Too busy to revive your inconsequential business?

Everybody in IT is busy these days. But when you say cloud, SaaS (Software as a Service) or hosting service providers, ¨booming¨ is more like it. Double-digit growth over the last 10 years is making an avalanche of tech companies transition toward hosted cloud based services businesses, mapping out a unique era in the history of web technology.

But let’s be honest, what most of us refer to as “cloud” is more often “cloud washing”.  Whatever the verdict may be, we’re all enjoying the recent tidal waves of disruption. Hyperscalers such as Amazon AWS, Microsoft Azure, Google Cloud Platform and others are providing cheap infrastructure like a utility. Undoubtedly, with such competitive environment comes an increase in confused end-customers coupled with the overarching need for “traditional” hosting and cloud service provider markets to change. NOW.

KPI optimization is almost non-existent

Besides moving a level up and focusing more on managed services around any cloud infrastructure, a key element when it comes to decision making in the cloud, SaaS or service provider world, is data analysis.  If you base business strategies solely on a hunch, recurring revenues will never happen.  A fundamental process must be implemented: Proper KPIs–managed and monitored on a regular basis. 

In today’s post, we work through 6 KPIs that every business manager–whether new to the service provider club, a system integrator transitioning into cloud services, or well-established kingpin of hosting–needs to know. These KPIs, if applied and measured correctly, are guaranteed to increase your profits.

The bread-and-butter basics for sustaining success

Bear in mind that KPIs only really work when you ask the right questions first. To come up with foolproof metrics you need to find out:

• What metrics best measure service provider efficiency?
• What are the most common benchmarks for such metrics?
• What are the typical revenues and cost ranges for service providers?

Next, you have to look at what makes a cloud, SaaS or hosting business successful.

This is where our exciting journey begins…

Acquiring New Customers – Difficult!

Known to be one of the toughest things in business. Right now you might have multiple strategies through sales, inbound/outbound marketing and other creative strategies in place, but customer acquisition tactics get more refined as our industry grows. Make sure you’re in the know on the latest trends. [1]

Retaining Existing Customers – Easier!

In modern cloud business, retaining existing customers is actually much easier than acquiring new ones. Again, you have a multitude of different opinions and strategies on how to execute this part. The key elements to focus on are reducing churn (keeping your customers, not having them leave to competitors) and increasing stickiness (selling your customers more services so it’s more difficult for them to leave to a competitor). [2]

Monetizing Customers – Science!

Monetizing customers can almost be described as an art form. There are various pricing strategies, from value-based pricing to freemium models. These depending on factors such as your target market, buying behavior, monetary/perceived value or customer lifetime value. Nevertheless, the goal is to obviously maximize monetization combined with the value you provide to your customers. This happens around selling (initial sale) but even more so around relevant, problem-oriented up and cross-selling. [3]

Now that we’ve laid the groundwork for why and how a hosting business grows, we’re ready to dive into our 6 golden KPIs.

The top 6 KPIs to save your business from becoming irrelevant

1. ARPU (also ARPA or ACV) and ARR/MRR

Average revenue per user, typically per month, unless stated otherwise and sometimes calculated as average revenue per account (end customer company in B2B) – ARPA. Also defined as Average Revenue per Unit. The related ACV, or annual customer value, is calculated on a yearly basis. The total of all your ACVs is the ARR, annual recurring revenue – or MRR monthly recurring revenue).

Service providers seek to maximize ARPU and ARPA (in B2B hosting & cloud) for profitability. In hosting, the ARPU is sometimes calculated per website or per domain. Whereas the ARPA has more importance in specialist/niche businesses which are closer to being a SaaS (Software as a Service) company. The more you offer a high-touch enterprise sales model, the better you use the annual customer value, or ACV metric.

2. Churn (or also Churn Ratio in %)

Churn or the churn ratio in % comprises the number of subscribers who discontinue their use of a service over a certain period of time, typically a month. Churn provides insight into the growth or decline of the subscriber base as well as the average length of participation in the service.

3. Customer acquisition costs (CAC) – Also known as “Cost per Acquisition” (CPA)

The customer acquisition costs (CAC/CPA) are the costs associated with convincing a consumer to buy a product or service, including research, marketing, and advertising costs. It is important both to minimize customer acquisition costs while maximizing a service provider’s return on investment (ROI) of the acquisition.

The ideal time span for ARPU/ARPA/MRR yields to recover your customer acquisition costs should be lower than 12 months. A valuable guideline and industry best practice when comparing CAC/CPA and ARPU/ARPA/MRR is:

4. Customer Lifetime Value (CLTV)

This is the number of months in ARPU/ARPA/MRR value that a customer will stay with your services, including all recurring and non-recurring revenues. Maximizing this number helps forecast and define realistic commissions for your sales team.

Your customer lifetime value should ideally be greater than 3x the customer acquisition costs. When comparing the CLTV with the CAC/CPA, the following guidelines can be considered an industry standard:

5. Customers per Server – Also known as “Density”

The number of customers per server is another way to measure a company’s hosting or cloud offerings efficiency, regardless of whether customers run on your own infrastructure or on a hyperscale cloud-based infrastructure. Keeping a close eye on the density is important to optimize your cost base.

6. Customers per support or customer success FTE

The number of customers covered by each support or customer success full-time employee (FTE). Maximizing this number lowers costs, but many service providers focus on maintaining a lower ratio to ensure better customer service.