Would you rather run a $100M annual business with a 1% profit margin, or a $20M annual business with a 10% margin?
The “bigger business” throws off $1M a year in profit and at that size it’s going to be a BIG company to handle. The “smaller” company is throwing off $2M a year in profit and is a fifth the overall revenue size/complexity of the larger company. You don’t take top-line revenue to the bank, you take profit.
If you want to grow your business, think about how you are going to grow your profit (not just your head count or customer count). Taking on low-margin jobs or losing money to service accounts just to ‘look bigger’ aren’t going to drive profits to the bottom line. Here are some strategies to help you focus on driving your profit and not just building a big business that loses money.
Look at your P&L
How you set up your books is important. We recommend that you review your financials in several specific ways that will help you make decisions about narrowing your focus and improving your margins.
Break your revenue out by one-time vs recurring revenue products.
Cost your labor out against these two revenue centers - what does it cost to deliver each of these products?
Cost your jobs for the full cost of delivery (that includes overhead for offices, trucks, other materials, insurance, etc… - the FULL COST). That way you can set prices that are at least profitable when everything goes well and you aren’t starting from a loss.
Make sure you are looking at the gross and net margins on each of your products and revenue centers regularly. A P&L review should be a monthly (at least) review of the performance of your business. There are outsourced groups you can work with to set these up.
Have a price book… And stick to it
If you are costing all your products, then you should be able to price them for a target profit margin. Since pricing doesn’t exist in a total vacuum, you do need to be cognizant of general market pricing. With that said, DO NOT LET OTHER PEOPLE SET YOUR PRICING. Just because the next person down the street is making up pricing without any thought to their costs (and probably losing money) doesn’t mean you need to match or beat their irrational pricing. Just be ready to explain nicely and confidently to your clients why and how you price and what they are getting in return (great service).
Once you’ve set pricing, make sure all your team members have easy access to updated and accurate pricing and then stick to it. Avoid changing pricing case by case and don’t offer discounts without an exchange of value to you.
Here’s an example:
“Our price for that services is $600 and for that you receive XYZ and ABC and LMNOP”
When the customer asks if there are any ways to reduce the cost, have an answer ready. There are plenty of ways you can respond, but prepare your team with the answer you want them to give - otherwise they will likely just guess at the right answer. Here are some example options but it’s less important that you pick one of these options, than it is for you to just have a plan.
Option 1 - “We have set pricing based on our experience in the time and cost it takes to do the job RIGHT. That ensures that you don’t have us back here (or someone else) multiple times to fix shoddy work. So for that reason we don’t adjust pricing. However, we will make sure it’s done right and you are happy with the service.”
Option 2 - “While our pricing isn’t adjustable we do offer a payment plan. It’s a little more expensive overall but it lets you pay less today. Is this an issue with cost or just paying everything at once?”
Option 3 - “No, I’m sorry we do not offer discounts on our services.”
Option 4 - “Why do you ask?” (learn more about what’s driving the request)
Option 5 - “We do offer a 20% discount for customers of our maintenance program. If you’d be interested in signing up for a maintenance program we can work with you on this price and you’ll actually have us out twice a year to help look at preventative maintenance and avoid big one-time fees like this down the road.”
These are just examples, but think about how your team would currently answer this question if they were on site. Are you confident that the answer is consistent and aligned with your business goals?
Define an ideal customer profile (ICP)
What do your best customers look like?
Where are they located?
What problems do they generally have in common?
What products or services do they buy?
How long have they stayed with you?
What is their average annual spend?
Who are your best customers? Do you know? When thinking about finding more of the “right” customers, have you established a baseline for what you are looking for?
If you are using a CRM or field management software system there is GOLD in there. It might seem like non-revenue focused time and effort, but if you take time to dig into your data you could find out that you are spending a disproportionate amount of time on the WRONG clients.
We recommend that you set aside time annually to review this information and look at how you are attracting the types of buyers you want to work with. Looking at tools that can inform these decisions (like CRM data or GlassHouse reviews) will allow you to focus your time and drive those profitable engagements instead of spending time spinning your wheels on people who aren’t a good fit for your business.
Once you have this defined, share it with your teams. Make sure everyone in sales and customer support knows about your ideal client profile. Push them not to sign the “wrong” buyers and don’t get too worried if you start shedding some clients that aren’t truly a fit. As you add more of the right buyers and shed the wrong ones, you’re making your business stronger and more resilient.
TO BE CONTINUED…