Selling your way out – it seems like common sense, yet I see this more often than you might imagine. Selling more at a loss never profits. You can’t sell more of something that just isn’t profitable and expect a return. This is likely one of the most frequent causes of business failure. This past week I reviewed financial reports of several resellers, all selling managed services offerings. In once case the numbers were all above 50% margin, with over 300 individual contracts – and for SMB (Small-Medium Business) contracts, reasonably large monthly commitments. In another case, a company who had converted many to managed contracts, using an ROI (return on investment) model – in other words, they sold their clients on moving to a monthly commitment, but didn’t do the math, and tried to save each client some money. The client is now saving money, but the contract isn’t profitable as we look back over the past 12 months.
Blindly pursuing sales, without a clear picture of the efforts involved in filling the contract is like chasing technology. Companies that will create any offering on the spot, or take on any new product, just to fill a contract, as destined for trouble. One of my clients made the astute comment in our weekly meeting, “It is so tempting to just cut the price when it looks like a sure thing,” and he’s right, but then he followed up with, “But it doesn’t make sense to do it – it won’t turn a profit by the end of the year.”
Managed contracts are like that. There is little in the way of upfront cost, so the temptation is to believe you can pull it off – manage it closely, do it more efficiently. But in the end, you will be squeezing the client, trying to get by without actually responding, just to make up for the loses. On the other hand, you might not realize your contract is a loss until it’s just too late. At that point, there’s no turning back. You can’t raise prices across the board and expect everyone to stay with you. Instead, you will be handing over clients that have taken years to build, to your nearest competitor.
Copyright 2012, David Stelzl