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Empowering Your MSP Business to Grow and Prosper—One Post at a Time

5 Ways to Improve Your MSP Service Level Agreement (SLA)

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5 Ways to Improve Your MSP Service Level Agreements (SLAs)

SLAs are the foundation of your MSP business. They are essential to building strong client relationships and must be clear, reasonable and well-constructed.

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6 Profitability KPIs You Should be Tracking

Posted May 20, 2014by Ray Vrabel

profitability-KPIs-you-should-be-tracking

In today’s increasingly-digital business landscape, everything is measurable. Whether it’s the ROI of a given marketing initiative, the effectiveness of an entire sales department, or an average cost of new customer acquisition, one thing is clear: businesses with a strong analytics program in place have a significant advantage over those that don’t. 

Think about it – if you aren’t able to track the success and performance of various aspects of your business, how can you identify what’s working and what isn’t? How can business leaders know with any certainty that they’re making the right investments?
 

What Should I Measure?

Developing a powerful analytics strategy involves more than simply buying a platform off the shelf and cataloging all of your business data. Organizations across different industries have vastly different analytics requirements and best practices – financial services providers, for instance, will focus on different reporting and data than manufacturers. Understanding which metrics and key performance indicators (KPIs) are most important to your business is critical to the success of any analytics initiative.

This cheat sheet is the first in a series designed to provide MSPs and IT solution providers with a general overview of the KPIs they should focus on when implementing or refining an analytics strategy. Specific calculations and formulas are provided where applicable.

Revenue and Profitability KPIs

Understanding where your profit is being generated, which of your customers provide the greatest value, and how much it costs to actually deliver products and services are all essential considerations when trying to maximize profitability.  

Recurring Revenue Rate (R3)

Recurring revenue represents the value a business is generating through subscription services, renewals and recurring contracted services, and can be measured on a weekly, monthly, quarterly or annual basis. R3 makes it much easier to scale your business because you can more accurately predict your revenues each month. It’s an important metric for MSPs in both understanding existing revenue streams as well as mapping out future growth.

Calculation: Sum of all recurring payments collected/projected in current month.

Average Revenue Per User (ARPU)

A measurement of the average revenue generated by each user or subscriber of a given service.

Calculation:           Total Revenue
                        Total # of Subscribers 

(Note: Businesses that offer free service levels or trial subscriptions should also calculate Average Revenue per Paying User (ARPPU) – Total Revenue/Total # of paid subscribers) 

Cost of Goods and Services Sold (COGS)

The total cost of manufacturing and delivering products and services. This includes labor, material, service and delivery expenses; this number can influence MSP pricing strategies, and provides helpful insight as to what it actually costs to deliver goods. This can be difficult to estimate in a services business, so make sure you’re tracking your technicians’ time closely so you can be more accurate in your COGS calculations.

Calculation: Labor Costs + Material Costs + Service & Delivery Costs

Gross Profitability

An essential metric for any business, gross profit reveals how effectively an organization is balancing production and labor costs with pricing and service delivery.

Calculation: Total Revenue – Cost of Goods Sold
 

Client Contribution (CC)

A great figure for MSPs, client contribution is an important metric in understanding the value that each of your customers generates, and helps in determining how you can grow your business. It can also help you find some clients that are unprofitable. It should reflect both the total number of dollars generated by each client as well as the cost of providing services and offerings to those clients.

Calculation: Revenue per Customer – Cost of Goods and Services Sold to That Customer

EBITDA

Earnings before interest, taxes, depreciation and amortization are subtracted. This provides a measurement of a company’s operational profitability, and can provide some interesting insight when used to compare competing organizations or businesses in different industries. Note: this is different from Gross Profitability because this helps measure operational efficiency, rather than just the profit you’re generating as a business.

Calculation: Revenue – Expenses (excluding interest, taxes, depreciation and amortization)

These revenue KPIs are a great starting point to help you keep track of cash flow throughout your business. Stay tuned for our remaining installments, which will include information surrounding marketing, sales, operational and service delivery KPIs!

 

Pricing-Profitably-Managed-IT-Services-Pricing-Strategies-to-Maximize-Margins

Ray Vrabel is Continuum's Director of Technical Account Management and participates in product and service growth initiatives, and also manages Continuum's Technical Account Management team, which supports over 3,500 partners worldwide. Prior to Continuum, Ray joined Zenith Infotech in 2005 and held several positions including Service Desk Manager, Sr. Technical Account Manager and Sr. Manager of Service Operations. He currently has over 15 years of experience in the IT industry, specializing in Managed Services, Disaster Recovery, and Cloud Solutions. Prior to Continuum and Zenith, Ray worked at ANH Refractories, a world-class provider of Refractories products, in their Service Desk Department supporting 53 locations and 1,500 employees. Ray also worked for a startup venture at Body Media a pioneer in wearable body monitoring systems as a technical lead in their Technical Customer Support Department. Ray holds a Bachelors of Science in Business Technology Support and Training from Indiana University of Pennsylvania.

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