As you look to increase the success of your MSP business, a key question to consider is: “Do I have the right customers?” Why is that important? The short answer is that if you had MORE of your BEST customers, and LESS of your WORST customers, in almost every case your business results would improve. So how do you evaluate best/worst customers? Answering the quantitative portion of that question may involve several components:
- How much REVENUE do I get from each customer?
- How much PROFIT do I get from each customer?
- How much TIME do I spend in return for that revenue and profit? (especially “Fully Managed” time, which is unlimited)
- NET RESULT: So how much do I REALLY make on this client? Remember to take into account how many hours were spent on this client. and how much you pay your engineers (and keep in mind that you may not pay all engineers at the same rate).
Given all that, along with the nature of the relationship with the customer, is THIS the type of customer we want to do MORE business with? Or less? Or none? If you had MORE clients just like this one, would you be MORE successful than before? Or less? The premise behind this exercise is to:
- Look for ways to do MORE business with your best customers
- Look for OTHER customers who would also fit that profile
- Do LESS business with clients who are less of a “fit”.
So, how do you get started?
REVENUE: Getting a list of the revenue for each account for the past year is pretty easy. You should be able to get a revenue breakdown by customer from ConnectWise, and perhaps even your financial system.
PROFIT: Determining profitability for each customer assumes that you break down your 3rd party costs individually for each customer and each transaction. Really easy to do for traditional product sales, but for some MSPs, a bit more of a challenge when you are bundling multiple 3rd party products into one monthly invoice. If your 3rd party providers offer any “bundling deals” (say for example, “up to 100 licenses for $29”), that may complicate the bookkeeping on this. Key point is to record your costs on a client-by-client basis so that you can later evaluate the overall results at the client-level. While you may be able to record this level of detail in your financial system, recording and tracking this information in ConnectWise via the “Product” table (which ends up as “Additions” on a contract and line items on invoices) is our recommended approach
TIME: One of the challenges of evaluating the overall results you get from any given client is the nature of billing for “fully managed” contracts. For most MSPs, you send out an invoice at the first of the month for a set fee to the client (say, $1,000). Then throughout that month, your engineers spend time providing service to that client for that contract. So, how profitable is that contract for you? Well, if you spend NO time working on that contract, you would make $1,000 profit (but very soon you would likely lose that client!) If your engineers spend one hour on that client and they are paid $100 per hour, then your net profit would be $900. The challenge is: You invoice the client at the first of the month, but you cannot know how profitable that client was until the last of the month. The amount of time you spend during the month (as well as even WHICH engineer did the work, since they may be paid at different rates) determines your success. So you need to determine the total time spent for each client, even if it did not appear to be tied to the monthly invoice (because it hadn’t happened yet at the time the invoice was sent).
STACK RANKING AND EVALUATION: So gathering these metrics and doing the calculations, you can then establish a “stack ranking” of your clients, from the “best” client to the “worst”. For your action plan going forward, you may want to start at the top of the list to brainstorm ways to increase the amount of business that you have with great clients like this client, and determine what characteristics make this a good client (so you can look for OTHER clients that share similar characteristics). Once you’ve covered the very top of the list, go to the bottom of the list and look at your underperforming clients. Perhaps these are clients that are a distraction, or are just “not a fit” with your organization. The bottom portion of the list represents customers that perhaps should NOT be customers going forward. They can be a distraction for you and your team, and chances are, they also may not be happy with the relationship with you. Getting MORE “best customers” and LESS “bad customers” is part of a sensible approach to improving the results of your MSP business.
THE NEW HAVEN APPROACH
At New Haven, we tackle this exercise using our “Profitability by Client” report. This shows a stack ranking of clients based on the type of criteria we have discussed. The black columns on the left show the aggregate results across all your lines of business, while the colored columns to the right show results for each line of business (managed, prepaid, T&M, and product).
Zooming in on the aggregate results columns (see below), we see that our most profitable customer is “Isle of Capri Casino”, with $248k of revenue ($123k of which is “service revenue”), 3rd party costs of $98k, and W-2 cost of $51k. So after taking all revenue and costs (3rd party as well as engineering costs) into account, we see that the net result from this client is $98,442 (listed in the second column as “Net after W-2”). So we can review the clients at the top of the list to understand the characteristics that make them great clients, then look for ways to do more business with them or with similar customers. This approach also helps you discern those clients who may have large contracts with you (i.e., lots of “revenue”), but may take an even greater share of your engineering staff’s time (i.e. resulting in a low “Net after W-2” result).
Hopefully this discussion will encourage you to take a look at your best and worst customers, with an eye towards getting MORE business similar to your best customers, and LESS business with your worst customers.
At New Haven Technologies, we provide access to information so that you can make data-driven, informed decisions about your MSP business. Our service is provided on a month-to-month basis, and starts with a free two-week trial on your network with your data. We also include customized reporting at no additional cost as part of the service. If you are interested in learning more, just “reply” to this e-mail, or you can sign up for your free two-week trial at https://www.newhaventech.com/Trial
Best Wishes for continued success in building your MSP practice!
Founder and Chief Consulting Officer
New Haven Technologies, LLC
Stop Guessing. Start Knowing.