Financial Pressures Lead to Bigger Losses

February 23, 2012 — Leave a comment

Today was my second day teaching at Verity College in Indianapolis – working with college students who have not really experienced the pressure of the business world provides some fresh perspective.  Today we covered material from my latest book and workshop, in a session I call, Secrets of High Priced Consultants.  Over dinner I had the opportunity to meet with two young men, both interested in building businesses and looking for counsel on how to get things started. One question that came up deserves some additional response – “Where do you see companies really getting into financial trouble?”

The other day I wrote about selling unprofitable business.  Let me expand on this some, as it applies both to the company and the sales person…

1. Numbers are down, because profits are weak or perhaps sales are low due to competitive pressures – in other words, there are opportunities, but in order to win them, you find yourself cutting the prices.  In my From Vendor to Adviser book I show how a 20% cut in price leads to a 40% cut in gross profit (at least when we are talking about services with a standard burden cost).

2. Profits are down which demands more sales, but the profit problem is still there, and with all of the competitive pressure, and need for fast sales, more pressure leads to more discounting, less contract signing, and more deals on a hand shake.

3. Revenue numbers increase when this happens (assuming steep discounts lead to more sales) – and if you are selling managed services, the compensation is likely based on revenue, since there is no gross profit measurement to be had.  Often these deals are compensated with 1 to 3 months revenue paid out to the rep up front.  The rep is happy, the business will soon be dying.   As pressure mounts to keep this contact profitable, the customers are sure to pay with poor services, often resulting in early contract termination.  You can try to sue, but this rarely works in your favor – in fact, forget I mentioned it.

4. Competition is bound to come in at this point, sweeping up the pieces and promising to make things right.  Whether they do or don’t make good on their promises, chances are you will not get this customer back.

Fix the profit situation first…more contracts don’t equal more profit.  Bigger companies don’t mean bigger money.  Fine tune the profit machine, then work on the sales end.  Once you know your product offering or managed service model works, then you can press forward with a strong sales & marketing program.

© 2012, David Stelzl

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