You’ve leveraged the changes in our industry and built a profitable business in the cloud.
But how do you know if your business is performing to the best of its ability?
To determine just that, you’ll need to establish some key performance indicators (KPIs) you can use to measure your business success on an ongoing basis. Then, you’ll be able to determine what changes you need to make, if necessary, to keep that great momentum going.
As a starting point, let’s look at the business in two equally important parts: growth and profit. Underneath these areas of business are a number of measures that will help you decide where adjustments need to be made. I highly recommend inspecting these metrics on a quarterly, if not monthly, basis.
KPIs for business growth
When looking into your key performance indicators for business growth, the goal is to ensure that you’re consistently earning new customers—don’t focus on just your current customer base alone.
Here’s what you’ll want to look into:
Rate of customer acquisition
Are you bringing in as many customers this quarter as last, or are things slowing? Losing steam on the rate of acquisition is the fastest way to stall growth. If acquisition is declining, inspection is simple: measure how your sales reps are performing month over month, and then look for reasons why that might be happening. Are your salespeople being supplied with sufficient lead volumes, for example?
Average Revenue per User (ARPU)
ARPU is the next killer metric for partners to focus on. The industry is moving away from large projects to long-term relationships, so it’s critical to maximize your average revenue per user. As customer needs and the technology IT solution providers use to meet them both evolve, cross-selling becomes an effective way to do this. Build a joint roadmap with your customer to keep the engagement going, and continuously educate them on how you can help solve any upcoming challenges.
Advanced partners should be implementing nurture marketing engines and hiring a dedicated nurture marketing/sales expert. Hire your expert when they can generate enough revenue from renewals and cross/up-sell to keep their direct sales cost to 15 percent of what they drive. For example, if the fully loaded cost of employment totals $50,000 (salary, commission, benefits), they need to able to drive a minimum of $333,000 in revenue.
Direct sales cost
This measure determines the value a seller is providing to the company. In the cloud, 8-10 percent is ideal and 15 percent is acceptable, but anything beyond that means either their quota is too low or their income is too high. As I’ve discussed before, determining compensation for sales reps has been a major challenge for partners trying to get legacy sellers to move to the cloud.
Percentage of billed revenue spent on marketing
So often when talking with partners who are struggling with sales volume, I find out the problem lies at the source—lack of marketing investment. It’s common to see less than 1 or 2 percent of revenue being spent on driving net new demand. However, some of our most successful channel members continuously spend anywhere from 8-10 percent. Now that cash flows happen over an elongated period of time, it’s really important to ramp up acquisition—be sure you’re investing to maximize your marketing.
What’s a good rate to aim for? Typically, you’re looking for something less than 8-10 percent per year of annual churn, but this number will vary based on your customer acquisition rate. I often see strong partners with 1-2 percent.
While renewal rates don’t drive growth, they can sure stifle it. Customers are now making a purchase decision each and every month. As a result, it’s key to build up a strong cadence of communication that serves both to add value to drive ongoing increases in adoption but also to serve as a reminder that a contract is coming due.
For me, the renewal process never stops. From the day they sign their first contract, you’re ensuring they understand your value and that of the product, continually giving them reasons to re-subscribe.
Attach rate of secondary offering(s)
Many partners have a consistent solution they sell as the first step in the engagement. We’ve often seen this be Office 365, which often opens up doors to a broader cloud opportunity. The challenge is, all too often, partners stop there. This is a quick way to see your customers move to someone else capable of providing the incremental value they’re seeking.
Now, if you’re highly specialized as a provider of dedicated IP, and you’ve built your business model purposefully around a narrow segment of the market, and the competition isn’t capable of providing your depth of value, you may not have to concern yourself as much with this. That said, it’s likely only a matter of time before someone else comes along with an offering as good or even better than yours. In either case, this is a significant lever of growth. If you’re pushing on acquisition and then maximizing the revenue per user, you have an acceleration formula that’s tough to beat.
KPIs for maximizing profit
For partners who’ve developed their model around project or managed services, a number of elements can have a great impact on your Profit and Loss Statement (P&L), depending on how disciplined you are in managing them. Mature partners in this line of businesses may be seeing as much as 50 percent or more of their revenues coming from these sources. They are the ones you have the greatest control over, so keep an eye on them to determine what the next steps for your business should be.
Remember, vendors determine product margins, but you dictate the services (and IP—you should be developing that as well).
Percent of revenue from recurring sources
While shifting your business model to recurrent revenue streams will certainly create growth, the other great benefit is an increase in gross margin. Remember, not all revenue streams are created equal, and in most cases the two highest profit-generating sources are managed services (40-50 percent gross margins) and packaged IP (often 65 percent or more). Ideally, a partner starting their journey should aim to have 15 percent of revenue from these sources by the end of year one, 33 percent by year two, and 45 percent or more by year three.
Gross margin by offering
No matter what you’re offering, inspecting the profitability of each should be something you regularly do. If it’s a project services offering, striving for 30 percent or more gross margin is important; managed services should return at least 40 percent and IP over 50 percent. Returns beneath those levels may indicate that something isn’t properly established or is out of alignment. It’s important to look deeply at your offerings. If you picked up a solution/offering because a customer asked for it, measure its success and only continue selling it if it’s creating net income for your company.
Underneath these measures there are a number of critical KPIs related to project services and managed services that I urge you to consider adding to your quarterly assessments. The one I would highlight for partners to pay close attention to is efficiency factor. This is the measure of how much work you’ve already done can be repurposed, packaged, and resold as IP. Customers want turnkey products they can implement right away, so use these building blocks to either jump start projects, or resell as a finished product. This can have considerable benefits on the profitability of your business.
As always, I’m happy to hear your input and learn from your best practices. Feel free to reach me via Twitter @BrentCombest. Thanks as always.