Archives For profit and loss

Selling Your Way Out

February 21, 2012 — 1 Comment

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

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When I was growing up my father used to refer to our boat as a hole you throw money into.  You probably have something like a boat; something that continually eats away at the bottom line.  When it comes to selling support work, there are several holes I’ve identified.  Things to avoid if you want to produce hard-dollar profit:

1. Selling managed services with a contractual agreement to be on site.  Make sure your fee is high enough to include the cost of staff augmentation if you do this.  In most cases it is unnecessary.

2. Selling on site support or engineering (staff augmentation) with a commitment to be on site two or three days per week.  This is especially bad when the person is to be there every other day – it is nearly impossible to fill the other days.  This is break-even at best.  Another trap is selling half days.  What will they do the other half?

3. Billing a client for three hours.  You’ll never recover that 4th hour before lunch or the end of the day.

4. Support calls with no minimum charge.

5. A close second is, too small of a minimum charge.  Consider two hours…if the engineer has to drive an hour in traffic one way, the support call will be break-even at best.

6. Not understanding burden cost.  If a support engineer drives two hours (there and back) between every two hour minimum time call, the profit is zero in most cases.  Move to contracted managed support with annual contracts, spread your risk, and make sure your fees cover your cost with the required profit.

7. Converting support calls to managed contracts without a clear understanding of your cost and profit.  Once converted, good luck increasing prices!  You should be making more on managed contracts, not less.

© 2010, David Stelzl