Often, we define the success of our sales team by looking only at the actual sales or closing of the business. That’s important because sales are the only indicator we need. Or so we think.
Tracking sales alone as a measure of your MSP’s success or growth is not enough. We need to create indicators that track the behavior required today to make sales tomorrow. Those indicators are what we refer to as Key Performance Indicators (KPIs).
These KPIs don’t just tell us how we are doing today in terms of revenue. They also tell us what the revenue will look like in the near future. They point to us the direction we need to take, if there’s something wrong, or whether we need to course-correct before it gets too late.
To identify the KPIs that you need to measure, you need to understand that your sales funnel isn’t the same as your sales forecast. A sales funnel gives you a clear picture of all the opportunities in different stages and which ones you need to take action on in your current reporting period.
If you have a well-defined sales pipeline, you will be able to streamline your sales process, create the right KPIs, and benchmarks for your sales team. All of this helps you predict the success of your sales. You can also identify roadblocks and do what is needed to fix it quickly.
A sales forecast shows you opportunities that have been qualified and will soon close into a deal. Think of it as a forward planning tool that comes in handy when you are deciding budgets and spending. As a result, you can predict revenues more accurately.
Here are a few key KPIs that will enable your MSP sales team to grow revenue for your business.
Net Operating Revenue is another important KPI that tells you the health of your MSP business. It is the number that you arrive at after you have deducted all your expenses from the overall/gross revenue.
You can alternatively use the Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) to gauge the health of the business. However, MSPs prefer to use the Net Operating Income since it is easy to calculate. Additionally, EBITDA is used when you want to sell your MSP business while Net Operating Revenue is used when you are looking to grow it.
A report by Taylor Business Group (TBG) benchmarks the Net Operating Revenue at 10%. This means that if your Net Operating Revenue is 10% or more, then your MSP is in good health. The same report states that the percentage of services to MRR should be more than 60% as an additional indicator of your MSP’s business health.
How to calculate net operating revenue
Net operating revenue = Revenue - operating expenses
Monthly Recurring Revenue (MRR) is one of the most important metrics that you should track as it is key to a recurring business model. This gives you an idea of how much revenue you’re getting in your bank each month. Healthy MSP businesses make most of their revenue through their MRR.
Some MSPs think bringing on board as many clients as possible is the best way to increase MRR. Well, we’d like to differ. Though this might seem counter-intuitive, it is best that you be choosy about which clients you want to do business with.
Large clients will stick around for a longer period of time because of the time they have invested in your MSP. They will not switch MSPs as frequently as a smaller client. The bigger the client, the bigger is your MRR —you will earn more for the same work your MSP is adept at delivering.
Another way that you can improve your MRR is building a sustainable pricing model. Your pricing needs to cover your expenses, and that’s a given. But to stay ahead of the competition, your pricing model should be competitive and reasonable. One way in which you can do this is by assessing the cost of your current technology and staff.
For a given month, the sum of recurring revenue generated by that month’s customers is your MRR for that period.
Product margin is the difference between the cost of the good or service and the selling price. The more the difference, the higher the margin. Though you have KPIs like MRR that most sales teams go after, it doesn’t quite point to the profitability of the company.
For example, an increase in revenue is no indicator of profitability. There is a good chance that though your revenue has increased, you probably have not made more profit because there might have been an increase in cost. You need to piece in the product margin to get a holistic view of your MSP business.
Calculating the profit margin for a service provider is trickier than it would be for a retailer or a manufacturer. When calculating the profit margin for your MSP business, remember to include direct labor and delivery charges, and sales commissions. But be sure to exclude any operating expenses that are not directly tied to delivering the service.
The benchmark for the product margin for the MSP business is 17.5%. If your profit margin is lower than that, remedy it at the earliest.
Product margin= (selling price of the product – the cost of the product) divided by selling price
The product margin and profit margin are not the same. The profit margin measures the ratio between net revenue and total revenue. It’s straightforward to interpret this KPI. If it is positive, it means your MSP business is making money. If it is negative, then you are losing bucks, and you need to find a fix for it. The magnitude of this KPI defines how far you are headed in a positive or negative direction.
You can use it to determine the health of your business. It also helps you benchmark your MSP business against a competitor.
Always remember that your net profit margin should be lesser than your gross profit margin because it takes into account the expenses. Similar to product margin, this KPI will help you assess how profitable your MSP is and also point to where you’re spending your money.
Percentage of profit margin = (Net income / Total revenue) x 100
Revenue per employee is a KPI that is often overlooked. But it is a valuable metric as it provides actionable information. It’s not just your sales team who are responsible for the revenue of your business. There are other functions within an organization that contributes directly or indirectly to the overall revenue of the business. But how do you measure their contribution?
The revenue per employee measures productivity. This indicates how your MSP business operates. Higher the number, the higher the efficiency of your organization, and the efficient use of your human resources.
*Note: On the flip side, it can hide inefficiencies in your sales team as it does not distinguish between functions.
Revenue per employee = Total revenue/number of employees
There is an infamous quote attributed to the statistician, W. Edwards Deming, that goes like this — “you cannot manage what you cannot measure.” We’d like to add to it by saying, — you cannot measure what you cannot understand.
While there are plenty of sales KPIs that you can take into account, it is essential that you understand what each of the KPIs means and whether they are the right KPIs for your MSP business. Each KPI should have a benchmark based on past data and industry standards. Look for patterns, opportunities, and deviations, so you are in a better position to take the right course of action.
Are there other KPIs that you’d like to see included in the list? Let us know in the comments. Happy selling!
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