August 23, 2019
By Craig Fulton
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 …
… not as profitable as you previously thought – or worse, they may actually be costing you money.
However, before bringing up any issues with your clients, be sure to do a full analysis to see if there are ways to increase efficiencies and reduce the amount of time your techs are spending on their business. For instance, increasing your use of automation can reduce the amount of time your techs spend on repetitive tasks such as opening tickets, assigning company information or contact information or searching for configurations. Or maybe your team could benefit from additional training to help them get better at solving technical problems. It’s also a good idea to ensure your tickets are being escalated properly. Often, lower-tier techs spend too much time trying to solve a ticket when it should be escalated to a more experienced technician or development team.
When the time comes to do your business review with your client, don’t just use that time to address issues. Spend some time getting to know them better. Try to gain a better understanding of their business goals for the upcoming quarter or year, and work with them to determine if their existing technology stack is likely to meet their needs. And of course, address the issues your team has resolved, general service-level agreement (SLA) adherence and average ticket resolution time, among other things.
If it turns out your customer’s effective rate is low, rather than letting them know you don’t consider them profitable, propose ways to increase the overall effectiveness. Some of the ideas proposed above are a good start. If effectiveness doesn’t improve after a period of time, then you may want to determine whether a rate increase is necessary.
Customer effectiveness rate is only one of many key performance indicators (KPIs) you should be tracking to measure business success, but it’s one that should always be included in your arsenal.
As ConnectWise chief customer officer, Craig Fulton oversees the support, consulting and onboarding teams to empower customers to succeed in growing their businesses and exceeding their goals. He credits his 20-plus years in the technology sector, including time spent as a support desk and field technician, for helping him understand what partners want and need from their business management software. He co-created ConnectWise CloudConsole and authored Path to Success, a ConnectWise best-practices guide about how to run a successful technology solutions provider business. He previously worked for Accenture as a technology consultant and served five years in the U.S. Marine Corps. He was named a Channel Partners Top Gun 51 channel executive in 2019 and holds a number of patents related to chat program and cloud management technology. He earned his bachelor’s degree in business management from the University of South Florida. When he’s not at work, Craig is spending time with his family, traveling, or working on his cars. Follow Craig on LinkedIn or @ConnectWise.
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