Estimating The Value Of An MSP Lead
Published: April 17, 2023
Last Updated: April 17, 2023
In today’s post, we’ll be talking about a muddy subject.. How to estimate the value of an MSP lead and how you can translate that into what you can spend to acquire a customer with your sales and marketing spend. Many MSP owners are overly cautious with their sales and marketing spend and try to rely soley on referrals to grow. With an industry wide 12.5% compound annual growth rate over the past decade, it’s a luxury many can afford to do, but having no sales or marketing program also presents signficant risks for an MSP business. It also leads to underperformance as a recent industry report revealed that 75% of MSPs grow at less than 15% per year, meaning most are growing at industry growth rate or below.
One of the root causes of this caution is that many MSP owners don’t have a clear picture of what investments in new customer acquisition look like, or really what the long term value of an MSP customer is. In this post we’ll break down more of the math behind estimating MSP customer values and turning that into a customer acquisition cost that you can be confident in making.
How Much Is An MSP Customer Worth?
Estimating a 50 seat MSP customer might look something like this:
- Managed Services Monthly Fee: $150/month
- Potential Seats: 50
- Monthly Revenue: $7,500
- Estimated Number Of Months Retained: 36
- Total MSP Revenue: $270,000
- Projects & Hardware Modifier: 25%
- Projects & Hardware Revenue: $67,500
- Estimated Total Revenue: $337,500
Based off conversations with MSPs, polling on Reddit, and reviewing industry reports, these are all realistic numbers and revenue estimates for a 50 person company wanting to go managed. This revenue is earned over a 3 year period, which again, after polling MSPs is a realistic estimate of customer lifetime (and many stay much longer). It’s also a standard contract length for many vendors providing software to MSPs which makes basing revenue estimates off this timeline a sensible choice.
How Much Can You Pay For A 50 Seat Deal?
MSPs generally spend between 0 and 15% of their revenues on sales and marketing. A good benchmark figure is 7.5%. Working backwards, we estimate that a 50 seat deal generates around $337,500 and if we wanted to acquire that revenue over a 3 year period and make sure that our sales and marketing budget is doing it’s job, that means we could spend up to around 7.5% of that revenue or around $25,000 to acquire that sort of customer.
You may not like those sorts of numbers and they don’t make sense for smaller deal sizes, but larger well managed MSPs who you’ll inevitably be competiting against are acutely aware of the value of a potential customer and the target acqusition costs to obtain them. When thinking about what scaling your MSP and creating enough value in it to sell one day, you’ll need to know these numbers too and be able to establish sales and marketing departments capable of bringing in new business at a reasonable price.
You may be more efficient than this right now, but as you scale, market pressures and lack of owner and partner involvement will force your company’s customer acqusition costs to regress towards the mean.
How Much Can I Afford To Pay To Acquire An MSP Customer?
Based off some of the math above, below are some target cost figures various seat counts for common customer sizes:
Target Max Customer Acquisition Cost
- 10 Seat Deal: $5,062
- 25 Seat Deal: $12,656
- 50 Seat Deal: $25,312
- 75 Seat Deal: $37,968
- 100 Seat Deal: $50,625
Not every customer is going to be a 50 seat deal, your customer base is likely a mix of sizes and will continue to be blended in the future. It’s important to measure your customer acquisition costs over time, relative to the quality of customers your bringing on board. When you develop this level of financial understanding it will make you far more confident in making marketing investment decisions and knowing when you can be more agressive, or when it’s time to pull back.
How Much Can I Afford To Pay To Acquire An MSP Lead?
MSPs who are conditioned to being handed scorching hot leads via referrals are used to a near 100% close rate. That’s not realistic with marketing and prospecting sourced leads. A good target close rate is around 20%. When thinking about how much you can afford to pay for an MSP lead, you can multiply your target acquisiution cost by your estimated close rate.
Target Max Cost Per Qualified Lead
- 10 Seat Deal: $5,062 * 20% = $1,012
- 25 Seat Deal: $12,656 * 20% = $2,531
- 50 Seat Deal: $25,312 * 20% = $5,062
- 75 Seat Deal: $37,968 * 20% = $7,593
- 100 Seat Deal: $50,625 * 20% = $10,125
In this post we talked a little bit about some of the numbers you can use to understand the value of an MSP lead. We discussed what an MSP customer is typically worth, and some of the assumptions we use to estimate that customer value. We talked about target customer acquisition costs at various price points, and how that translates into a target cost per qualified lead. Getting an understanding of these figures and modeling the numbers for your own MSP is a worthwhile excercise that can help you budget for, and be more confident in a plan for growth.