Understanding MSP Monthly Recurring Revenue (MRR)

MSPs are in a constant environment of change. Sell projects, collect payments, rinse, and repeat. Many MSPs have recognized this and in response to that climate, the traditional transactional billing has been replaced with MRR or Monthly Recurring Revenue.

Through MRR, MSPs can wrap the software they provide with various services to bring value to clients. Furthermore, the price – a monthly subscription price – is predictable and often flexible to meet the demands of clients.

As an MSP owner, it’s crucial to stay ahead of revenue changes that accompany subscription billing models, in addition to leveraging it to ensure the MSP survives and thrives in this environment.

Understanding MRR Business

MRR is the income that an MSP can reliably anticipate every month through collecting subscription fees. These fees replace the upfront and maintenance licensing fees of previous models. Instead, the price covers updates, patches, and upgrades to the software whenever they happen.

This model provides several benefits:

  • It guarantees a steady cash flow for an MSP. It’ll protect the bottom line with consistency, especially if MSPs rely on project-related businesses
  • It also mitigates the peaks and troughs of cash flow, offering predictable and easy-to-budget planning and revenue projection
  • Clients also benefit from paying a fixed fee over a varied amount which helps their budgeting too

MRR Metrics To Understand

There are four core metrics under the MRR model that MSPs must keep note of:

  • MRR: It is the total monthly billings in recurring services. It’s the amount that MSP expects to receive per month. Always be tracking this as it’s the primary benchmark for progress.
  • Customer Lifetime Value (LTV): This represents how much a specific customer is worth. It’s calculated by multiplying the average revenue per account, the gross margin, and the number of months a customer has been with an MSP together. This puts into perspective the long-term potential value that stems from a customer relationship. This emphasizes the importance of a customer compared to project work.
  • Cost Per Acquisition (CPA): This is the total amount spent in marketing divided by the number of new customers brought in over that same period. It’s the average amount of money spent to gain a new customer. This calculation is harder to calculate as well because MSPs don’t know where each customer is coming from. Customer analytics that can tie data to customers is the best way to understand whether marketing efforts are working or not.
  • Churn (%): To calculate this, it’s the number of customers lost over a period of time divided by the total customers had during that period. MSPs will always experience some level of churn, however if the result is in the double-digits, it can be a sign that there is something wrong with the product itself and not customers. Calculating this often can assist MSPs in spotting issues and addressing them before they become larger problems.

These metrics are all very helpful as they identify core aspects of an MSP. With these insights, MSPs can identify opportunities and build further.

MRR Changes The Sales Landscape Too

Adopting a subscription model like MRR provides significant changes in not only billing, but sales as well. An MSP shouldn’t rely on the same traditional sales model as it can encourage sales laziness. After all, if salespeople earned commissions off every subscriber forever, each salesperson would work to ensure a certain number of clients and never put in work beyond that.

To avoid this problem, MSPs should introduce sunset clauses – tiered commissions rates that decrease over a four-quarter cycle. Each new customer earns a higher commission while by the third and fourth quarter, that customer will provide zero commission to that sales rep.

Others argue that a significantly smaller commission is in order but keep it for as long as the customer is subscribed. This would encourage sales reps to be more motivated in keeping in contact with the customer.

Regardless of the model, each one has benefits and drawbacks, the question becomes what model would work best with each MSP.

About MSP Corp

MSP Corp understands you’ve worked hard to build your business and you want to protect it. With a mission to be a world-class business partner for MSP owners across Canada, we actively seek to acquire and partner with owners looking to secure the value of the business they have built and provide a seamless exit process that ensures business continuity and employee and client stability.

Contact us today to learn more about selling your business and maximizing its value.