Archives For product

Here’s a great example showing just how much you lose when you discount services or consulting efforts.

Let’s assume you quote a job, fixed price, but calculated by estimating your time.   Here are some considerations you use in your quotation process:

1. Engineering rate: $150/ Hour.  (example rate).

2. Company’s published burden rate: $75/ Hr.

3. Hours estimated to do the job: 8 (one full day)

4. Total proposed price (Fixed Fee): $1200

5. Expected burden cost on the deal: $600

6. Expected gross profit (GP) on the deal: $600

So you put together your proposal and submit it to the client along with whatever products are to be installed.  The client looks at it and figures there’s no harm in asking for some discount.  “How about if we just go with $1000 even?”  Well,  that’s fair.  After all, it’s so close.

Assuming your engineer does complete the work in 8 hours, the client get’s billed $1000.

Looking at the numbers more closely:  That is about 17% off.  Not a huge discount, so you’re not worried.  However, let’s look at the GP discount:

Your fee: $1000

Actual burden cost: 8 X $75 = $600  (Same as above)

Realized GP: $400

Whoa, you gave away $200 right off the bottom line.  That’s a 33.33% discount which is about twice the discount you thought your were giving!  No wonder the numbers don’t work at year end…

© 2010, Dave Stelzl

Resellers, VARs, Solution Providers, and Channel Managers – this is an important lesson on the profitability of services.  While your (or your partner’s) services may be very profitable, they may not be as profitable as they seem.  As the market has commoditized, I’m seeing far more short product/install contracts…less consultative, long term engagements.  This is particularly  true in the mid and smaller markets. What is the result.

Listen and see how calculations on profit, gross profit, and net profit are sometimes confusing.  To the sales rep, all GP is good – you get paid, right?  To the person with P&L responsibility, the numbers don’t always add up…I frequently run into people who initially think they have strong services margin.  When I show them how to calculate it, we find profits to be much lower apart from the product sales.

© David Stelzl, 2010

Share

What happens when the people in charge don’t get it?  The value solution providers (VARs, Resellers, Consultants, etc.) bring to their clients has more to do with the business advantage they bring and less to do with the features…yet I am hearing the disturbing message this is being sacrificed in the name of budget constraints.  Here is what I am hearing from the field:

1. When distributors bring together their clients (generally mid market and SMB resellers), the attendees need to hear from industry experts, receive business building strategies, and be challenged by new ideas.  Thousands will be spent on the travel, accommodations, and food, not to mention opportunity cost.  Why would those in charge allow free speakers from the manufacturer to dominate these sessions with product information?  It’s all available online and it’s all commodity stuff…I’ve heard numerous comments this year along the lines of, “waste of time.”

2. When “Vendor” sponsored training is forced on the reseller (forced may be a strong word – but this is the way I receive the message from resellers I work with), why is it so product centric with “speeds and feeds”, when what is needed is a message that resonates with senior managers, negotiation skills, and marketing insight.  It’s rare to find people making these decisions who understand the reseller business, financial model, and competitive pressures, so bring in someone who knows.

3. I recently learned of a major reseller who went through several days of sales training with HP specifically on building their message. After attending my Mastering Board Room Presentations (where we were going to focus on delivering  their new message) they told me, “Our message stinks.”

4. When marketing dollars are available (which they always are if you sell enough product), why do the people managing these budgets insist that it be spent on golf outings, call blitzes, and product specials?  These programs are proven failures…I’m told by sales people and VAR business owners, “We’d gladly sacrifice the outings for outstanding content and training.”

5. “Stop telling me there’s no money available.  Instead, give me the criteria for getting the money I see others getting.”  It’s no secret, money is being spent on marketing and  training…if it’s not, the channel is dead. But who will get it and who dictates who it will be spent?  The criteria needs to be clear, and the reseller’s choice of partners should take this into consideration.  There’s no sense in trying to build this business alone – channel partners are needed, great channel managers are needed, and resllers who think they can build a business without the product are wrong.  When synergy exists between the two, a winning combination is formed.  But this requires an understanding of how to invest and partner in a way that produces profit.

© David Stelzl 2010

Share

Here’s a rare clip where I explain how security works – this message has been central to helping management level people understand why their IT people cannot be the only one’s looking at security – creating an opportunity for consultants like those in your firm.  Notice I don’t speak technical jargon in this presentation.  There is no benefit to showing off your acronym vocabulary while selling.

© David Stelzl, 2010