Situation: A finance company wants to revise its web portal. The objective is to provide up-to-date specialized financial information to clients for a subscription fee. Currently information is provided directly to clients. The portal will allow clients to manipulate the data provided to gain greater insight into their own strategies and operations. How do you launch an Internet portal?
Advice from the CEOs:
This presents an opportunity to bring several niche services together under one umbrella.
The plan is to make money by selling subscriptions. A challenge will be determining how much clients are willing to pay for this service.
Perform an analysis to determine how much clients can either make or save by utilizing the new service.
Try a menu approach with varying fees depending upon the number and frequency of services accessed.
To more quickly gain recognition and credibility, consider partnering with an existing well-established entity such as Bloomberg. Design your portal to integrate your data into their existing traffic flow.
This reduces the development effort because the partner already has the shell and a well-established market presence.
As an alternative to partnering, it may be best for the company to develop the portal on its own.
In this case, if there is a tightly defined target audience and the company already possesses all the equipment and programming required to launch its own portal, it may be best to carefully select initial clients and for the company to do everything itself.
If the company has the necessary access to key target clients, this will save the need to split revenue with a partner.
Situation: The CEO of a specialty service company is curious about whether they have the right internal focus to drive their business. Their internal focus statement is to the most competitive, most responsive company in their market with high profit per job. One school of thought calls this focus the Main Thing driving the company. Does your company have the right Main Thing or focus?
Advice from the CEOs:
Look at the tie between your Main Thing and your financials.
Determine an appropriate measure of efficiency – for example, billable hours per field worker per day.
Look at cost per field worker versus efficiency.
Ask what will generate the profit to grow to the level that the company has established as the revenue target.
If you can boost the gross margin on services, this provides far more benefit than merely cutting expenses.
Look for market niches that support higher prices without a parallel rise in either expense or risk exposure.
Do leadership and staff have the right skills and talents to support growth objectives? What can be done to enhance skills and talents?
Consider the following – By increasing efficiency and margins from 16% to 20% on $10 million of job revenue, the company can increase the operating margin by $400,000. If certain staff cannot work within a more efficient structure, you may want to move them to jobs that are less critical to the business. Having the right staff in the right seats is critically important to bottom line results.
Look at the company’s customer selection criteria. Using the 80/20 rule – 20% of customers generate 80% of revenue and/or profits. How do you improve customer selection?
Rank all customers on measures of profitability of their business, payment time, and most importantly future business potential. Focus on customers with the highest scores, and “fire” low scoring customers.
Focus on cash flow: Look at early pay options or discounts to speed payment from large customers.
Incorporate a schedule of values in all contracts as an addendum to prompt earlier payment.
In proposals, include a payment schedule and finance the receivables through a factoring company – particularly in the case of slower paying or less desirable customers.
Situation: A component company is struggling to set financial goals. Its sales are dependent upon purchases by large customers whose orders are influenced by the economy and demand for their products. How do you set goals in a volatile economy?
Advice from the CEOs:
What are the principal drivers that define the market? Have they changed? If so, how? Focusing on principal drivers creates more clarity in a volatile economy.
Rather than looking at the company as a producer of components, focus on the critical value add that the company’s products provide to customers. By focusing beyond the product, strive to become a key partner to customers. This can allow you to develop retainer contracts with key customers rather than working solely on a project basis.
The Holy Grail is predictable recurring revenue, for example on a service contract basis. The establishment of retainer contracts can help the company move in this direction.
The company’s customers have increasingly placed rush orders because they have been hesitant to commit to steady production. This, in turn, increases the costs to the company because they are being asked to alter their production schedule to accommodate rush orders. It’s fair to publicize and charge expedite fees for rush orders, just as delivery companies increase their charges for expedited delivery. Expedite fees will cover the cost of altering production schedules and can also add cushion to company profits.
A portion of the company’s business is supplying consumable parts that the OEM marks up and distributes to end users for their equipment.
As an alternative look at parts manufacturing/sourcing, storage and distribution direct to the customer as a separate business opportunity and take this over from the OEM – it may be a nit to the OEM that they would be willing to give up for a reliable service alternative.
Situation: A company’s goal is to replace an old, established market with new technology and, by owning the technology, to reinvent the industry. Given this aggressive goal, there is a temptation to go into volume production before establishing the cost advantages to make the technology profitable. The challenge is to establish disciplined, stable, qualified, scalable and profitable manufacturing. To accomplish this, the company must decide between alternatives as they cultivate new customers. How do you optimize your pipeline?
Advice from the CEOs:
There are two sides of the market:
Mega-markets dominated by large corporations which have long lead-times and potentially huge payoffs; however, these markets present long payoff delays for the company.
Smaller, quicker markets with limited volume but which will offer rapid PO acquisition and proof of concept.
The question is how much effort to devote to which market.
Look for early customers who are cast in your own light – disruptors who can help to catapult you into the marketplace
The trade-offs are strategic vs. tactical opportunities.
The immediate tactical need is to generate cash to show that you can. This is the steak.
The strategic need is to seed a foothold in a mega opportunity – to show the potential to revolutionize the market. This is the sizzle.
Identify a killer app that will gain tactical advantage and cash and help prompt maturation of a strategic opportunity.
Another CEO shared experience landing a large client.
They used a short, low cost pilot project to prove the concept to skeptical client staff. The client was surprised and delighted by the success of the pilot project. The pilot project was then articulated into larger projects.
Over time the company used incremental steps to gain a broad presence within the large company.
Focus business development on selling killer apps.
Find low hanging fruit for quick proof of salability and to show a revenue ramp.
Small design wins exercise the machine.
Is it possible to conserve cash to raise the impact of early wins to the bottom line?
Are all current staff during the next 12 months?
Early on, the game is business development – gaining key contracts and agreements with lead customers. Sales follows, with focus on the larger market. This may be 6 months to 2 years out. How many people are needed to focus on business development?
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.
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.
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.
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:
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.
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.
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.