A few months ago, a client came to me with an idea to shift her role within her business.
She delivers onsite services and like most modern businesses uses ‘staff-on-demand’ or subcontractors to deliver services outside of her local area. Wanting to start a family within the next few years she was searching for ways that she could reposition her business to allow her to work from home more and reduce the travel to clients.
The option she wanted to explore was what would more volume (bookings) look like? The thought process was that she could essentially become a booking agent, maintain outsourced staff-on-demand and grow her business. The thought was to double the number of bookings over the coming 12 months.
So I got to work and modelled out what the numbers would look like based on booking goals for her three main services. We took her out of the service delivery and instead put in her flat rate subcontractor cost for each service.
The results weren’t as she was expecting. Whilst the business would still make a profit, it was very similar to what it was currently making — hardly rewarding for the additional effort of doubling bookings. In addition, there would be some difficult cash flow shortfalls to deal with. But the story doesn’t stop there.
In our discussions, my client had told me that to see out her plan of doubling volume she planned to target a new market, and one that had a greater appetite for price. She knew that her current price was mid-range within her market, and that her product was of high standard. So rather than leave the modelling where it was, I raised the option of increasing price instead, and seeing how that would play out with lower volume.
We cut the volume target by 33% and raised prices slightly to a rate that would still be competitive within her marketplace and more importantly still appeal to her new target customer. She felt the new volume target was much more achievable than her previous target and that current customers could also live with a small price increase.
Instead of simply going through numbers on a screen I put together a dashboard to visually display the differences between the two options (volume vs price).
The result?
17% less turnover but 25% more profit
Positive cash balance at year end
Lessons:
- Know your margins: If you’re selling a product with minimal margin, it is always important to consider price increases as well as volume increases.
- Know your customer: If you’re operating in a particular market knowing what your customer expects in terms of product, quality and price will help you to make decisions within your business. In this case study the client knew that her market could withstand a price increase. If you operate in a highly commoditised market, then increasing price may not work for you.
- Do some modelling before expending effort: In this case study the client could have spent 12 months working hard to sign more customers only to find that she still only made the same profit as when she was delivering the service herself. Taking some time out to talk to an advisor about her plans gave her more options and showed her how else she could achieve her goal.
- If numbers put you in a spin, ask your advisor to visually model the data: It’s not uncommon for business owners to space out when someone puts a sheet of numbers in front of them, but we’re all adept at reading charts and graphs, so get advice in a way that speaks to you so that you can truly understand it.
