Okay, part three. We’re now in Venn Diagram territory and we’re talking pricing vs capacity vs efficiency. Previously, we’ve spoken about cash coming in and out. We’ve also had a looked out drawings, how much cash you’re pulling from the business. We then had a bit of a looked at marketing; what’s the return on the marketing spend? Should that be up or down, should we change agencies, what should happen there? Also looking at occupancy, going in an office or not, and also looking at your team. Am I overstaffed? Can I become a bit more efficient and no longer need certain team members or positions maybe can be rolled in.
Link to Episode 1
Link to Episode 2
So there are a few areas to look at and some discussions to be had. Now we’re looking at pricing, capacity and efficiency. So pricing. Most service based businesses under-price. They devalue themselves. It’s usually a self-esteem thing. Some people do not know what they know. They do not know what they are worth. I’d usually say with most service based businesses that haven’t had a bit of a freshen up, haven’t had a bit of a CFO strategy session or a planning session for a while is put your prices up by 10% now. Start with that. Okay?
Let’s fix your cashflow. Pull your debtors in, stop pulling all the cashflow and drawings from your business and put your prices up by 10%. That is my quick win goal recipe. Now I know most people won’t do that. Why? Because they’re scared. They’re scared of people leaving, they’re scared of what might happen, but that’s just their fears. Never predict what the market’s going to do.
So pricing. We’re looking at most businesses under-priced. What’s your pricing strategy? That’s a discussion to have with your CFO, with your board, with your management team in regards of the pricing. But more specifically, how is it priced? Do you charge an hourly rate? Do you bundle up services and charge a fixed rate? Have you unbundled services and you charge a fixed rate? Is it a bit of both? What are your pricing terms? 30 days, 14 days, 7 days? Do you price upfront, 50% upfront, 50% in 30 days? You got always different strategies. Now, just because you’ve done it one way for a long time, just because everyone in the industry does it a certain way, just because your mom tells you you’re going to do it this way, doesn’t mean you need to do it that way. Stop telling yourself these make believe stories. Everything is up for discussion, everything is up for negotiation.
Now, the power of getting your pricing right is that it falls straight to your bottom line. So what I mean that is if your price goes up by 10%, your revenue is now going to go up by 10%…if you lose no clients. And if your revenue goes up by 10%, it doesn’t cost you anything extra to do the work. Okay? So like you bring in more work where you’re going to need more team members to do the work and that’s going to be a cost. Pricing doesn’t cost you anything so it goes straight to your profit.
Now the other thing we’re putting your price up is it can get rid of all of those bottom dweller clients which just a bottom feeders. They just aren’t your client anyway. You just got them because you’ve got them and they sort of come back every year or whatever. But are they perfect client? No way! Well, it’s just going to cull them out. You just want price shopping clients unless that is your business model, unless you are low cost. Okay? If you are Kmart, if you are Aldi, well, I’m not saying that they’re bottom dwellers, but I’m saying, it is a low cost business. So when you go needed to buy something, that’s why you go in there. If that’s your business model, so be it. But for most of you, that’s not going to be your business model. So a discussion around your pricing strategy can pay you big and instant dividends in regards to your cashflow and the profitability of your business.
Let’s now look at that versus capacity, whether some of you might say, “But I just got so much work, I can’t do it anymore. What do I do now?” Well, there’s some good discussions. You can now put your price up. So any new work that comes in, is at a higher price. That can allow you to afford a couple of, a bit of work, a bit of existing clients to drop off. And that’s okay. I want you to be comfortable I want you to accept that, that by improving your business, not everyone’s going to stay with you. People are going to come and people are going to go. That’s just the nature of it. So to increase capacity you can put your prices up.
Think of it this way. If you double your prices… let’s say today you double your price, you can afford to lose half of your clients and still make the same amount of money. Okay? Let’s say you’re turning over million dollars a year. You double your price, so your revenue hypothetically now goes to two million dollars a year but half of those clients leave, so it brings your revenue back to a million dollars a year. But you’re doing million dollars a year right now, but with the new price, you’re still doing million dollars a year. You you’ve only got half of your clients, so it’s going to be half the work. So you can now maybe get some of your life back; take a holiday, spend some time with your family, or reinvest that time back into working on the business to maybe build it out even more.
In regards to capacity as well, a lot of businesses will just get busy and put on another team member. They get busy again, they put on another team member, they get busy again and they just goes on and on. I see this happens all the time. Usually what happens is they have a cashflow issue the whole way through, they’re still never really profitable and it just gets to a point where they get a little bit bigger and they got all these team members, they can’t keep up paying ATO, paying income tax, GST, employee tax, employee superannuation, they get all these debts, and then bang! They got no cashflow left and they’re get in a lot of hot water and they got to close the business down. It’s really sad; it doesn’t have to be like that.
So the reason that is is because 1) they haven’t changed their pricing, but another area can be because of their efficiency. So by becoming more efficient, you can increase your capacity. So how you become more efficient? Well, the way I describe efficiency is doing the same job in a quicker timeframe with the same quality. Let’s have a look in the example. Let’s say you’re doing your job – there’s two businesses doing a job for a client, and the job is priced at $2,000 and it’s a fixed fee. Okay? Business number one takes 20 hours to do the job, business number two takes 10 hours to do the job. So, it’s $2000 but it just the time it takes you to do the job.
So efficiency, another way to look at it – let’s call it the metric – the way to measure it is say through average hourly rate. And what that means is if it’s $2,000 job and you’re taking 20 hours to do it, your average hourly rate is a $100 an hour, right? But if you do the same job, it’s still $2000 but you can do it in 10 hours, your average hourly rate is now $200 an hour. Okay? So you’re able to actually do more work for the same quality and the same price. The client is still going to like it because it’s $2000 but you now can internally do it a lot quicker. That means you’re going to fit in a lot more work, you’re going to be a lot more efficient. So what it’s going to come in, it’s going to go out, and the profitability per job, your average hourly rate is going to shoot up through the roof. So how can you improve that?
A lot of it is systems, policies, checklists, not very sexy, not very exciting. I’ll be honest, I hate doing a lot of those sort of thing but I know how important it is so I push myself to do it. One part that I do love doing is the Cloud accounting and the Cloud computing side. Lucky for me that a lot of that automatically includes automated checklists and policies and things like that. Certain Cloud products will be able to help you with the job and keep track of a job. Make sure you’ve got everything from your client you need to do the job. It’s going to depend on per industry but it’s a discussion to have.
What I want you to do is pull apart how you work with a client from end to end. Okay? So when you first start the job to when you end the job. How can you put a checklist at the start? So you get everything from a lot quicker as opposed back and forth and back and forth. Or maybe in the middle of it, is there certain team members that are better doing admin and other team members that are better doing the more technical stuff. What you’ll find is a lot of the senior members or staff will be doing a lot of administration. That’s a waste of capacity, unless they’re spending that time by just doing the high value bill of a work. And the admin should be done by an admin person, by the client service coordinator. You could outsource it. There’s all these different discussions that can be had there.
So you can see that by changing up your pricing, reviewing you pricing, by reviewing capacity, which comes in to team members; what they do, are they all required, can we outsource some of it, but also your efficiency in regards to how the business works in all those areas can be improved even if it’s just in a little way. Your business might be spending a lot of time doing bookkeeping, looking after all the receipts processing all the invoices, you would know, just jumping on Xero and Receipt Bank, it’s automatically made you more efficient there. There’s a lot more insight and the expense in that area if you are paying a bookkeeper to do it, will now be reduced. So there’s now an instant efficiency gain for you.
So there’s the end of the three part series. There’s some tips. This last part here can be expanded out. I think I might do some more things in the future. Give me some feedback. What do you want to know more about, where do you want me to deep dive on and I’m more than happy to do that for you. Thanks!