Tag Archives: Utilization

How Do You Price a Product and Service? Five Approaches

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.

What are Your Key Business Metrics? Seven Suggestions

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:
    • Portfolio performance
    • 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
    • Resource utilization
  • 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

But We Don’t Produce Anything Measurable! Seven Metrics and Tactics for Service Companies

As a service company we find it challenging to measure project profitability and client satisfaction. What measures and metrics do you find most useful?

Advice from the CEOs:

  • For billable services: utilization percent defined as (hours available for service delivery)÷(billable hours)
    • Include in the denominator both billable hours and customer good-will or preventative maintenance hours. The latter, while not producing current income, are an investment in future income.
    • Set up audits for service needs, especially future needs, when working with customers. This will help you to stay abreast of changes in the service environment and to plan accordingly.
  • For fixed budget projects – measure budgeted vs. actual expenditures by project.
  • For fixed-fee services: a fraction expressed as: (income per customer company) ÷ (cost in hours for that customer)
  • Customer audits and surveys. Options
    • Exit “pizza party” with the client – may produce tainted results. While this builds customer good-will and may provide qualitative feedback, it should be supplemented by more objective measures.
    • Mailed survey – from 3rd party with a prize for responding.
    • Email follow-up from 3rd party that directs you to the 3rd party site to complete the survey.
  • Ambassadorial CEO visits to the top contact person in key accounts
    • Opportunity to learn about the customer’s present and future needs, staffing plans, business and strategic direction. Helps to anticipate changes in the competitive landscape.
    • The more your business relies on recurring revenue, the more important these visits are.

Key Words: Service Metrics, Project Profitability, Resource Utilization, Customer Satisfaction, Business Trends