6 profitability KPIs MSPs should be tracking

Posted:
08/17/2020
| By:
April Taylor

In today’s landscape, where we have more access to technology and data than ever before, everything is measurable. Businesses that measure their data—such as their ROI of various campaigns, customer lifetime value, or gross profit margin—have a strong advantage over those who don’t have a measuring strategy in place. 

Without data analytics, it’s challenging to identify what’s working and what’s not. When it comes to measuring data, how can business leaders know which key performance indicators (KPIs) to focus on to make strong and effective business decisions? Developing an analytics strategy involves more than buying a measurement tool and simply cataloging your data. 

Depending on your organization and your industry, you will have different priorities and best practices that apply. Financial service providers are going to have different reporting requirements than companies in the healthcare industry, for example. 

Understanding what’s important to your specific business is a critical part of having a successful data analytics strategy. 

MSPs and IT solution providers should use this cheat sheet as a general overview of useful KPIs to focus on when initiating a data analytics strategy. Calculations and formulas are included whenever possible. 

Revenue and profitability KPIs

No matter the industry you serve, understanding where you generate profit, which customers provide the highest value, and the true cost of delivering your services are essential considerations to make in determining how to maximize your profitability. These KPIs help guide those business decisions:

  • Recurring revenue rate: Often calculated as monthly recurring revenue (MRR). This metric represents the value a business generates through subscription services, renewals, and recurring contracted services. This number is often measured weekly, monthly, quarterly, or annually. Tracking this KPI helps you more accurately predict your revenues and make future projections based on hard data. 

    To calculate, sum all recurring payments for the current month.

  • Average revenue per user (ARPU): This KPI helps you understand how much revenue each individual customer or subscriber of your service is generating. Knowing this data helps you realize the value associated with adding or losing a customer. 

    To calculate, divide your total revenue by your total number of subscribers.

  • Cost of goods sold (COGS): To understand how much profit your company is bringing in, you must first understand the cost of delivering your services. COGS takes into account the total cost of manufacturing your product and services, including labor, material, and service and delivery expenses. This metric can drive important decisions, such as MSP pricing strategies. In a services business, tracking your tech’s time closely can help you more accurately calculate COGS. 

    To calculate, sum up your labor costs, material costs, service and delivery costs.

  • Gross profitability: This is a must-track metric for any and all businesses. Knowing your Gross Profitability helps you determine how well you’re balancing production and labor costs with pricing and service delivery. 

    To calculate, subtract your COGS from your total revenue. 

  • Client contribution: Client contribution is a key metric for MSPs, as it demonstrates the value that each customer generates and helps determine how to grow your business. It can also help you weed out those unprofitable clients that it may not make sense to do business with anymore. This metric should reflect both the total dollar amount generated by each client and the cost of providing services to those clients.

    To calculate, subtract COGS per customer from revenue per customer. 

  • EBITDA: A company’s earnings before interest, taxes, depreciation, and amortization are subtracted is another metric that all businesses should track. This KPI gives insight into a company’s operational profitability. Businesses often use this number to compare how they are doing against other organizations in the market. This differs from Gross Profitability because it helps measure operational efficiency rather than just profit. 

    To calculate, subtract expenses (excluding interest, taxes, depreciation, and amortization) from revenue.