Tag Archives: strategy

Good Revenues

“What makes for good revenues?” You ask.

good revenues from shaversWould you rather own Dollar Shave Club or the Gillette Corporation? Probably the answer is Gillette, because its worth a hell of a lot more. But, the answer could be different tomorrow because of Dollar Shave Club’s good revenues.

Gillette was founded in 1904, has 750M customers and is valued at USD$19B. Dollar Shave Club was founded in 2011, has around 2M members and was valued on sale recently at USD$1B. This means that Gillette’s customers are valued at USD$25 each, whereas Dollar Shave Club’s Members are valued at USD$500 each. They both sell razors! Startling, isn’t it?

Lets have another look, say Engineering firms. I have held commercial and leadership roles in engineering businesses (Avionics, Telecommunications, Machine Tool Engineering, IT ) for half my adult life, so I reckon I have some insight into how they operate.

Your standard engineering business offers design services, and may also offer a bit of hardware, software and installation. Perhaps they also offer maintenance services for the hardware and software. Commercially, their revenue is generated from a customer that they win a big project with, then they may pick up a trickle of maintenance work. If they’re lucky, the customer uses them again for another project in another area.

So what’s wrong with the traditional revenue model?

readitional business has difficult revenuesFirstly the future is always hard to plan on. Forecasting sales is really difficult as your confidence in invoicing dates is low. All to often future forecasts are based on last years data, without any insight on which customers the sales will come from.

Secondly this means they will be generally less profitable as they need to endlessly spend more on acquiring new customers, plus their operational people are expensive but regularly benched.

Thirdly It’s always going to be feast or famine when it comes to cashflow. Times of famine also mean you lose good people!

Perhaps some innovative thinking is required?

When designing an offering to the market, a large number of requirements need to be addressed:

  • Corporate strategy alignment
  • Customer problems that need solving and their demands for a specific bundle of features  and benefits
  • Your own operational capability and supplier capabilities
  • Legislative, environmental and community requirements
  • Internal requirements from marketing, operations, finance, IT and human resources etc, etc

But what I’ve noticed over the last 30 years or so though, is that there is one area which gets very little attention – the underlying commercial arrangements, or commercial packaging of an offer. Everyone tends to use industry norms instead.  So that’s what I want to address with this article, and answer the question “What makes for good revenue?”.

Commercial Packaging is the Key to Good Revenues

Experience indicates there are 3 principles of good commercial packaging, that should be considered.

  1. Low Barriers to Entry
  2. Maximise your Profitability
  3. High Barriers to Exit

Pretty simple, yes? So let’s dive a little deeper.

Low Barriers to Entry

So on top of creating products and services your customers value,  you want to make it as easy as possible for the customer to buy.  So how do you do this?  Well, lots of ways (and I’m sure my list isn’t exclusive).

lower your drawbirdge to make selling easierHave a Trusted Brand – Consumers still insist on buying pharmaceuticals from name brands that are chemically identical to the generic brands, but three times the price.

Lower Entry Cost – Large upfront costs can be turned into “one low monthly payment” with financing leases. Mobile phones are costed into contracts rather than having an upfront payment. Colour printers are discounted to make them easy to buy and profits are made from the ink. Some features can be removed and sold back later as “accessories”. Perhaps the type of revenue model (sell, rent, subscribe, licence, usage, brokerage etc) should be altered to lower the cost.

Lower Ongoing Cost – Consumers have a much higher propensity to buy a product with lower ongoing costs but a longer contract, than a higher costing short contract that has the same total value. Lower ongoing costs doesn’t mean you earn less! $100 a week for 10 weeks, isn’t nearly as valuable to you as $50 a week for a year! Its why adding the metallic paint option to your new car costs you another month or two of repayments, rather than increasing the monthly cost. Its why the first service of a new car, appears to be free.

Reduce Risk – “Try before you Buy”, “30 days Free Access”, “Freemium” & the “Money Back Guarantee” are common ways of reducing risk. Some of these cross over as  tactical marketing solutions, not underlying commercial packaging, but they are worth considering.  Another method can be to change the business model and offer a rental of plant & equipment first, for clients who are not sure they will get good use out of a product.

Maximise your profitability

So once you have got the customers, you want to make as much money from them as you can, for as long as reasonable. Right? This translates to:

jump as high as you can to Maximize profitabiltySeek Annuity Income – Wouldn’t it be better if one sale led to months or years of revenue, rather than a couple of milestone payments then you’re done?  Annuity income means getting ongoing regular payments from just one sale.  It can come from a business model that charges a regular fee, such as rentals, subscriptions and licensing. It can come from selling consumables such as printer ink. It can come from selling consumable products or bigger items with built in obsolescence such as smart phones. It can come from selling product extensions such further musical albums. It can be supported by supply contracts and automatic resupply.

Lower Costs – Profitability increases as you lower your costs. Review your value chain and eliminate waste. Automate the routine as much as you can. Substitute cheaper resources whenever possible. It could mean having a graduate trainee program, it could mean FAQs and technical manuals written and published online, it could mean investing in systems to support your customers!

Higher Prices – Don’t leave money on the table, use research to understand how your customers value your solutions! Understand how they will pay a premium for a better solution! Jon Manning, the pricing expert behind Pricing Prophets once said to me, “best practice is always having some price experiments going on”.

Automate the Cycle – once you have sold to a customer, you don’t want to put a decision in front of them every month to continue buying. Automate the delivery, invoicing and payments wherever you can!

High Barriers to Exit

When you have a profitable customer, you don’t want to lose them as new customers are much more expensive to acquire.

A Better Customer Solution & Experience – generates more loyal customers than a loyalty program marketing comes up with. A cancelled flight is far more damaging thpenalities for exitan expired frequent flyer points, and I don’t care that Telstra is more expensive, if you want to check your email in regional Australia, they’re the only choice. Beware unethical behaviour, it appears lucrative in the short term, but will cost you in the long run.

Requires a Loss to Exit – Nobody wants to lose their email address which traditionally keeps most people with their ISP, long after they start to think about leaving. If you live in the Apple ecosystem, you don’t want to lose all your apps (covers, in car holders, chargers etc) when you move to Android, and vice a versa.

Requires Effort to Exit – Nobody wants to lose their mobile phone number when changing phone companies, which is why the Government had to force number portability onto Optus, Telstra etc. But despite it being a reasonably easy process, the Telco’s will still make you jump through alot of hoops to exit. It’s a pain, and its deliberate. However it’s nowhere near as painful as changing Banks!

Requires Penalties to Exit – Minimum contract lengths and exit penalties have found their way into an enormous number of industries, despite having no relationship to the underlying costs that customer churn causes. If you are renting anything or subscribing for access to a service, expect to be locked in with alot of pain if you try to break the contract. See Smartphone and ISP contracts!

So what would happen when you re-engineer your business for good revenues?

  • Perhaps engineering businesses would see themselves as sellers of more lucrative maintenance contracts, with the initial design project just the gateway? The service teams would no longer be the poor cousins of the project teams!
  • Perhaps expensive suit manufacturers, could package in drycleaning services to the monthly fee you pay for accessing their clothing line.
  • Perhaps Pharmacies could help you reorder your drugs as you need them, rather than waiting for you to come in.
  • Perhaps Real Estate Agents would provide services around building value in your house over the long term, rather than just  appraising it and selling it.

And perhaps the business that you launch and grow, will become a valuable commodity. Looking at Dollar Shave Club again, their revenues per customer are valued at a massive  20x higher than a competitor selling the same product in a traditional way! Dollar Shave Club clearly has the “good revenues”.

Strategy, the Accounting Equation and the failure of Arrium

If I remember rightly, the very first thing you learn in Accounting in first Year Uni is the Accounting Equation.  The fundamental framework that underlies the recording of a business’s activities.

Assets = Liabilities + Shareholder Funds

It means that for everything a company has, there is a claim on it by either the owners of the company, or by those that the company has a liability to (i.e. its suppliers of labour, inventory, cash etc).

But its actually more than this.  Bear with me, its actually the basis of strategy!

Everyone’s heard the lie line “the purpose of the company is to increase the wealth of the shareholders”.  So the Board of Directors can believe they are acting correctly and ethically when they pay out dividends, even if this slowly compromises the company’s ability to survive.   Almost certainly this will also shaft the suppliers to the company.  So when a Board ignores warnings and continues to give cash to shareholders, Administrators need to step in to start looking after suppliers.  i.e.  Looking back to our Accounting Equation, the shift in strategy becomes obvious – the emphasis moves from looking after shareholders, to looking after those with the Liability  (the Shareholders).

This isn’t abstract, it translates directly into the real world.  Have a look at Arrium.  Since One Steel became Arrium in 2012, it paid out a large percentage (41%+) of its profits as Dividends.   Despite plenty of warnings that trading conditions were deteriorating, despite profitability diminishing, and having to maintain crushing debt levels.  It still looked after the shareholders.  Only in 2015 did it have to call a halt to the Dividends.  There was no building a war chest to make the company more resilient.   Consequently, the Administrators have taken over and will now look after the Creditors, to the detriment of the Shareholders.

So the fundamental strategy of a company isn’t the value proposition of a company that it takes to a market segment,  it’s how it balances the competing needs of owners and suppliers so that it can survive!

The 10 Principles of War

On war ClausewitzAround the start of my career in the late 80’s, Eastern thought was very big in the workplace. There was a growing awareness of Japanese solutions such as Kanban and Keiretsu. Management books such as Miyamoto Musashi’s – The Book of 5 Rings and Sun Tzu’s The Art of War were massively popular as books on strategy. What I found strange though was that these two books were very old. The Book of 5 Rings was written in 1645 and the Art of War in around 500BCE! What was going through my head at the time was, “If I am going to apply military strategy to business, surely there must be something a little more up to date!”. I was certain that we must have learnt something over the last couple of hundred if not thousands of years.

Of course, the answer was staring me in the face. In the Army I had learnt about the 10 Principles of War. These were the ideas first acted upon by French General & Emperor Napolean Bonaparte, then codified by the Prussian Officer Carl von Clausewitz in his essay “The Principles of War” in 1812. Since then these Principles of War have been further tweaked and are now taught in every Military Officer school on the plant.

Each of them are quite simple and in every case can be applied to commercial operations to improve the chances of their success. So what are they?

  1. Selection and Maintenance of the Aim
    A single, unambiguous aim is the keystone of successful military operations. Selection and maintenance of the aim is regarded as the master principle of war.
  2. Maintenance of Morale
    Morale is a positive state of mind derived from inspired political and military leadership, a shared sense of purpose and values, well-being, perceptions of worth and group cohesion.
  3. Offensive Action
    Offensive action is the practical way in which a commander seeks to gain advantage, sustain momentum and seize the initiative.
  4. Security
    Security is the provision and maintenance of an operating environment that affords the necessary freedom of action, when and where required, to achieve objectives.
  5. Surprise
    Surprise is the consequence of shock and confusion induced by the deliberate or incidental introduction of the unexpected.
  6. Concentration of Force
    Concentration of force involves the decisive, synchronized application of superior fighting power (conceptual, physical, and moral) to realize intended effects, when and where required.
  7. Economy of Effort
    Economy of effort is the judicious exploitation of manpower, materiel and time in relation to the achievement of objectives.
  8. Flexibility
    Flexibility – the ability to change readily to meet new circumstances – comprises agility, responsiveness, resilience, acuity and adaptability.
  9. Cooperation
    Cooperation entails the incorporation of teamwork and a sharing of dangers, burdens, risks and opportunities in every aspect of warfare.
  10. Sustainability
    To sustain a force is to generate the means by which its fighting power and freedom of action are maintained.

I tend to think that this is a great framework for both building a plan within, as well as analysing the plans of others. Just replace the word military with commercial and it all tends to make sense. But the big one for me is the first, and master principle – Selection and Maintenance of the Aim. Get this right and everything else starts falling into place.

The reality of online retail in Australia

Not good enough!

I read today that Myer intends to do away with shipping and handling costs for its online store, to stop the leak to internet shopping.   Apparently “Commonwealth Bank estimates that Australian consumers spent $9.5 billion online last year, with $4.2 billion going to overseas online retailers and the remaining $5.3 billion paid to domestic retailers.”

MyerCompeting on price isn’t going to work,  as the competition is always going to roll you.  Here’s a real example.

This week I had my quarterly breakfast meeting with Scott Kilmartin of haul.  haul is a highly successful  multi channel retailer that upcycles advertising billboards into laptop bags, ipad cases and promotional products for companies from their materials.   Scott and I get together regularly to dissect each others business and offer impartial advice.  I value Scott’s insight into retail trends  as he is a keen watcher of players in the market, a keen reader of analysis of retail trends and has bags of experience (excuse the pun).

Scott conducted a couple of experiments this week that have got him worried.  He purchased two items off eBay that were direct shipped out of  China.  The first was a black sweater, XXL size, and in his words  “well made, no loose threads or rough sewing/joins. It could be from Country Road”.  The total cost AUD$9.90 including shipping – But retailing in Australia for around $89.95.  The second item was a fake leather iPad case, for AUD$10.45 – Retailing in Australia for around $49.95.  Both were delivered in 10 days in an Australia Post eParcel box.   Note Scott’s rate to send an empty eParcel box from Carlton to Fitzroy is a whopping $7.65 at the 1,000-5000 pieces a year contract rate.

So can Myer & big retail compete on:
Price? Not a chance.
Quality? Nope, goods are coming from the same factories.
Delivery Speed? Perhaps if they lift their game.  7 days deliver from local stocks is slow when you can get something from China in 10 days.
Risk of Fraud? Absolutely.  The is much lower risk  buying from an Australian retailer – so a fear campaign could work well.
Impact of Fraud? Nope.   Almost everyone I know is happy to trial an order or two and write off the $10 if it doesn’t work.
Range?
Nope.  Australian retailers can’t afford to stock all shapes and sizes  – as most men in their 40s find out when they go to buy jeans.

The conundrum retailers face is old though, just not in retail.  On a number of occasions, businesses I have worked for have had an agency for wholesaling electrical products that we practically built the market for.  And when our sales were strong enough, the manufacturer decided to directly step into the market and we just couldn’t compete.  This always happens.

The solution though is not to compete on price, but to endlessly innovate and provide superior customer service.

Cutting costs and competing on price only is a death spiral.  Always has been, always will be.

Lessons from Disneyland

Today, I was going to take the kids down to the Water Adventure Park in Geelong, but after realising the forecast for there was 20 C and a spot of rain, we opted for Fun Fields in Whittlesea instead. After promising the kids a theme park, It seemed to be the better “yucky day” option.

It was a big day for the kids, and a slightly grumpy day for the adults as we tried to smile when the demands became unreasonable and the queues became longer and longer and longer. So on the way home, I found myself daydreaming about Theme Parks, and how I felt about them when I was a child.

When I was young my parents always promised me that if they ever won Lotto, two things would happen. Thing 1 was that they would buy my older brother and myself a whole chicken each. The pinnacle of gluttony! Thing 2 was that they would take us to Disneyland. And Disneyland, unlike the chicken, was more than a quick pleasure fix, it was the representation to me of the pinnacle of all things pleasurable to a kid.

Sadly though they never won more than about $40 in Lotto, so the trip never happened. However the concept sat in the back of my mind for decades, as something I must do. So when arranging a trip to visit my brother in San Francisco in late 1999, my wife and I were there for New Years, we decided to drop into Disneyland.

I must say I had a fabulous time, but for completely different reasons than I expected. I learnt a number of fascinating business lessons about managing queues from the leader in the theme park field.

1. Queues that are constantly moving don’t get grumpy.

But here’s the interesting thing, you can artificially make the distance queuing people need to move through longer, by using moveable barriers. Creating a zig zag line out of a straight line means that your queue of people needs to spend more time moving to go the same distance as the crow flies. By dynamic use of barriers, you can make your queue happier.

2. Queues that are being entertained, don’t get grumpy.

As you are well aware, If all you are doing is waiting, time slows down and you get irritable quickly. The Disney solution was to start the ride experience, lot earlier than you would expect. For each ride, there was always a back story to read on the walls, or even a video. There was also regularity moving parts, such as a bridge you had to cross, or a cave that you could see collapsing. It was of course a multimedia experience with automated music, sound effects, voice-overs, steam etc.

3. Queues that can’t see the end point, focus on the entertainment.

I wondered why we could never see the end point of the queue, until it was revealed to us as a couple of metres away, but after a bit of pondering I realised that it made sense. If I could see the end point, I would focus on it and become agitated about how slow the queue was. If I couldn’t see the end point, I enjoyed the trip by focussing on the entertainment on the way.

4. Staff where always part of the experience.

There was not a pimply faced 15 year old wearing an ill fitting uniform combined with a bored/sour attitude to be seen. All ride staff where part of the ride experience. They wore ride appropriate uniforms, and acted out set pieces. They entertained and made the whole ride experience a pleasure.

The consequence of this queue management was that we didn’t even notice until afterwards that in one case we spent an hour & 15 minutes queuing for a 5 minute ride. I would happily recommend Disneyland to anyone.

Unfortunately I’d have to say that although there was a lot of rides at Funfields, there wasn’t a single ride experience that you wanted to tell your friends about.

wanna get lucky?

So at a recent Churchill Club function in our Innovation thinking stream, we ran fascinating event Luck. As part of the panel, we brought up a chap called Jason Bresnehan from Tasmania to talk. Jason is a corporate advisor who last year decided to start writing articles about becoming luckier.

Jason had started to wonder about phrases like “I was in the right place at the right time”. Specifically he was wondering whether he could increase his chances of “being in the right place at the right time” and so began his research on the pursuit of luck.

Jason felt you get lucky when 4 elements align themselves:

  1. A random collision of life’s interactions presents an opportunity to you.
  2. You are prepared to act upon the opportunity that has presented itself.
  3. Your character is such that you are empowered and willing to act to exploit the opportunity
  4. Your systems and techniques are ready to enable you to exploit opportunities efficiently while mitigating risk

But what does this mean on a day to day basis? Here’s some of Jason’s suggestions.

  1. Taking action to interact more with life and forcing more random collisions – such as trying crazy things, change your routines, do crazy stuff and just get out there. This will increase both the quantity and quality of opportunities in your life.
  2. Act to change your brain, so you notice the opportunities in your life and change the way you think about them. Learning new skills, opens up new neural pathways. Force change into your life so you you have to cope with doing new things. Don’t accept the status quo, even if its simple routines such as where you park your car.
  3. Be prepared to exploit the opportunities that random collisions throw your way. This may include conducting research without acting on it yet, creating a financial reserve or allocating time to explore lucky outcomes.
  4. Build your character so that you willingly and fearlessly act to exploit opportunities. Try new things such as skydiving or acting to overcome your fear of failure and embarrassment.
  5. Creating systems and techniques that create efficiency and risk mitigation when you explore opportunities, such as; KISS – Keep in Simple Stupid, take a portfolio approach to risk, or locking yourself in to a break even/small win strategy rather than big win/big lose strategy.

Weirdly, I started feeling luckier just by writing this article.

Planning for Good Luck

Every win in my career has been due to hard work and great strategies. Every failure due to bad luck. About 10 years ago I won a million dollar a year support contract. It was due to the sensational sales strategy we had in place. Two years later the business folded due to bad luck (losing the two biggest customers in a six week period, one with a very large bad debt).

Does that sound strange?

Of course it does, as human beings with fragile ego’s we don’t like to admit mistakes. Consequently we blame luck for everything that goes wrong, but strategy for everything that goes right. But the truth is though that everything in that happens in our life occurs as a mixture of outcomes from effort or just plain luck.

But here’s what’s weird. In business we only actively plan for bad luck, not for good luck.

We:

  • Have a huge variety of insurances in place to cover off every conceivable outcome.
  • We create risk registers when planning new projects.
  • We take backups of our data
  • We create disaster recovery plans.

But we don’t plan for good luck because that would be considered as silly, and “a plan for idiots”.

But interestingly, in other areas people do plan for good luck.

In science, unexpected positive outcomes from research are considered normal and are expected. Experiments are designed so that they are open to unexpected outcomes, both positive and negative. The number of inventions that are a product of a unexpected outcome (see serendipity on Wikipedia) are legion.

The 16 year old boy, out on his first date keeps a condom in his wallet “just in case”.

In the military ,battle plans acknowledge good and bad luck. Orders will cover what do if things go horribly wrong -which they most likely will, plus what actions to take if you get an unexpected but positive outcome. Eg What should you do if the enemy retreats a lot further than expected?

These examples aren’t “betting the farm” on good luck, but they do show a preparedness to take advantage if things go your way.

Makes you wonder what you could achieve if you also prepared to get lucky.

Solutions to problems

A couple of weeks ago I wrote about experience versus wisdom and mentioned different types of solutions.  What I was really talking about was solutions from the entrepreneurs point of view.  I have found myself discussing this a bit lately, in fact last night  I had a meeting with a couple of senior members of a community who were trying to fund activity to meet their communities objectives.  What they pointed out was their people were highly passionate about their area of interest and we should be cashing in on this as the source of funding.  What I pointed out is that this passion, is not necessarily the basis of a business.  From my (entrepreneurs) point of view there are only three types of solutions.

Solutions without problems
Research organisations tend to come up with really fantastic solutions, funded by you and I, that don’t know what problem they are solving, or perhaps can’t communicate it clearly. Most solutions (without a problem) tend to be described in terms of their features, rather than their benefits.  For instance if you look at the product set of Melbourne University spin off Quantam Communications Victoria, its easy to understand what they are doing as clever, but almost impossible to understand what problem their solution solves.  Its also worthwhile remembering though that just because the problem doesn’t exist today, doesn’t mean it won’t tomorrow, or a slight tweak may help it solve a problem.  Eg Whilst looking for medical uses of wheat fungus’s, Albert Hoffman invented the drug LSD; whilst looking for refrigeration gases, Roy Plunkett invented Teflon.  The list of these kind of discoveries found accidentally whilst looking for something else is endless.

Solutions solving a problem
Charities, clubs, associations & community groups all solve problems,  some of them very serious problems.  However this doesn’t mean these are problems that people are prepared to pay for.  The large majority of Government services deal in problems that are important, but users are not prepared or able, to pay for.  Communities way wish to save a species from becoming extinct, or preserve a natural habitat, or prevent illegal immigrants, or have our streets policed. All important, but not able to survive on a user pays model.  Commercially it might be a new feature on a product, which although desirable, might not allow you to charge a premium.  But don’t forget though that these type of solutions this can be tweaked.  For instance many markets are “two sided” meaning that they satisfy more than one distinct group of customers.  Perhaps only one of these groups is prepared to pay for a product or service.  Talk back radio is a great example of this,  consumers love it but won’t pay, advertisers will though.

Solutions solving problems that people will pay real money to fix
Successful business not only solve problems but solve problems that can be quantified and that people are prepared to pay for.   The ways this can be done are legion and include reducing, costs, mitigating risks, improving quality, satisfying status or brand needs,  or simply solving a problem such as hunger.  The quickest way of figuring out whether people will pay for your solution is to uncover whether they are already paying to solve the problem in another way.  If no one is already paying to solve the problem your solution  addresses, your idea might be great but it may not be a business.

So back to my meeting of last night, my position was that unless they can find the problem the members of their community are actually prepared to pay to solve, they will have to depend on grants to get things done.

Does Commission Only sales actually work?

Quite regularly I get offered  commission only sales work.  Rarely though its ever phrased that way.  Normally its a discussion about how exciting and lucrative the opportunity is with a statement at the end like “we don’t pay retainers though”.  Instead there is a discussion around “spotters fees”, “trailing revenues”, “your margin” or being “looked after”.

For me its not normally just  products or multi-level marketing schemes, its about larger transactions eg “sell my business” or “can you get some serious money involved”.

Commission only has been around for along time, however I believe it has gained transaction in the last  decade or so the rise of business schools has communicated the message that its a cheap, low risk way of gaining sales.  In some cases it has been highly successful, for instance selling Encyclopaedia’s.  But like most things in life the multitude of failures are hidden from us as we celebrate the lone success.

So When does it work?

There are three situations, or combination of situations where Commission Only sales seems to work well.

  1. When the product is easy to sell, commission only provides a way for the salesman to maximise his earnings.      I have a friends that sells advertising on a commission only basis, when his peers have a base combined with a much lower commission.  He chooses commission only as he spends his day working lists of old customers, which have a very high percentage of people that are ready to make a buying decision.
  2. When the “salesperson” is already selling to the target audience and your “product” would simply be layering  on additional revenue with perceived minimal effort.  This option also covers selling though an ad hoc opportunity.  eg I sat next to this guy at lunch and ….
  3. Commission only also seems to work best when their are short sales cycles measured in hours or days.  Long sales cycles cause two issues, first the time investment increases requiring a much greater ROI for the salesperson.  The second issue is the risk  the sale “undermined” by a competition, a member of the same sales team or even the vendor also increases dramatically.

When does it not work

  1. Obviously its not going to work when you get the reverse of the above.  When your product is difficult to sell, when your salespeople have to find brand new customers and when there are long sales cycles.
  2. However it also doesn’t work  when its an excuse to not invest in your  sales activity.  I don’t mean just pay retainers, I mean not even providing adequate training, management and follow up.  All to often Commission only is perceived as a “I’ve got nothing to lose” solution as it costs the vendor almost nothing.  The reality is that it can lull you into a false sense of activity, or worse you can have your brand completely trashed.
  3. It doesn’t work when the agreement is informal, or the audit trail is poor quality.  Both which normally translate into perceived breaches of the agreement, a lack of trust, and sales coming to a standstill.  All to often I see merchant banker types fighting over who was owed the commission on a deal that mutated and had mutltiple parties involved along the route to a transaction.
  4. And finally, it doesn’t work when what each party brings to the table isn’t valued properly by the other party.  For instance I am endlessly approached by people who wish to access my network for free (the one I slaved long and hard to build) and only wish to pay me if they can conclude a transaction – an activity I have no control over.  Another regular theme is that I can have a website built for them at no cost and then make margins from their brilliant product.

A couple of other points to consider:

  • A Commission Only sales force has little interest in providing customer service beyond the sale.
  • The hiring and management of Commission Only staff can can be a huge drain on the management team, as these people are all independent operators.

My point of view is that Commission Only is a great tool and the right tool when used properly.  Mostly though its an ill thought through strategy that is doomed to failure by the “I’ve got nothing to lose” mindset of the vendor.   Am I wrong?

Selling Services for A Fixed Price

Recently I had a look at Billing  Time and Materials for your services.   This time around I thought I would have a look at packaging your offering and selling it at a Fixed Price.

Packaging up your offering is not for the faint hearted though, you need to think carefully about which of your services are “standard enough” to be packaged up as well as where you can derive benefits from the packaging.  Will the automating, creating standard process and delegating that naturally occur under packaged services increase your profitability?  Can you develop standard marketing collateral and will this save you time and make the sales process easier?  Finally and most importantly though, how will your customers feel about a fixed price billing?

As mentioned before to, it doesn’t have to be all one way.  You can have a fixed price base service, that your clients can then extend with either further packaged up services, or time & materials billing.

Consider the average web developer:
Hosting & Domain Name :           Fixed Price
Core Functionality :                      Fixed Price
Extended Functionality :            Time & Material
Design :                                               Time & Materials
Maintenance :                                  Time & Materials

I note that Accountants & Lawyers have traditionally  used fixed price billing for small standardised offerings such as registering a new Pty Ltd company.  Almost every service provider has a fixed fee for this.  However there is a trend for fixed price billing to be offered for large expensive services to the big end of town as well.  Try searching Google for “fixed price audit“.

Pros

  • It offers you the ability to increase profit margins and grow your business beyond the 112 hours a week you are awake for.
  • You don’t have to spend your time on things such as explaining bills.
  • Its much harder to “shop you around” as your product can be easily differentiated.  You are no longer offering an hourly rate, but an outcome of your own definition.
  • The processes, automation and delegation that blooms under a fixed price model means that you get to make money whilst you sleep and you can even take a holiday and still get paid.
  • Customers are easier to sell to, and happier under fixed price billing as it means:
    • you wear the risk on the job,
    • they have certainty around their budget,
    • outcomes tend to be more clearly articulated,
    • they don’t need to spend as much time, effort or stress monitoring your effort,
    • they don’t particular get upset when you outsource effort to cheaper resources, and
    • they see you as motivated to finishing the job with speed and quality.
  • Investors are more likely to be interested in fixed price billing as it means your business model can be scaled, without relying on hideously expensive, unreliable, fickle resources (i.e. you).

Cons

  • Fixed price billing requires a lot of thinking through around which services can and should be packaged up?   Picking services that are too individualised can mean a loss on the job.
  • If you want to improve profitability by automating, building process and collateral  or delegating – you need to understand what your ROI will be.
  • It increases your risk on the job, as you get will get paid a set amount, no matter how long it takes you.
  • It makes it more difficult to be dynamic, which may be exactly why the client wants to engage you – their concepts could evolve or they maybe want to stay ahead of the market place by outsourcing innovation to you.
  • You will need to spend energy trapping and managing potential clients variations (and expectations) for billing purposes.

It Suitable for

  • If your offering is reasonably fixed or has a lot of “same” components for every customer, Fixed Price billing is a way to create scalability and increased profitability in your business.
  • Its suits areas where routine processes are the major component of the job.
  • It suits projects where there is low danger of the job dragging out because of unknown factors such as technical risk.
  • It suits projects where there is likely to be only a small amount of scope creep.
  • It suits more mature organisations who understand the value proposition of their customer offerings and their niche in the market.
  • It suits young organisations that feel that they have earned the right to grow.

Top Tips

  • You don’t need to introduce fixed price billing in one go, in fact I would highly encourage you to dip your toe in the water with one type of standard service
  • Experiment with the pricing and components of the offering. However never ever change prices without changing the offering (as value must change when prices change).
  • Make sure you control any milestones that your billing is connected to.  I have agreed to charge customers the first invoice on the first milestone which was them selecting an option for options we researched.  Consequently they never picked and option and we never got paid.
  • As part of negotiations, include as much of the  “pre-sale” discussions or early design work into the fixed price service so that you can have them paid for.
  • Trade more invoices for lower value invoices as customers generally prefer this.  The car leasing  industry knows that every Australian will package metallic paint in for an extra couple of payments but would never consider an increase in the payments.
  • Segment your invoices into fixed price lines where possible.  Fixed price means that standard line items such as “Travel Fee” will be paid without blinking.
  • If multiple invoices -Match your invoice to your risks.  Never have a client “owe” you for WIP as these are always the people that will fight a bill.
  • Put effort into building marketing collateral for the fixed price service.  Every client at some stage will let you know the value to them and this should be included.
  • Think outside the box about automating, creating processes or delegation to dramatically reduce your costs.  I recommend you read up on Lean Manufacturing to understand about reducing waste.
  • Don’t be lured into offering a fixed price on a service when you haven’t thought it through.  Just because a customer wants it and you offer fixed pricing on some of your other offerings doesn’t mean you always should.

To sum things up, Time & Materials Billing allows you to innovate and explore, Fixed Price Billing allows you to grow.   But you need to be sure you are ready for Fixed Price Billing, not just react to a customer demand.