One Factor in Determining Your A, B and C Customers
When businesses go about evaluating how successful they are, there are some common metrics most use. This could be anything from tracking tech utilization, to analyzing overhead costs, to determining if automation is being used to the fullest extent.
All of these are effective ways to measure the health of your business. But there is one area you may not have considered that can also provide an accurate view of how your business is doing: your customers. More specifically, the ability to determine which customers are providing the most value to your business.
While most businesses refer to the monthly recurring revenue (MRR) they receive from customers to evaluate their overall profitability, it’s just as important to know the effective rate of each of your customers – in other words, the per-hour value. This is done by calculating the total revenue received from each customer, divided by the number of hours spent delivering services for them.
For instance, if your revenue for Company X is $10,000 and your services team logs 100 hours supporting them, then Company X has an effective rate of $100 per hour.
It’s a fairly simple calculation, but managed service providers (MSPs) that have a lot of clients often take advantage of professional services automation (PSA) tools, which help them easily capture all their clients’ billable hours in a central location. This can help provide the most accurate read of effective rate.
Why You Should Know Your Effective Rates
Once you have a grasp of your customer effective rate, you can better determine if you are maximizing revenue for the amount of services you are providing. You will also have a better understanding of which customers are bringing in healthy revenue, and which customers may be cutting into your profitability by draining your team’s time and resources. This can help you figure out if there are clients you want to promote and maintain. After all, your team’s time is limited.
Not knowing your customer effective rate can cause real problems for your business. Besides cutting into your margins, you run the risk of making things worse by continuing to work with clients that have become a drain on your resources. Moreover, you could end up wasting valuable sales and marketing time selling to the wrong customer – i.e., one that doesn’t fit your key market or industry, or is the wrong size. Being unaware of where your customers stand on this key performance metric could cause you to miss opportunities to pursue more profitable customers.
Addressing Effective Rates with Clients
The best time to perform the effective rate calculation is prior to any quarterly or annual business reviews you may have with clients. That way, you understand how many hours your techs spend on each one, and whether it’s worthwhile from a profitability perspective. You may realize that some clients are …