Situation: A company offers a product combined with a service. Small companies can’t afford the combined price, but don’t need the full functionality of the combined product plus service. An option is to create an offering on a per-seat basis. In this option, how do you price seat utilization? How do you price a product and service?
Advice from the CEOs:
Pricing needs to follow value. For large companies, functionality and seamless operation are key. Small companies have different challenges – they have less money and don’t need all the features required by large companies. Configure a limited product for this market.
Don’t de-feature the product – create a different use / pricing model. Consider a model that prices based on the user company’s revenue, with periodic review of their revenue and fees paid. As they grow and increase utilization, they increase their ability to pay for, and their need for full utilization.
Use a cloud model and create a “pay per amount of use” option. Limit this offering to X number of users or X number of projects to create a different product from the full license option. While this will require monitoring, it will differentiate the partial license option from the full license option.
Develop an alternative to what is offered by the chief competitor and create an offering that this competitor can’t compete with.
Before making a final decision, institute a formal process for collecting ongoing feedback from customers. This will help to clarify alternatives going forward.
Situation: A CEO has been analyzing the metrics that she uses to track her company’s performance. Historically she has used common metrics like sales, gross and net margin, profit and net operating income, budget plan vs. actual expenses, and sales forecast vs. actual sales. She is curious what other companies use to track performance. What are your key business metrics?
Advice from the CEOs:
The most important financial metric for many companies is actually cash flow – how much cash you have on hand and your cash flow forecast. Two metrics that can help you to better understand and boost cash flow are:
Receivables – aging rate
DSO – Days Sales Outstanding
Additional financial metrics include:
Variable versus fixed cost ratios
To augment understanding of profitability, track “good” profit – revenue from customers who are profitable, as opposed to revenue that is either break-even or unprofitable.
Sales metrics to measure future revenue include:
Order backlog – by month for X months out
From this, forecast beyond visible orders
Marketing metrics include:
Net promoter score – would the customer refer us to a friend or family member?
Client and referral client retention rate
Metrics for utilization of resources for a service provider include:
Total hours paid versus total hours billed
Business trend tracking. If business is seasonal, look for historic peak to peak times – this may be 3 months and may be 18 months. Determine this and make the rolling cycle equivalent to your business cycle.
Review your metrics regularly to reinforce their importance across the company