One of the more appealing characteristics of the managed services business model is recurring, predictable revenue and profitability. Since services are sold on a subscription – monthly, quarterly, annually – MSPs know precisely the minimum they will bill and collect in any given period.
A critical factor in this equation is not just having customers, but retaining them and keeping them in good standing.
MSPs often complain about the expense of building a managed services practice – infrastructure development, software acquisition, marketing, sales, support – is front-loaded. Over time, the MSP will recoup that cost as more and more accounts and devices under management are added. At a certain point, an MSP will reach an inflection point after which all accounts become pure profit.
With a fixed number of accounts on the books, MSPs can accurately forecast to the penny the minimum amount of revenue they will bill in any given month. The qualifier “minimum” is there because there’s always the possibility that more accounts and devices will be added to the ledger, increasing the monthly gross.
This basic mathematical principle is what makes customer retention so important in managed services. Without a stable account base, an MSP does not have predictability in revenue or profitability. If customers keep falling out of your program, the profitability of the business actually decreases precipitously as more energy and effort must be put into recruiting and closing replacement accounts.
It’s a well known truth in sales that it’s far less expensive to retain a customer than it is to sign a new account. An existing account has experience with your services and the benefits that come with them. They know you as a trusted advisor to their services needs, and they’re far more apt to consider a product or services recommendation you make than one brought to them by a cold call.
The need to retain customers makes customer satisfaction and quality of service paramount in the MSP model. Instability alone will make revenue inconsistent, and that will make for irregular cash-flow and increased difficulty in managing expenses. And this is to say nothing of the irregularity in profitability, which will hamper the ability to invest in new resources and capabilities.
A stable customer base that continues to consume a steady level of services creates a revenue – and profit – foundation that enables MSPs to not just reap profits, but expand markets, acquire customers and increase capabilities. As every successful MSP knows,customer retention is synonymous with recurring revenue.