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6 Must-Know Formulas to Grow Managed IT Services Profitability

Posted 23 August, 2016by Mary McCoy

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Just because your firm is bringing in revenue doesn’t mean you’re making money. You have to earn a profit in order to sustain your business and grow. Revenue is good, of course. But revenue doesn’t do you any good if your costs exceed it. That’s why it is critical for MSPs and IT solution providers to track profitability as well as income. 

How do you do that?

You need to think like a CFO.

There are many ways to measure business performance. Using key performance indicators (KPIs) allows you to track profitability. It also gives you valuable insight into your ongoing business operations.

Your business is an investment. You invest in customer acquisition, development and delivery of products and/or services and daily business operations. Ongoing tracking enables you to see where you’re getting the best returns on that investment – you want to do more of that. It also shows which clients, offerings or activities are not performing well for your bottom line – you want less of that. 

For managed IT services providers, these six KPIs are excellent metrics to help analyse and grow your business. That’s because these metrics enable you to examine your ROI in multiple ways.


1. 
Recurring Revenue Rate (R3)

Subscription services, renewals and recurring contracted services all bring in ongoing revenue. You can measure this by the week, month, quarter or annually. The nice thing about recurring revenue is that it is predictable. Knowing your R3 allows you to understand your current revenue streams and also plan better for the future.

Calculation: add all recurring payments collected and/or projected in the current month (or other period you want to measure)

 

2. Average Revenue per User (ARPU)

As the name implies, this shows the average income generated by subscribers or users of a specific service. You can compare the various services you offer to see which are the most popular (total number of users) and also which ones produce the highest per-user revenue. This data helps MSPs refine your menu of products and services offered. Your most profitable offerings are those that attract a high number of users and bring in high per-user revenue.

If you offer a free service level or trial subscriptions, be sure to calculate Average Revenue Per Paying User (ARPPU), too. You should also track your conversion rate – the percentage of free or trial users who upgrade to paid status. After all, you’re in business to make money.

Calculation: Total Revenue/Total # of Subscribers (or Total # Paid Subscribers)

 

3. Cost of Goods and Services Sold (COGS)

This tells you what it costs to create and deliver the products and services you sell. You will use this figure to determine if you are making a profit, but you can also use it to refine your managed IT services pricing strategy. Labour, materials, service and delivery expenses all count toward this total. For MSPs, it’s especially important to closely track your technicians’ time to ensure your COGS numbers are accurate.

Calculation: Labour Costs + Materials Costs + Service & Delivery Costs

 

4. Gross Profitability

This metric is a fundamentally important for every business. It reveals the effectiveness of your pricing strategy – is revenue covering your costs and realising a net gain?

Calculation: Total Revenue – Cost of Goods Sold

 

5. Client Contribution

This helpful metric enables you to identify which clients are the most financially valuable for your firm. Understanding customer value helps you grow your business, by targeting similar prospects. It also helps you identify and perhaps weed out unprofitable clients. Remember that the most important number is the net – what you’re left with after you subtract your costs of serving each customer. 

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

 

6. EBITDA

This stands for “earnings before interest, taxes, depreciation and amortisation.” These are costs of doing business, though they may not be as obvious as COGS. EBITDA helps you measure your operational efficiency and profitability. 

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


Being an efficient and competitive MSP requires more than just technical prowess. Financial KPIs help you see what’s working and what is not when it comes to revenue and profitability. That helps you know which types of clients to target and which products and services to offer. To be truly effective, however, MSPs should track more than revenue and profitability. Using KPIs can help you become more strategic in your sales and marketing, service delivery and overall business operations.

Improve-MSP-SLAs


 

Meet Mary! Mary McCoy is a Senior Demand Generation Programs Manager at Continuum, where she's worked for over two years. Mary has consulted with hundreds of partners, lending website, blog and social media support. Before that, she graduated from the University of Virginia (Wahoowa!) with a BA in Economics and served as digital marketing intern for Citi Performing Arts Center (Citi Center), spearheading the nonprofit’s #GivingTuesday social media campaign. Like her school’s founder, Thomas Jefferson, Mary believes learning never ends. She considers herself a passionate, lifelong student of content creation and inbound marketing.


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