How much would you pay for a $1 of MRR?
I spend a lot of my time working with IT managed services companies (MSP). The main revenue stream for these companies are fixed fee IT services and monthly recurring revenue (MRR). The strategy is that the MSP delivers reliable and predictable technology to their clients through disciplined and proactive processes for a fixed monthly fee, MRR. However, like all businesses, MSP’s need to build a solid and valuable operations model and then locate ideal customers who need and will value their services.
One of the areas I see many MSP’s (and many other businesses I work with) struggle with is sales. They are constantly struggling to find more ideal customers and looking for ways to locate them. As I was working with one of these MSP’s recently and they were talking through their sales and marketing budget, it occurred to me to question “How much would you pay for a $1 of MRR?”. They couldn’t answer that question. As we talked through the question it further occurred to the group that the answer depends also on a couple of factors.
- How long will the customer stay a customer?
- What are the gross margins for that customer?
If a customer stays a customer for 18 months, the lifetime value of the $1 MRR is $18. If that customer stays 10 years then the lifetime value of that same $1 MRR is $120. The length of time the customer stays is largely dependent on starting with an ideal customer and then delivering well, consistently, through operations. This is called “Customer Success” and we elaborate on this topic regularly in this blog. So, there is clearly a different answer to “how much would you pay for $1 of MRR?” when the lifetime value of that $1 could be anywhere from $18 to $120.
The gross margins for the customer are important too. Using the 18 month and 10 year numbers above and showing gross margins at both 30% (the low end we see) and 70% (world class), we see that we need to consider margin as well as top line revenue.
|
GM % |
Lifetime MRR $ | Lifetime GM $ |
|
30% |
$18 |
$5.40 |
|
30% |
$120 |
$36 |
|
70% |
$18 |
$12.60 |
| 70% | $120 |
$84 |
Gross margin is driven primarily by selling at the right price, and operational performance and efficiency.
Our example shows that $1 in MRR has a lifetime gross margin value that can vary from $5.40 to $84.00.
So, how much would you pay for a $1 of MRR?