Improving Customer Retention Rates [A Guide for MSPs]

Improving Customer Retention Rates [A Guide for MSPs]

Recognizing the Value of Customer Retention

The most successful Managed Service Providers (MSPs) understand that high customer retention is one of the most important factors contributing to growth and profitability.

In today's fiercely competitive landscape, retention has become not only more challenging to maintain but also more crucial than ever before. This article explores the pivotal role of customer retention, its impact on revenue and growth, and more importantly how to improve retention rates, including introducing innovative new services.   

For MSPs, retaining existing customers is more than a cost-effective strategy. It’s necessary to grow profitably and sustainably.  According to Harvard Business Review, acquiring new customers is five to twenty-five times more expensive than keeping an existing customer.  And increasing retention rates by just 5% can increase profitability by 25% to 95%. But there are more reasons than just profitability to focus on retaining customers.

Why Customer Retention is Crucial for MSPs

Customer Loyalty and Referrals

There is clearly a direct correlation between retaining satisfied customers and increased loyalty and overall satisfaction with your services over time. Loyal customers often refer new business, creating a cycle of growth. Referrals are cost-effective and typically have a higher conversion rate to paying customers, who may then continue the referral chain.

Better Customer Insights

Maintaining long-term relationships with customers can yield insights into their needs and challenges. These insights can lead to operational improvements, the development of new services, and enhancements to existing ones, further strengthening client relationships and improving the bottom line. For example, learning that a majority of clients are using HubSpot, and that the data is not protected might open the door to offering an expanded SaaS Backup as a Service offering with SaaSAssure

Reduced Volatility

A stable customer base with low churn rates can lead to more predictable revenue and cashflow, reducing the feast and famine cycle that can plague some MSPs.  A loyal customer base also increases the valuation of an MSP business, making it easier to raise working capital or sell the business down the road. 

The Impact of Customer Retention on Revenue and Growth

The key to any business’s long-term success is the difference between Lifetime Value of a Customer (LTV) vs. Customer Acquisition Cost (CAC). It’s really no different for MSPs.

The longer you retain customers, the higher your customer lifetime value grows. LTV is calculated as profitability per period x the number of periods.

An MSP providing services for 50 employee companies at $100 per month with $20 of margin, with an average retention period of 2 years would have an LTV of 50x$100x24, equaling $24,000. Improving the retention rate and retention period to 5 years would yield a value of $60,000.

Strategies to Improve Customer Retention

The Cost of Acquiring New Customers vs Retaining Existing ones

MSPs must invest in lead generation campaigns, advertising, trade shows, and hire salespeople. All of that adds up.  The average CAC per MSP varies widely based on the type of services provided, the types of customers they are trying to attract, and effectiveness of the campaigns they run, but it’s not unheard of to see CAC rates as high as $10,000.   

This is why improving retention rates are so important. The higher the LTV to CAC ratio is, the healthier the business is and the faster it can grow. A business with an LTV to CAC ratio of 2.4 is not very healthy, whereas a ratio of 6 is fantastic. A general rule of thumb is that the ratio should at least be higher than 3.

The Cost of Onboarding New Customers

Another thing to keep in mind is that there’s a cost to onboarding new customers that takes many months of service to recoup.  An MSP has to assess, evaluate, and understand their customer’s IT environment, document it, learn where the trouble spots are, and plan how to more efficiently maintain it.  This is a lot of upfront work, that isn’t always captured in an upfront service fee. If churn rates are high, then the cost of onboarding customers may not be recovered.

Evaluating the Current Customer Retention Rates in the MSP industry

A Technology & Services Industry Association Managed Services Benchmark shows that the average retention rate is healthy at 90%, but they also note that there is a wide range of responses with more than 50% below that number, with some reporting 70% or lower. This makes sense as once a company chooses an MSP, switching them out has high costs, so there needs to be bigger compelling events for customers to decide to leave. However, there are several compelling events that are likely to impact retention rates for the worse.

Identifying the Reasons for Customer Churn and Attrition

There are internal and external reasons for customer churn. Internal reasons include service satisfaction rates and perception of value delivered vs cost or rate increases. External factors can include economic pressures which force customers to reevaluate their cost structures, and service innovations that entice them to consider new services and/or providers.  

With big changes in interest rates and the pressures on stock prices, lots of businesses are in cost containment mode today. And with an increasing focus on SaaS services and AI, businesses are looking for new ways to improve their delivery of value. 

The Role of Customer Feedback in Measuring Customer Retention Rates

MSP customers don’t tend to change suddenly and without warning. These are longer-term relationships governed by contract provisions. But MSPs should not ignore warning signs from customers about to churn. A sudden interest in contract cancellation clauses are a big red flag, but there are often many yellow flags that come up before this, which could be an increase in user tickets, longer time-to-resolve metrics, or other indicators. Proactively soliciting feedback from customers and their users can provide early warning indicators before yellow or red flags show up. 

Effectively Improve Customer Retention

So how can MSPs improve customer retention? While many factors seem out of the service provider’s control, there are ways to make customers less likely to switch or pull back on the support they receive.  

Enhancing Customer Experience and Satisfaction

By truly understanding the value a customer brings to the organization, it likely makes sense to invest a bit more time and resources into supporting the customer. That may mean staffing the help desk with a few more reps or investing in software that makes serving customers more efficient. But these investments are likely to be less than the cost to acquire a new customer.

Strengthening Customer Relationships

Customer bonds are built and strengthened with relationships.  Small gestures like a shared meal, a yearly thank you gift, appreciation events, invitations to other vendor events are all ways of making a customer feel appreciated, valued, and make them less likely to part ways with their MSP when times get tough or when competition comes knocking.

Increasing Value and Upselling

Find ways of increasing your value to the customer through new capabilities.  Some MSPs have seen success in adding in yearly security health checks and assessments and providing free training on commonly used systems.  These types of value adds not only create greater value for the customer, but they also reduce support calls, which increases user satisfaction.

Incorporating New Technologies and Services

Adding new technologies and services that address real business challenges not only differentiates you from the competition but also enables you to command a higher price per seat. One way to achieve this is by addressing the needs of modern SaaS-powered businesses, which are adopting SaaS applications at an unprecedented rate (73% of businesses are using SaaS services exclusively or mostly). Extending data protection and backup to critical SaaS applications like Microsoft 365, Jira, and QuickBooks can create more opportunities to increase customer lifetime value and enhance customer loyalty. 

As SaaS service usage has been increasing, the criticality of data generated and stored in SaaS has also been increasing.  Over 1/3 of businesses assume that their SaaS vendor fully protects their data (they do not), and that puts them at risk.  Educating customers about the risks to their SaaS data and offering them an affordable solution like SaaSAssure is a surefire way to increase service revenue, margin, and customer stickiness. The more services customers use from their MSP, the higher their retention rate.

Leveraging Data and Analytics for Customer Retention

Paying attention to customer data is key to improving retention. There are certain indicators that MSPs can use to determine which customers are happy, and which ones are likely to switch. These key performance indicators are ones that every MSP should pay attention to.

Implementing key performance indicators (KPIs) to track customer satisfaction

  1. Net Promoter Score (NPS): NPS is a simple survey that can be sent to customers on a periodic basis. It asks 2 questions. The first is “how likely are you to recommend this service to a friend or colleague?” The second asks them to explain their choice. The first is ranked from 1 to 10, with 1-4 being detractors, 5-7 being neutral, and 8-10 being promoters. Ideally, MSPs want to have more promoters than detractors, and a score of 40 or greater is a good indication of good service. But more importantly, they’ll need to pay attention to the individual detractors and the reasons for those issues.
  2. Average Revenue Per Client: Average revenue per client can be an indicator of overall service performance, and health of the business overall. An increasing revenue per client indicator can be a sign that customers are signing up for additional value-added services. Be careful though that you aren’t artificially inflating the number just by raising prices. 
  3. Churn Rate: Aiming for a yearly churn rate of less than 10% can be an ideal goal for MSPs to maintain strong customer retention. If churn rates exceed 10%, it may indicate a serious issue with the customer base that needs attention.

Building a Long-Term Business Model for Success

Once an MSP has some metrics in place, it might be worth considering ways to adapt to customer feedback and stay ahead of industry trends. Investing in staff training can help ensure teams are capable of delivering exceptional customer service. Incorporating feedback into service offerings is a key factor in retaining customers over the long term. 

Aligning business goals with customer retention strategies is paramount. This alignment can be achieved by developing effective pricing structures, ensuring regulatory compliance, and continuously evaluating the service portfolio against customer expectations and market demands. 

Conclusion 

For MSPs, customer retention is not just a metric to be improved but a philosophy that shapes every aspect of their business. By focusing on enhancing customer experience, incorporating innovative technologies into their managed offering like the SaaSAsure platform, and leveraging data for personalized service offerings, MSPs can build a sustainable business model. This approach thrives on long-term customer relationships. 

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