Tag Archives: Margin

How Do You Balance Two Businesses? Four Thoughts

Situation: A company provides both contract staff and consulting services. They have a large client for whom they provide staff, but not consulting. The client routinely requests discounted rates on contract staff from the company. The CEO believes that the client requests lower rates because they, in turn, offers consulting to their customers, using the company’s staff, and want to offer these services at a competitive rate. How can the CEO better respond to the next requests for discounted rates? In addition, is there a way for the company to market their consulting services directly to the large client’s customers? How do you balance two businesses?

Advice from the CEOs:

  • Don’t avoid the conversation on your rates. Make sure that your client knows that they are getting top quality services and that this is reflected in your rates.
    • Make the issue a price / quality trade-off. If cutting costs is important to the client, offer lower quality options at a lower price and let the client decide what will fill their needs. This positions you as flexible and willing to work with the client, without losing margin.
    • Offer modest discounts for incremental business, but not current business.
  • Tell the client sooner, rather than later, that your prices are as low as you can make them. Don’t wait until you are in pain.
  • How can you promote your own business to end customers via the staff that you provide for this client?
    • Give them business cards to give out that reflect your business, not your client’s.
    • Provide them with wear nicely embroidered “Company” shirts to wear at work.
  • Be aware that your desire to approach the client’s customers directly with your services will be a threat to your client and may result in them firing you as a provider of contract staff.

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How Do You Maintain Company Culture as You Expand? Six Ideas

Situation: A company wants to open a satellite office in a lower cost geography where they can provide current services at a reduced cost to improve margins. In doing this, the company wants to maintain the same culture and controls on quality of work that they enjoy in their home office. They also need to accurately forecast revenue for the new office. How do you maintain company culture as you expand, and how would you forecast revenue for the new office?

Advice from the CEOs:

  • Maintaining company culture is tricky as a company expands geographically. Assign one of your current managers, someone who buys into the company culture, to head the new office. Also maintain the same hiring and personnel management policies that you have at the home office.
  • As the biggest concern is cost efficiency, make sure that the office manager has clear objectives to realize anticipated savings.
  • Look for an incubator that can handle all the peripheral office details so your staff can focus on their work instead of managing facilities.
  • When it comes to revenue forecasting:
    • Given the lower costs associated with the new geography, look for opportunities to trade margin for longer contract commitment windows to improve revenue forecasting.
    • Both margin and delivery can be lumpy when opening a new location. Obtain a credit line to help you smooth the rough spots in your revenue stream.
    • Investigate deferred revenue options to spread revenue risk – right of first refusal on next generation projects in exchange for a lower cost per project to the customer.

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How Do You Negotiate Milestone Contracts? Three Suggestions

Situation:  A company’s contracts are based on milestones versus time and materials. This is common for their industry.  However, end products are poorly defined at project outset and product requirements frequently evolve and change, making milestones squishy. How do you negotiate milestone contracts and payment schedules?

Advice from the CEOs:

  • In addition to payment schedule, there are four elements to a project negotiation – specifications, schedule, project flow, and budget. Tell the client that to hit their budget target, they need to give you control of any two of the other three factors. This means that if they want to specify budget and schedule, then they have to yield you control of the specs and project flow. Any change to these means that they have to be willing to change budget and/or delivery date. Finally, to keep the project going on a timely basis, they must make milestone payments on time and on schedule.
  • Try to transform the project, as much as possible, to time and materials. Here’s your talk line:
    • To give you 100 hours of effort on a fixed bid basis, we have to budget 110. Time and materials, in the long run is less expensive because you only pay for what we need to deliver your product.
    • Your credibility to deliver on a time and materials basis will be based on past performance and the relationships that you have developed with your clients.
  • Milestone contracts are especially difficult in low margin industries because of project variability. One solution is to bid 130 hours cost for 100 hours work. The challenge is that this looks uncompetitive, especially compared with offshore resources. Therefore, an option is to develop offshore capability so that you can deliver your projects using a variety of resources with variable costs. Price everything based on domestic prices, but use offshore resources to improve your margins and your ability to cover project overruns without killing your profits.

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What is the Best Response to a Price Cut Request? Eight Thoughts

Situation: A key customer just asked for a price reduction. Our raw materials costs have increased and eroded our margins. What is the best way to respond?

Advice from the CEOs:

  • Are you selling a commodity or a unique and differentiated product?
    • Commodities rarely command a premium above market unless you can bundle with differentiated delivery.
    • Unique or differentiated products justify a premium because the customer has only two choices: purchase at your price or try to develop an alternate source.
  • The customer may have valid reasons to request a lower price.
    • Counter with a combination lower price and lower level product to retain your margins.
    • If the sale involves service, assign less expensive resources in return for a lower price to preserve margins.
    • Define the trade-off to the customer so that it becomes their decision, not yours.
  • Adjust your terminology. Use “run rate” vs. “price,” and speak of balancing resources assigned. Avoid cheapening or commoditizing your offering to meet the customer’s price demand.
  • Don’t assume that there is such a thing as a “fair price” or “fair margin.” The price is whatever the customer is willing to pay for your offering. The price increases the more unique it is, and the more critical to the customer’s needs.
  • Do NOT share your cost and margin information – as company policy.
  • Consider combinations of pricing, terms and delivery that keep you whole while offering the customer different price points.

Key Words: Price Reduction, Margin, Costs, Commodity, Differentiation, Counter-Offer, Resources, Terms, Delivery  [like]