Author Archives: Sandy

About Sandy

Publisher, Ceo2Ceos.com Adjunct Instructor, Southwestern Indian Polytechnic Institute

How Do You Evaluate a New Revenue Model? Six Suggestions

Situation: A CEO is considering a new revenue model for his company. The existing model is profitable and stable, but not scalable. A new model, and perhaps additional locations may be needed to add scalability. How do you assess the risks of the model? What steps can be taken to reduce these risks. How to you evaluate a new revenue model?

Advice from the CEOs:

  • Project both the current and new models on a spreadsheet. What do profitability and return look like over time based on current trends?
  • Include assumptions about adding new customers within the model. Consider capacity constraints at the present location. Add start-up investment needed for the new model. Does overall profitability increase in the projections and will this adequately cover new customer acquisition costs?
  • Are performance standards for the current and new models different? Would it make sense to have different teams managing the models? What kind of experience will be required in the people who will build the new business? Account for personnel additions and start-up costs in the financial projections.
  • Critically evaluate the upfront financial exposure as new clients are signed up for the new model. Consider hybrid options which can be added to customer contracts. Examples include:
    • A variable flat fee model. Customers contracted under the new model will receive services up to X hours per month for the flat fee, with hours over this billed separately.
    • How do current time and materials rates compare with industry averages? If they are high, it is not necessary to quote existing rates to new model customers. Create a new rate schedule just for new model customers. Taking a lower rate under the flat fee model will not cover all costs and profit; however, it will at least partially cover utilization exposure and a higher rate for additional hours can make up the difference.
    • During the ramp up period of a new operating unit, client choice is critical. If, based on observations and responses in client questionnaires, heavy early work is anticipated, charge an initial set-up fee. Alternatively, ask for a deposit of 3-4 months to cover set-up exposure. If either at the end of the service contract or after a burn-in period some or all these funds have not been used, the client is refunded the unused deposit. This can both cover early exposure and make it easier to sign new customers for the new unit.
    • Draft contracts under the new model to include one-time fees in the case of certain events – e.g., a server crashes in the first 9 months of the contract, or an unplanned move within the first X months of the contract. These resemble the exceptions written into standard insurance policies. They can be explained as necessary because standard contract pricing is competitive and does not anticipate these events within the first X months of the contract. Most companies will bet against this risk. Those who do not may know something about their situation that they are not revealing. In the latter case you will be alerted to potential exposure.
    • Consider a variable declining rate for the new model. The contract price is X for the first year, and, assuming there are no hiccups, will be reduced by some percent in following years. This resembles auto insurance discounts for long term policy holders with good driver records.
  • Adding hybrid options may make it easier to sign new clients while covering cost exposure. The view of the CEOs is that most clients will underestimate their IT labor needs and will bet against their true level of risk. Provided that the new model delivers the same service that supports the company’s reputation, once clients experience the company’s service, they will be hooked.
  • An additional benefit to hybrid options may be faster client acquisition ramps within new satellite units and faster attainment of positive ROI.

How Do You Decide Between Strategic Options? Five Thoughts

Situation: A CEO is faced with three strategic options that the company could pursue. He seeks guidance on how the company should evaluate the three options. What signs should they be watching for in their marketplace? Are there steps that they should take while completing their evaluation? How do you decide between strategic options?

Advice from the CEOs:

  • Go with what sells! Listen to the market, and your key customers. Make sure that you have ears out there that will give you early signals.
  • Until there is a clear indication from the market place as to which is the stronger strategy, keep your options open. A hybrid strategy – maintaining your current strategy while evaluating the strongest strategic option – will allow you to do this and continue to drive revenue from your existing base while the market determines dominance among the new platforms.
  • Look at the cash flow from your current strategy and each of the new options that you are considering.
    • What difference is there in upfront payments versus ongoing residuals?
    • Look closely at your cash flow needs compared to the timing of receipts from each option.
    • Are there ways that you can strengthen your cash flow depending upon which strategy you select? How will you bridge the gap between current and future cash flows from each strategic option?
  • Consider hiring a full-time manager in business development.
    • This will help you to learn more about your customers and what they will buy.
    • Select someone who has relationships with the key people in your target markets, and who knows what the insiders are doing at important existing or target customers.
    • Select someone who can give you access to new opportunities and help steer your strategic development.
  • Consider a long-term strategic partnership with a leader in your market.

Does a Phantom Stock Plan Make Sense? Three Considerations

Situation: The CEO of a privately held company wants to share company success with employees. An option that she is exploring is phantom stock. The objective is to engage employees in company success. Does a phantom stock plan make sense?

Advice from the CEOs:

  • Why would you use phantom stock options instead of real stock?
    • Phantom stock options are popular in the tech sector. Phantom stock confers the right to receive cash at a future point in time, typically a share of the proceeds received upon the sale of a company.
    • The principal difference between phantom stock and real stock, is that real stock must be issued in exchange for cash, property or past services. There is also a tax consequence to the receipt of real shares. When shares are issued in exchange for past services the employee must recognize taxable income, just like wage compensation. Employees may be disappointed to learn that they may face taxable income based on the fair market value of their shares received without compensating cash to pay the tax.
  • Let’s assume that the objective is to increase employee engagement as they observe the value of the shares increasing with company success over time.
    • Under phantom stock programs the value of the company is pegged on a periodic basis, based on a pre-set formula developed by the company.
    • In some cases, employees can “sell” their phantom stock back to the company for the differential between the price when they were awarded the stock and the current pegged price.
    • The structure of the program is determined by management based on company objectives.
  • Employees frequently don’t have the cash to purchase real stock or options at a fair price given the value of the company. Using a phantom stock plan, a company can offer the rewards of stock ownerships without a purchase requirement or tax implications at the time of award. Employees can be apprised of the value of their phantom stock based on a periodic internal accounting exercise.

Do You Share Company Costs with Customers? Five Points

Situation: A B2B company has historically negotiated pricing with customers individually. While there are similarities between customers, each receives a product customized to their needs. The CEO is considering creating a “full disclosure” pricing model including their costs and seeks feedback from others. Do you share company costs with customers?

Advice from the CEOs:

  •  With only two exceptions, the CEOs did not agree with the concept of fully disclosing their cost structure to the customer.
    • The industry exceptions were public construction and government work. Some cities and the federal government require cost breakdowns and mark-ups by regulation.
  • The difficulty with the profit or license line, however it’s labeled, is that it becomes obvious that this is the company’s profit ‘nut.” This may be shared with a CEO that you respect; however, if the CEO shares this information with others in the organization your cost breakdown may become the basis for future line-by -line negotiations for cost reduction. Those with whom your company negotiates will be acting in their company’s interests, not yours.
  • The key is to optimizing pricing is to identify and sell a solution to the customer’s pain. If you do your homework well, and the customer is the right prospect, the price that you charge will pale in comparison to the costs that the customer seeks to avoid.
  • In your first negotiation, make sure that you have identified the customer’s pain and are presenting a value that addresses this pain. Only after you set expectations and have assured balance of effort do you go into more detail about your cost structure. Even here, only share detailed cost information if you deem this critical to the sale.
  • Look at it this way – price is not the key issue. The key issue is whether you can solve the customer’s problem and do so while providing an appropriate return on investment for the customer.

How Do You Fuel Early Stage Growth? Five Suggestions

Situation: An early stage company has assembled an impressive team and has a solid service offering. The immediate challenge is bringing in clients to fuel growth. The team has the capacity but needs some creative ideas on where they should focus their efforts. How do you fuel early stage growth?

Advice from the CEOs:

  • Fully utilize the team’s talents. Team members with established expertise can offer clinics featuring the company’s service offering at local colleges, business organizations and other venues to target audiences. Think about business organizations with members who would benefit from the company’s services. Also reach out to venture capitalists and the entrepreneurial market.
  • Develop a strong value proposition:
    • Go-to Organization
    • Eyeballs on the market
    • Links to highly qualified resources
    • Demonstrated expertise in your space
    • Claims tied to the top priorities of target clients
  • For start-up and entrepreneur client targets:
    • Offer a packaged set of services for a fixed fee. Be open to creative payment options to fit the financial needs of entrepreneurs.
    • Start developing a full suite of services. Start by assessing the need and developing a target list of early clients. VC portfolio companies can be a great target.
  • Build a good web-based communications interface for client use. Think of what is needed to create an attractive menu and let this drive service development.
  • Develop a separate brand for ancillary services that will complement the current offering, but which is outside of the current offering. Look at markets which would benefit from the service, including medical and nursing providers.

How Do You Expand the Sales Funnel? Six Solutions

Situation: A company has strong technology and good top customers. However, the CEO is concerned that the company is too dependent on a few large clients. She wants to increase business among mid-tier clients. How do you expand the sales funnel?

Advice from the CEOs:

  •  Get very crisp in identifying who your core customer is and focus on them near term. Look at what you offer that your competition can’t match and create appealing offers for new clients.
  • Simplify and clearly define your market position.
    • Here’s an example: First to market with the best, smallest, fastest solution.
    • This clearly defines who you are. Focus the company on delivering this.
  •  In each high potential market find one company to whom you can offer a significant advantage.
    • Their current market position might be number 2, 3 or 4. Offer them a solution to gain an advantage on #1 and shift the playing field. This is a win-win for both you and them.
  • Horizontal business expansion could be the best near-term strategy. This lets each vertical market solve their own problems of technology direction, logistics, etc. Seek customers who have the resources to manage this in their respective market places.
  • Tailor contract minimums and pricing according to customer order commitments. Be willing to sacrifice price and some margin for committed purchases that match your timelines and resources.
    • Buyers often overstate their anticipated needs because they don’t want to be caught with short supply.
    • You can meet and promise lower prices for higher volumes because they rarely order them. However, combine this commitment with higher prices for the lower volumes that they are more likely to order.
  • Look across markets and focus on promising targets.
    • Use a call center to queue up prospecting telephone calls.
    • Have sales people conduct scripted qualification calls with prospects by telephone.
    • Only send sales people out to talk to qualified prospects. This saves travel expense and increases the productivity of in-person sales calls.

How Do You Establish Performance Metrics? Three Guidelines

Situation: A CEO wants to establish baseline metrics to evaluate company performance, and guide both planning and operations. Without baseline metrics it is difficult to compare the impact of options that the company faces. What are the most important areas to analyze, and what do other companies measure? How do you establish performance metrics?

Advice from the CEOs:

  • Start with the basic divisions of the business. As an example, take a company which has three arms to its business – products that it represents for other companies, products that it distributes, and custom products that it manufactures to customer specifications.  
    • For each of these lines track gross revenue, profit net of direct costs, FTEs necessary to support the business, number of customers, net profit percent, net profit per employee and net profit per customer.
    • Calculate these metrics on at least a quarterly basis for the past 2-3 years to set a baseline and a chart of historic trends.
  • Once you establish a baseline, chart current performance on at least a quarterly basis and look for trends and patterns.
    • Where is your greatest growth and greatest profitability – not just on a global basis but in terms of profit per customer and profit per employee?
    • If you’ve included your full costs including the costs of the FTEs to support each business, then the analysis should show you where you want to invest and what it will cost you to support additional investment.
    • Do a similar analysis of costs per line to further support investment analysis.
  • This analysis will help to evaluate whether it is better to purchase another rep line, or whether you would be better off investing the same funds to grow custom business.
    • Similarly, it will demonstrate on what kinds of customers and products you want your sales force to focus to grow profitable business and will help you to establish objectives based on anticipated revenue or profit per new customer that sales closes.
    • Finally, it will highlight potential vulnerabilities such as the impact of the loss of a key customer in one portion of the business.

How Do You Expand into New Markets? Three Perspectives

Situation: A CEO is evaluating a horizontal market development opportunity to markets related to their current market. There may be branding implications. The new opportunity focused on a different sector and can add business unrelated to current customers. However, the new opportunity will stretch current resources and potentially impact current business and service delivery. How do you expand into new markets?

Advice from the CEOs:

  • Pros:
    • Because the new opportunity utilizes known capabilities the company should be able to segue into the new market relatively easily.
    • Because the company is already familiar with security and other issues relevant to the new market, compliance should present no challenge.
  • Cons:
    • Consider the impact on company time and resources. Building any new business will challenge current priorities and will require a careful balancing of efforts to assure that both current and new customers’ needs are being met.
    • Build workload and service schedules for both existing customers and the effort that it will take to develop the new opportunity including the time needed to create and build new customer relationships. Take your best estimate of resource utilization for the new effort and double it, then ask whether your current staff and capacity can handle both markets. If the answer is positive, then you can be more comfortable with the decision to expand into new markets.
  • As you evaluate the new market opportunity, look at both anticipated and unanticipated but predictable challenges that customers may face over the next five years.
    • For example, is there misalignment between future challenges likely to be faced and the current expertise and skill sets of managers who will be tasked with addressing these challenges? If so, tailor the sales pitch for new capacities to address these challenges.
    • Are there existing mismatches between products and services currently offered in the new markets, and do proposed solutions help to address these mismatches? If so, there may be significant opportunities in addressing these mismatches across multiple customers within the affected markets.

 

How Do You Plan for Retirement? Three Strategies

Situation: The CEO of a family business is anticipating retirement in the next two years. Currently, there is no succession plan. Other family members do not seem interested in running the company. What steps should the CEO be taking? How do you plan for retirement?

Advice from the CEOs:

  • To set the stage for your successor, make sure that you are being paid adequately for your job. If you are being paid less than some of your key employees, nobody else will want your job. Raise your salary to a point where it is appropriate for a CEO, and so it is attractive enough to entice a qualified successor. This will also help attract a buyer should you decide to sell or merge the business. Raising your salary will also help your bottom line if your company is an S Corporation.
  • Once you identify a potential successor, bring this individual into the business as soon as possible so they have an opportunity to understand the business fully and can receive on-the-job training from you. 
    • Understand the numbers and red flags that give you the information and authority to run the company and the respect of your employees. Teach these to your successor so that this person has the same overview of the company that you command.
    • Look at what skills your successor needs to be CEO and start mentoring that person on those as soon as possible.
    • You may need to delay your planned retirement so that you have time to select a successor and prepare that individual to take on your responsibilities. Your current 2-year plan may not work, at least without compromises.
  • Without a management succession plan, the company may not bring in as much in a sale or merger as you expect. It is important that you improve the numbers to maximize the value of the firm if you choose to sell or merge the business.
    • Look at your current range of projects. Focus on those which are most profitable to you and emphasize these. You may be able to reduce staff and expenses by being more focused.

How Do You Compete Against Free Software? Six Tactics

Situation: A boutique software company with superior expertise in their market competes against a large corporation that provides similar software for “free.” The competitor sells systems with their software pre-installed; however, these systems are known to work better with the boutique company’s software. How do you compete against free software?

Advice from the CEOs:

  • Create an alternate message that rings consistently through your advertising, speaking, and media. The core of this message is that if you want a successful experience with the competitor’s installation, the only clear choice is your software. Feature data from your case studies showing improvements in performance, savings of time and resources, etc.
  • Your best target is customers who are in the proof of concept stage. Here they are learning about the system and dealing with the early challenges with the software installed by the competitor. They not only have to pay for the system, but they must pay for installation services. If you can demonstrate both cost savings and smoother operation they will be open to your pitch.
  • Keep a list of the competitor’s trial sites and approach them three months after they try the pre-installed software. Have case studies in hand that demonstrate the clear superiority of your software. At this point they will have experienced enough during the trial that they will be open to your sales message.
  • Focus on the regional rales organizations of your competitor – the people who sell the competitor’s equipment. The RSOs are driven purely by sales performance. Show them that it is easier to sell their systems, and that trials go more smoothly when they recommend your software as part of the sale.
    • Your message: with our software your trial installations go more smoothly; without our software, the entire system sale is at risk.
  • Continue to refine your search engine optimization so that you appear in the first five hits when anybody asks about the competitor’s systems or software.
  • Find an independent Blogger who cares and wants to spread the message that your software is the only way to go with the competitor’s system. Continually feed this blogger with fresh material from your field sales experience.