How to determine the best customers for your business
Not all customers are created equal. And as a managed service provider (MSP), it’s important to determine which of your customers are best for business. We’re here to walk you through identifying these customers, what they mean to your success, and how the ‘not-so-great’ customers can cost you in lost revenue.
What kind of customers do you have?
Your best customers are considered your A customers. This type brings in the highest margins, adopts your methodology, and stays within their agreement. Sounds nice, right? Then, we have our B customers. These type of customers are mediocre. You most likely don’t have any problems with them, but they’re not the best clients to have because they only bring in the expected margins and nothing more. Lastly, we have our C customers—the worst ones with a lot of problems and no margin benefit. For any C customer, it’s important to ask yourself what the opportunity cost is. What does losing one bad customer do to your ability to bring on better ones? You might be able to bring in more revenue and increase margins by dropping that C customer and only focusing on the A and B ones.
Measuring your best customers
Knowing not all customers are created equal, you’re probably wondering how you can measure who your best ones are. It’s not only about who’s bringing in the most revenue each month. Some MSPs look at the dollar amount of their customers as a metric for how to value them. But when it comes down to it, the customers that offer the most recurring revenue each month could be worse than the ones bringing in half as much.
Even though the highest revenue number shows you one story, it’s not the full picture or representative of your bottom line. The takeaway here is that you could be losing money with your highest monthly recurring revenue (MRR) customers.
For example, let's look at two groups of customers who each deliver $50K a month in revenue. In one group, we have 5 customers who pay $10K a month each, and in another group, we have 10 customers who pay $5K a month each. Both groups bring in the same amount of revenue, but it's the margins that set them apart.
If your 5 $10K/month customers are C customers providing 20% margin, your monthly margin is $10K total. However, if your 10 $5K/month customers are A customers providing 25% margin, your monthly margin is $12.5K. Over the course of the year, that extra $2.5K in margin each month from your A customers equates to $30K a year.
Your best customers…
…have a good effective rate.
If one customer brings in half as much revenue compared to another, but they’re taking up less than half of your time, they could be better for business. It’s all about the effective rate: How much money you’re making each month divided by how much time you’re spending each month. That’s how you can tell who’s a more profitable customer.
For MSPs to be more profitable and keep healthy margins, they need to spend fewer hours performing service. Think of hours spent each month when operating as break/fix and operating as an MSP. Break/fix has flat margins, but for MSPs, more hours means decreased margins. So, it’s important to ask yourself which customers have lower hours and higher margins—because these will bring in more profit. On the contrary, the customers that have higher hours and lower margins are not delivering the most value.
To effectively measure who your best clients are, it’s best practice to ensure you capture all the hours billed. Implement a tool that lets you capture time detail against each customer, type of service request, piece of technology, and agreement—all while your help desk team is doing their job. Let a technician do their day-to-day process while your tools do the measuring.
…make it easy to anticipate what they need.
Your best customers don’t cancel orders, change things outside of their agreement, or do a lot of unexpected things against their order. You should be able to anticipate what your customers need by knowing what's included in their order.
Being in the know allows you to estimate time spent on that customer so you can set appropriate pricing. Your best customers don’t require extensive after-sales service, which directly impacts their effective rate. If your client has numerous unexpected changes, the hours spent will increase and cut into your margins.
… pay on time.
Your best customers pay on time without being chased. If you’re chasing them around trying to get them to pay, you’re wasting time that could be spent on your business.
… adopt your methodology.
Are your clients adopting your methodology? Are they taking advantage of you? Do they follow the best practices and standards you’ve put in place? If not, it’s time to part ways.
… don’t hurt your team’s morale.
You should also be measuring morale. There are non-monetary impacts that bad customers can have on your team and organization, such as being demanding or rude to your techs, talking down to your techs, or they simply don’t find value in what you provide. Are your customers bringing down your morale? If so, they’re a customer you don’t want on board.
Determining what to expect with new & potential clients
For any new or potential client, it can be tough to determine what kind of customer they’re going to be. Set expectations up front when trying to determine the grade of the customer you’re dealing with.
You can do this by completing a business assessment first. Before you put a quote in front of your client, assess their business to determine if they’re going to be a good customer or a bad customer. Then, you can see if they can or are willing to raise up to your standards. Doing this assessment allows you to see what needs to be fixed within their organization before you sign anything. If they decide not to sign an agreement with you, you’ve already collected money for the assessment, and the customer can take their results to another provider.
If they say yes to signing an agreement with you, you can put that cost toward the first month of their contract. The assessment will show who (between the two of you) is willing to pay for the technology, find value in the partnership, and invest in being successful. Yes, it will show you their current standing, but the process itself will also give you insight into their organization, the type of customer they are, and how quickly they pay you during the process.
Now that you have a good idea of which customers are best for business and how to evaluate your current ones, take the time to do your research. In the end, you’ll end up with profitable, easy-to-handle customers who help your bottom line.