When it comes to MSP marketing, do you ever feel like you’re just burning your money? Do you ever ask if you’re spending way too much on marketing? Or maybe not enough? Is there a KPI that will show you exactly how much your MSP should budget for marketing?
On the one hand, it isn’t a simple math problem because how much you should spend on marketing depends on several factors. But there are several numbers you should track to determine your marketing spend each month.
Do you know your CAC? An MSP recently asked me what CAC meant and how they could determine it. First, what is CAC? Well, CAC is an abbreviation for Customer Acquisition Cost. This sounds complex, but the premise is actually simple. How much does it cost you to acquire a single new customer? Remember to include both marketing costs and staff expenses. The formula to figure this out is relatively simple and worth the effort to calculate.
To figure your CAC, simply divide all the sales and marketing costs during a set amount of time by the number of customers acquired over a set period of time. The period can vary. It could be a month, a year, a quarter, or some other length that works best for you and your MSP. As I said, the formula is simple. But depending on the structure of your company, it might take a little time to pull out all the costs related to acquiring new customers. Once you have all your costs, you need the number of new clients you added during that same time period. Once you have those two numbers, it’s a simple division problem.
One of the challenges I see is that MSP marketing budgets are bloated with anything related to branding, graphic design, and more. Figuring out your CAC is a great time to take a hard look at the dollars you’re spending on marketing. If those dollars are not going toward client acquisition, it’s time to ask whether that’s a good use of your resources.
A second way to lead to the same answer is by tracking lead cost. If you know what leads cost you (and you know your close rate) then, with a bit of math, you can find your CAC.
The better data you have access to, the better decisions you can make. Especially for MSPs selling ongoing contracts, it is critical that you know how much MRR (Monthly Recurring Revenue) you have currently. If you aren’t sure how much MRR you have currently, take the time needed to create a quick spreadsheet that lists Company Name, Number of Endpoints Under Management, and total MRR. Then total up the MRR across your entire client base. (Separately, and perhaps the topic for another blog, it’s very helpful to apply some simple math to your entire client base and determine how many dollars you’re getting, on average, from each client or endpoint.)
Once you know your average MRR, you have one more figure you need. Then you can determine how much you should spend on marketing. You’ll need to calculate, or estimate, how long clients stay with you after initially coming on board. This allows you to determine the LTV (Life Time Value) of a client.
LTV is the total revenue per client over their entire time as your client. If you don’t have a good feeling on what this number should be, simply base it on your typical contract length. For instance, if you typically close 3 year contracts, factor in 36 months of your MRR. (Most MSPs keep clients 7-20 years. But if you don’t have good data to support this premise, you’ll be better off being conservative and sticking with the lower number.)
Now you have everything you need to calculate lifetime value. Just take your average MRR and multiply that by the average amount of time clients stay with you. That is your LTV.
For example, imagine that your average customer pays $1,000 per month and stays with you for 36 months. That customer’s lifetime value would be $36,000.
The Answer You’ve Been Waiting For
To keep the math simple, let’s round that up to $40,000. And let’s pretend you have a 50% profit margin. This means that your company realizes $20,000 in profit during the lifetime of a single customer (on average.)
Here is the big question: If I offered to install at ATM in your office and you would put a sum of money INTO the machine…and magically what came OUT of the machine was $20,000 – how much would you be willing to put INTO the machine to get back $20,000? The answer to this question is how much your MSP should spend on marketing.
Let’s say a marketing firm presents you with a plan that costs $5,000 per month. Initially, that may feel like a lot of money. (This underscores why you should make business decisions based on data, and not on feelings. Our feelings are designed to keep us “safe.” Our feeling want to maintain homeostasis (or the state of being the same.) Marketing investments assume we want CHANGE.)
However, if a $5,000 marketing budget would get you one new client per month, what would you think of that? That would be a $5,000 CAC to acquire a client with a lifetime value of $40,000 and a profit of $20,000.Further, marketing takes time to create an impact. So logically (and emotionally) how long can you feed $5,000 into the marketing engine (without seeing a return) before you are tempted to end the relationship?
When we look at this logically, would you recommend that a friend spend $5,000 to make $20,000? If your friend had the cash flow to invest, this is a fantastic return. However, remember that investments always have a risk. In this case, the risk is whether or not the marketing firm can actually deliver leads for that investment.
Is that Really an Answer?
By now, you probably see that there is no exact answer for how much your MSP should spend on marketing. It really does depend on several factors. The figures I used in this post suggest that the correct answer is $5,000 – and that’s a solid number…if all of your numbers precisely match the examples I showed you. But now you know all the data you need and how to factor the correct number.
Start with your CAC to understand how much you currently spend to bring in each new customer. Then, figure your MRR to know how much a customer brings in each month. Now, figure the average LTV of a customer.Next, factor what percentage of that lifetime value is profit. Finally, figuring your budget is a matter of determining how much you would pay to add that much money in additional profit.
Once you have that, it is a matter of determining if you can spend that amount based on your current cash flow (and whether a marketing company can deliver on their promises.) There is no strict rule about what percentage of lifetime value you should spend on marketing for your MSP. However, you now have some tools to work with to determine the potential value of that marketing and to later evaluate the effectiveness of your marketing spend.