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 the 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 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. Looking for more help? Check out these MSP pricing strategies