You might have heard that it costs five times more to attract a new customer than to keep an existing one. But did you know that increasing customer retention by just 5% can lead to an increase in profits of between 25% and 95%? Or that the success rate of selling to an existing customer is 60% to 70%, compared to 5% to 20% for a new customer?
This, says Gregg Lalle, senior vice-president of international sales at ConnectWise, is an example of how key performance indicators (KPIs) are evolving for service-based businesses. It’s also why KPIs need to be segmented and measured separately to accurately determine a managed service provider’s (MSP’s) value and performance, and how it can become a best-in-class business when measured against its peers.
This is especially important as the traditional service model moves away from the sell-and-forget approach to a value-adding partnership, says Lalle.
Shifting KPIs
MSPs should still measure KPIs like products sold and labour hours, but they should focus more on measuring things like customer churn, recurring revenue and – more importantly – how they can segment and improve performance in these areas to add more value to customers. Marginal improvements in one or two areas impacting customer churn can potentially increase recurring revenue and, by extension, an MSP’s valuation, says Lalle.
In the XaaS (anything as a service) era, customers can switch providers quickly, especially if they’re not getting the service and business support they need from their technology partners, says Lalle.
Yet measuring the impact of KPIs like recurring revenue, customer acquisition and churn rate on the business is not as simple as looking at a single line item.
That’s because losing a customer costs a lot more than only lost sales; businesses need to factor in marketing and sales costs needed to replace the customer. Marketing, for example, can be segmented into several KPIs, like advertising, content creation and e-mail campaigns, as well as the labour costs associated with these activities. Sales costs can be split into tools, commission and overhead costs. All this should be considered when calculating how much it actually costs when a customer leaves, says Lalle.
Number-crunching
So, how can businesses crunch the numbers?
It starts with knowing what you want to calculate, for example, customer acquisition cost, customer lifetime value, revenue churn, or revenue valuation.
“Let’s take customer acquisition as an example. To work out how much it costs a business to win a new customer, it needs to factor in costs associated with inbound and outbound marketing, which can be further segmented into things like SEO, Web analytics, cold calling and referral costs. Then, factor in sales costs and how many customers were acquired in a given period and you’ll come to an accurate number of how much each new customer actually cost you.”
The lower the customer acquisition cost, the better, as it indicates that a business’s marketing and sales efforts are efficient and scaled up properly.
But what if it’s high? This, says Lalle, presents an opportunity for a business to improve.
Having granular visibility into costs can help MSPs to identify which KPIs can be optimised for better return. “If marketing costs are high, businesses can look at employing marketing automation, from lead to quote. Then they can look at how to maximise sales efforts from quote to sale, which can help to increase their conversion rate,” says Lalle.
He adds that, once business have a metric against which to measure themselves, they can use it to figure out how to adjust their business and to identify which operational levers to pull to make an impact.
ConnectWise has launched a tool to give MSPs a starting point and encourage them to “think differently”. The calculator helps them to understand their KPI-related costs and identify areas where they can operationally improve. It also provides resources and guidance to help MSPs gain operational leverage. New functionality around marketing, sales, service, support, finance, customer success, legal, security and HR will be added to the calculator in future. Those businesses that have downloaded the tool will be notified when new features have been added.
“The calculator provides non-emotional gauges to figure out where you’re at, where you need to go, how you rank against everyone else, and how you can change the inner workings of your business to become a best-in-class MSP. It’s geared to helping MSPs understand how to calculate the things that matter and, more importantly, what they can do to improve. How do you drive more efficiencies, and what do you need to deploy differently to make that happen. That’s our intent with this tool: to help MSPs benchmark themselves and, ultimately, to move up the ranks.”
Access the tool here.
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