Is your cash flow all over the place? Perhaps you accept too many big-ticket IT projects that help you get by in the short-term, but funds run out before landing your next large contract. Solely targeting these one-off projects places tremendous pressure on your business—not to mention your margins—especially if too much time passes in between clients.
In IT, the cost per lead is high and only increasing over time. Indeed, the sales cycle for an email migration, for example, could last months or even years. And in some cases, you could spend thousands of dollars trying to close one of these larger, one-time requests. Clearly, this model can cause significant challenges for your MSP business.
Monthly Recurring Revenue Is the Answer
Having a predictable revenue pipeline reduces the volatility of your market and smooths out uneven cash flow. You can maintain financial stability and continue to grow even if you don't consistently obtain larger deals. Monthly recurring revenue (MRR) affords this by covering ongoing projects, such as managed services or monthly IT support. This subscription-like model uses renewals and recurring contracted services that pay out either weekly, monthly, quarterly or annually.
Let's dive into the core benefits of MRR.
MRR Increases Customer Lifetime Value
MRR amplifies the value of your marketing efforts. The initial revenue from new customers may be lower than that generated by giant one-off projects, but their lifetime value ends up being much higher. As the adage goes, it's far more expensive to sign a new client than to retain an existing one. When you build relationships with existing MRR clients, the money you invest in IT lead generation yields a higher return.
When you adopt an MRR model, your marketing and sales teams will no longer have to operate under "churn and burn" pressure. MRR focuses on lead quality rather than lead quantity. Then, through lead nurturing, you can simultaneously qualify leads and demonstrate your authority and trustworthiness. By maintaining regular contact with these prospects after they close into clients, you can strengthen existing relationships and increase customer loyalty.
MRR Scales Your MSP Business
A reliable, high-quality pipeline with a steady income stream creates a more scalable business model. With MRR, you know what your workload looks like a month in advance and can plan around your capacity. Having a steady revenue stream also allows you to be more selective with labor-intensive and time-consuming projects. You don't have to exhaust all of your attention and resources managing a single large client with varying requirements for every project. Instead, process automation and other tools streamline the workflows of your frequently offered services, enabling you to become a specialist in these areas.
An MRR business model helps set your business up for long-term success. With predictable revenue in place, you can more easily track and forecast profitability key performance indicators (KPIs) like average revenue per user, cost of goods sold and gross profitability to gauge the overall health of your company. Moving away from the more reactive mindset helps you plan for future growth and stabilize cash flow. Remember that what gets measured, gets managed. In order to fully reap the benefits of MRR and continue expanding margins, you must monitor these metrics regularly.
MRR Positions You for Acquisition
Are you interested in attracting acquisition partners for your MSP business? MRR increases your chances of M&A by moving your company away from unsteady income sources. Those looking to acquire a managed services business will evaluate your company and appraise it based on your financial stability and predictability. And, in many cases, MSPs that have embraced a recurring revenue model are valued much higher than those who have not.
You don't have to deal with the feast and famine cycle that plagues many managed IT services providers. Forget chasing after substantial, yet fleeting projects. Invest your energy and time into developing relationships with clients paying you MRR and receive a higher valuation upon exit!
By Gretchen Hoffman
By Paula Griffin