Practical Marketing for MSP. Part 2 - Marketing Funnel and Metrics

In the first article of the series, we took a practical approach to designing an MSP strategy. Let’s take the same approach to discuss the marketing funnel, metrics and plan.

Marketing funnel

The marketing funnel is a key concept for evaluating marketing performance. The funnel provides a clear view of the process of generating interest among prospects and converting them into customers.

Traditionally, the funnel is split into six stages (awareness, interest, consideration, conversion, signup and advocacy), and those stages are grouped into four blocks (Top of the Funnel, Middle of the Funnel, Bottom of the Funnel).

Let's looks at three most important stages:

The funnel is a solid tool for thinking about the marketing process – how many potential customers understand the problem and seek a solution, how many of them are considering your services, and how many are actively evaluating the services.

Marketing metrics

One thing that comes as a surprise to most people starting learning marketing is that marketing is all about numbers. Marketing has stories and requires creativity, yet it all comes down to numbers – choosing metrics, setting up goals, and achieving those goals.

Here are the most common metrics used by MSPs to measure their marketing efforts:

The metrics help to evaluate marketing performance at every stage of the funnel. The best practice is to measure the metrics and set targets for improving those that will have the most significant impact.

Let’s look at a few significantly simplified examples:

Let’s imagine you have 100 new users visiting the website every month, and 50 submit an assessment request, and then only 1 signs up every month. Given that the conversion rate from the assessment requests to sign-ups is 2%, it would make more sense to look into ways to improve the conversion from assessments to sign-ups, rather than invest more money into getting more traffic to the website.

Or, imagine you get 1,000 new users coming to the website every month, but only 10 submit assessment request. With 1% conversion from visitors to the next stage of the funnel, it makes sense to look into what prevents the visitors from submitting the request. Is the form working well? Is the form easy to fill in? Is the content good enough and leading the visitor to make a decision?

And, if you have 100 new visitors a month, 10 submit requests and 5 convert, you have 10% conversion to assessment requests, and then 50% conversion to customers. Why not invest more in getting more quality traffic to the website?

You will need to take a baseline for the metrics and then examine them to identify areas for improvement, focusing on those that you can directly impact. We will be looking into the tactics you can execute in future articles of the series.

Key business metrics

The metrics we discussed earlier help assess and optimize marketing performance; however, the ultimate goal of marketing is to directly impact key business metrics, including customer acquisition cost (CAC), monthly recurring revenue (MRR), and lifetime value (LTV).

Customer acquisition cost (CAC)

The formula to calculate CAC is simple – divide the total expenses of customer acquisition by the number of new customers. Total expenses include salaries of sales and marketing team, marketing expenses for online and offline activities, and expenses for tools used for sales and marketing.

Let’s make a simplified calculation:

An MSP has a part-time sales person and part-time marketing person, and pays $6,000 per month for them and their business expenses. Monthly marketing budget is  $2,500. Website and content management system, SEO tools, CRM tools, LinkedIn Sales Navigator cost another $500. Therefore, total sales and marketing expenses are $9,000. On average, MSP acquires one new customer per month. Therefore, CAC =  $9,000/1 = $9,000.

Monthly recurrent revenue (MRR)

MRR is the total amount of money clients pay to an MSP every month. MRR includes all collections under long-term contracts, as well as recurrent service fees such as charges for backup and storage, but does not include one-off projects.

Another simplified calculation:

An MSP has 50 customers with average contract value of $12,000. Thus, on average each customer pays $1,000 per month, and MRR = 50 x $1,000 = $50,000.

Lifetime Value (LTV)

LTV is the total expected revenue per customer that an MSP anticipates collecting. The formula is simple – multiply average contract value by the average number of years clients stay with an MSP.

One more simplified calculation:

Our MSP with 50 customers for the last many years in business retains most customers for 2.5 years. Therefore, LTV = $12,000 x 2.5 = $30,000.

Putting the metrics together

CAC, MRR, and LTV enable MSPs to evaluate their business performance and forecast their financials, and marketing has a direct impact on all of them. Choosing the right messaging and right channels, and optimizing marketing campaigns, lowers CAC. Targeting specific customer profiles, signing up larger customers, and continuously upselling existing customers on new services increase MRR. LTV mostly depends on the quality of service and stability of the client’s business; however, upselling clients on additional services reduces the risk of the client changing service providers, as the cost of transition becomes higher.

One frequent mistake owners of new MSPs make is pushing for recruitment of customers, significantly raising the CAC, before they can justify it by the LTV. If an MSP is spending more money on recruiting customers than they pay over their lifetime with the MSP, you will eventually run out of money. It is imperative to monitor marketing performance from a cost perspective and evaluate the quality of incoming clients based on the value they bring each month and over their lifetime.

Spending more on sales and marketing eventually leads to diminishing returns – CAC is growing faster than LTVs, and this can be illustrated by the simple graph below.

An effective marketing manager strives to optimize marketing investments to maximize value while monitoring long-term financial performance. It is easy to generate a high volume of new leads at a higher cost. Still, the MSP should have the capacity to sign them up and maintain the quality of service, thereby extending the value of contracts by adding more services (growing MRR) or keeping customers for longer (growing LTV).

Return on Marketing Investment

Another common pitfall for MSP business owners is not investing enough in marketing. The moment they are trying to scale your business and start making marketing investments to expand customer acquisition beyond referrals, it is essential to recognize that, up to a certain level of activities and expenses, marketing may not be producing results at all, or may produce only bare minimum results. Thus, it is crucial to conduct experiments and scale investment and activity to determine the optimal amount of investment that yields the maximum return.

Most MSPs I have worked with have a 5x return on marketing activity, excluding the fixed costs of personnel and tools, which means that for every $1 spent on marketing activity, they expect to receive $5 in return over time. MSP spends $2,500 per month on digital marketing costs, expecting to make at least $12,500. If the expense brings one customer, it would mean that the LTV of the customer should be over $12,500.

Having returns below 5x for most MSPs indicates that the sales and marketing efforts may not be profitable, after factoring in the costs of personnel, client support, licenses, and other miscellaneous client-related expenses.

Based on the experience with MSPs in 2024, most MSPs that are investing in marketing are spending around $2,000 on marketing per month, and we can anticipate that the amount will grow in 2025 as the cost of digital marketing and the cost of events are rising and expected to grow, while competition for clients becomes more aggressive.

Conclusions

Marketing is all about the data and metrics. Marketing is much more than lead generation. Marketing encompasses everything from bringing in the client to retaining the client and expanding the portfolio of services provided to them. Marketing must consider the business's ability to sign up and retain clients, as well as its capacity to do so profitably.

One of the best ways for MSP owners to evaluate marketing professionals they plan to hire is to ask them about the metrics they use and how they analyze them. If they can discuss volume of leads, conversion rates, and deal sizes, they are educated marketers. If they can discuss CAC, MRR and LTV and put it into the perspective of an MSP business, they are experienced marketers.

In future articles, we will discuss marketing tactics.