’” He attributes some of the uncertainty to the recurring revenue model. “We tend to ride bad months or bad quarters or just don’t push. And I think that’s one of the reasons that the growth is lower,” Farr says.
Farr recommends measuring your revenue growth monthly.
>Your Goal: 20% or better
“Really well run MSPs will grow 30%,” Farr notes.
2. Recurring Revenue % (MRR/ARR)
Industry opinion varies on what the ideal split is for MRR vs. projects/product sales, Farr acknowledges. However, he recommends 85% MRR /15% projects because that level of MRR is more predictable and puts less stress on your business.
Plus, he adds, in general, “MSPs are not very good at projects. I would much rather include some of those projects in my recurring revenue. And instead of trying to sell gear like firewalls and things like that, I would rather rent those to [customers]. And all of that’s going to help bring up your recurring revenue percentage comparatively.”
>Your Goal: 70% MRR/30% projects (50% MRR minimum)
3. Gross Margin (Gross Profit)
Gross margin is a multifaceted metric, and Farr recommends drilling down into the percentage for each category: Service, product, sales, marketing admin, and overall gross margin will all differ. For example, your margin on service will be higher than what you get for products. Your PSA can aggregate this data and calculate your margins. If you’re not hitting your targeted percentages, you need to make adjustments.
“There’s tons and tons of factors that go into gross profit, and that’s both a good thing and a bad thing,” Farr says. “The good part is [there’s] lots of ways to find where you’re bleeding out–death by a thousand cuts. But the bad part is it’s also an easy way for them to get caught up in the minutia. In the end, you need to be hitting the top number.”
>Your Goal: Overall Gross Profit of 50%
4. EBITDA
Farr likes to boil down EBITDA (earnings before interest, taxes, depreciation, and amortization) to net operating income (NOI), basically your net profit. “All the [factors] there that go into true EBITDA, for most MSPs, it’s not relevant and they don’t have any control over it. For instance, they can’t change their tax rates. So the only things you can control are gross profit and net profit. That’s where they need to stay focused.”
>Your Goal: NOI of 20% plus
5. Customer Satisfaction
There are a variety of tools that measure customer satisfaction (CSAT), but Farr recommends keeping it simple with green/yellow/red indicators for help desk tasks and tickets. “The key is, if you make it simple for the customer, they’ll actually do it,” he says.
Farr also uses net promoter score (NPS), a more complicated assessment and “something you do more with the ownership or leadership of your customer, and it’s less frequent,” often done as part of a QBR.
>Your Goal: CSAT 98%+; NPS 80 (50 minimum)
6. Customer Retention
While some MSPs like to focus on churn rate, Farr prefers retention, strictly measuring the percentage of customers he keeps. “If I start the year with 100 customers, how many of those 100 do I still have at the end of the year?” He considers it “cheating,” for example, if you acquired eight new customers and lost 10, and say your churn rate is just two. “Losing 10 customers is a service problem,” Farr says, “and [MSPs have] deluded themselves that just because they sold more, they’re not that bad.” Acquiring new customers is just part of the job, he says, but retention is a more telling metric.
Farr recommends looking at this metric monthly and strictly measuring MRR.
>Your Goal: 95% (90% minimum)
7. Employee Retention
Technology is important, but in the end, MSPs are about people and relationships, so Farr says it’s critical to keep your eye on overall retention and your retention of rock stars. If employees are consistently walking out the door, you need to examine what you may be doing wrong.
>Your Goal: 90% overall; 100% all-stars
8. Employee Satisfaction
This goes hand in hand with retention. He recommends quarterly (mostly anonymous) surveys that ask employees to rank the company on a 1-to-5-star rating in areas like culture, morale, ability to do their job, etc. If you’re getting bad ratings, you need to make adjustments. “Some of the biggest nuggets of gold I’ve ever gotten are from those surveys.”
>Your Goal: 4.5+ stars
9. Enterprise Value (the Monetary Value of Your Company)
MSPs often inadvertently die of those thousand little cuts Farr mentioned earlier. Here’s an example: “One of your techs will tell you, ‘We need this really cool tool; it’ll make us much more efficient. It’s only $400 a month.’ That doesn’t sound like much, right? Well, let’s take the $400 per month multiplied by 12. So that’s really $5,000 a year. OK, that’s starting to feel a little more impactful. Now take that $5,000 and ask how much does that reduce the overall value of your business? That $400 a month doesn’t seem so cheap anymore.”
This metric, he says, “is about understanding the impact of these small little cuts.”
>Your Goal: Calculate enterprise value every month (look at revenue, MRR, and EBITDA)
10. Marketing and Sales Pipeline
“I think one of the biggest areas where MSPs fail is not only do they not really know how to sell and market; they don’t measure anything,” Farr notes. “If you ask an average MSP how many appointments they had that month, they won’t be able to tell you. That’s literally malpractice.”
Tools like HubSpot and Keap can help you track incoming leads, first-time appointments, close rate, and more. Tracking these weekly or even daily helps you keep your foot on the gas, he says.
>Your Goal: Set metrics based on goals for growth, hiring, and new customer acquisition
Now, Spot and Fix the Trends
Armed with these metrics, you have the ability to identify and fix problems that are trending in the wrong direction. For example, a one-month drop in service gross profit because you had two techs out sick and had to pay overtime is not an issue. However, if you notice continually declining service gross profit, it’s a problem you need to address. Perhaps you overhired based on clients you thought you would land but haven’t yet.
Metrics can take the emotion out of hard decisions: “We just hired Joe, we really like Joe, but we’re overspending in service,” Farr illustrates. “The answer is, Joe has to go.”
