As an MSP, you need to know if your sales and marketing work well. Are you meeting industry standards or falling behind? One way to know is to be aware of which key metrics to track. These numbers will reveal how profitable your efforts are and how you compare in the industry.
Introduction
The main metric to watch is the lifetime value (LTV) to customer acquisition cost (CAC) ratio. This single metric shows how profitable your sales and marketing are. It also shows how you compare with others in the industry. To find your LTV to CAC ratio, you need to know your CAC and LTV.
Understanding CAC
CAC is your total cost of getting new clients divided by the number of new clients gained over a specific period, typically calculated annually. This shows how much you spend to get one new client.
CAC = Total cost of acquiring new clients / Number of new clients gained
You can lower your CAC in several ways. Use organic search instead of paid search. Follow up with leads quickly and often to turn more leads into sales conversations, resulting in more paying clients.
In the MSP industry, the average CAC is about $32,000. This big investment makes sense because clients have high LTV.
Calculating LTV
LTV is the total gross profit from a client. Find this by multiplying monthly revenue by how many months a client stays with you, then by your gross profit percentage.
Prasanna Perera
LTV = Average monthly revenue × Average client retention (in months) × Gross margin
If you lack your own data, use these benchmarks: 60 months (five years) average retention and 60% gross margin. You can raise your LTV by providing great service so clients stay longer. You can also offer more services to increase profit from current clients.
The LTV/CAC Ratio
Once you know your LTV and CAC, the ratio between them shows how well you’re getting new clients. A good MSP acquisition process should have a ratio of around three.
Ideal LTV/CAC for an MSP = 3
For example, if you spend $24,000 yearly on acquisition and get a client paying $2,000 monthly, your CAC is $24,000. If this client stays five years with a 60% gross margin, your LTV is $72,000. This gives an LTV to CAC ratio of 3, which is healthy.
Conclusion
If your LTV to CAC ratio is below three, improve your customer acquisition process and profitability per client. Try to reach a ratio of three or higher. At this level, you know you’re getting new clients profitably and meeting industry standards.
By tracking these metrics and improving your strategies, your MSP sales and marketing will be solid. And your business will grow profitably and stay competitive.
Prasanna Perera is managing partner of RiseOak, an MSP marketing company.
Featured image: iStock
