Improving the odds

Some days, it is challenging to write on topic.  For instance, today for this blog, I am on topic number 4.  And frankly, number 4 is just wing it.  So many things to discuss and I am not quite certain how to frame the issues or put them in context.

We had several meetings last week, not the least of which was the meeting to discuss a private placement strategic plan.  That did not go quite as well as I would hope.  The concern is valid – I mean, the plan calls for changing how certain software is licensed.  It models out but we all know models only go so far.  To change direction will cost a ton in marketing dollars and face resistance from the current marketplace who do not want a shift in power.

The shift will happen; it is whether this group wants to be the driver.  Actually, that isn’t it, they want to be, but the hard reality is that it takes a lot of resources to upset the current way of doing business.  With no guarantee of success.

Not that there is any guarantee of success by following the same model as the other developers in the marketplace.  But that channel is well known and understood.  The licensors will likely be open to incremental change which means that the cost to land a subscriber will be substantially lower than trying to go directly to the consumer.

Sorry, I know this seems somewhat vague but I am working under an NDA so have to be extremely generic.  But the strategic business problem is not unique – it is one faced by every business that decides to sell.

Who is the customer?  And how do you improve your odds of success within a sales and distribution channel?

If you are a handyman service one way to go about this would be to get door hangers and go to a mature neighborhood and hang them.  If you do up 2,000 you will likely end up with 40 new customers.  It won’t happen immediately but that 2% is pretty much cast in stone.  You will spend a bit on advertising but it will likely pay off rather quickly.

But, what if you wanted 10% new customers?

One way to attract more customers would be to offer free yard debris removal, for example.  People love a free deal and chances are, many more would look at your service offering after having a positive experience with you.  You will spend more money than on just advertising alone but, it might pay off.  Again, no guarantee that you will substantially increase above the 2% but there is lots of evidence to support the conclusion you will get above 2% new customers.  Your costs will most certain go up though.

Freebies, giveaways, basic services with the opportunity to license premium services.  These are ways to build trust with your product and service but they are not free to you and oftentimes are quite expensive.  Are they still worth doing?

Perhaps.  And that is what I am facing this week.  Do we redesign the offering to make it compelling to the existing channel?  It is going to be expensive either way – either by spending a ton of money on marketing and advertising to go around the existing purchasing channel or on giving away revenues while we work to entice users through free use.

Part of me, of course, loves the idea of challenging the status quo.  It would be awesome to completely upset the applecart and win this my way.  But, the reality is, it is probably more risky to take that approach than it is to work within the existing channel – even if the existing channel is ripe for challenge.

More on this another day.  Have a great Monday.  If you are ever in the market for a thinking accountant who loves marketing and sales, feel free to contact me for a free consultation.  I am here to be of service to you.

 

GAAP and Projections

I have a new project which I started at the end of last week and which must be ready for discussion by Friday.  I need to pull together a projection for a start-up company, determine its capital requirements, figure out how it should be structured by debt and equity class and then make sure that, given a certain range of possibilities, what the ROI is going to be.

Did I mention this has to be done by Friday?

It is interesting and I have a great model I have developed over the years (in my humble opinion) that helps me focus on the big picture while also making sure I cover the necessary ingredients.  One area I have spent a lot of time updating is the revenue projection side.  First, I am trying to design a revenue model which takes certain assumptions, like lead generation rates through sales close rates and figure out how many sales will happen.  And then from there how many sales support people are needed.  And then…

Sorry, I was going to slide right in and describe why I like modeling this so much but really, today I am writing to discuss how Generally Accepted Accounting Principles (GAAP) are causing a serious headache for me in this projection.

Naturally, my first irritation is the requirement of recognizing stock awards as compensation expense, although I know intuitively that it is something the employees earn.  It is still a challenge because the only “cash” part of this is the amount paid in taxes to gross up the award.  Why am I worried about it?  Because I am thorough and don’t want anyone to say they were “Unaware” that earnings were going to be lower than projected because GAAP treats stock compensation differently than cash models.

The bigger concern is the new GAAP on revenue recognition.  You remember, the one I have blogged about here recognizing that this particular headache was coming.  Well, this projection is impacted by it because, naturally, it is a software company that licenses its program on an annual subscription and offers free, unlimited tech support.  Love it.  Revenue recognition side?  Not so much.

I spent about 6 hours last night after the game (nice to see the Saint’s work hard to try and lose but they managed to survive until next week – not much hope there) updating my assumptions page and working through the model to address control and amortization of revenue.  No, I am still not done but I am getting closer.  What I can tell you is, I don’t like the results.

On a cash basis, this particular start-up should get to positive operating cash flow in about 14 months; right now it takes about 52 months to get to profitability under GAAP.  I am also seeing about $8,000,000 in deferred revenues.  That is, by the way, cash collected from customers that the company cannot claim as revenue.  Yes, it is software and there is no right to refund but still, under the control principles in new GAAP, the revenue is unearned.

How I get there is to make certain assumptions about purchasing patterns and I am making a rather aggressive assumption that most purchases will happen in the first part of the year.  It is more intuition at this stage but my research indicates that this is the likely time when this sort of software is installed – something about New Year resolutions.  So, this is only a few months of overall deferred revenues but it is enough to throw off accounting ROI.

Don’t get me wrong, I think the most important information comes from cash flow.  How quickly cash is burned through, minimum cash levels, marketing expenditures are absolutely essential to figuring out minimum equity positions, acceptable leverage, target interest rates; all that delightful CFO stuff that can make or break a project.   But still, I think that potential investors have a right to know everything about the project they are taking under consideration and GAAP is one of those things – because at the end of the day, if the goal is to go public, then GAAP is the beast to tame.

Like I said, I try to be thorough.

I will keep you updated, probably at the end of the week when I meet with the ownership to review what I have and start changing assumptions and figure out what to add.  They want to start pitching by the end of the month so I have my work cut out for me – because I am doing this on top of everything else I do!

If you are looking for an accountant who might be able to help you get to that next level, either by acting as your controller or CFO (or combination) feel free to contact me and lets schedule a time to talk.  I enjoy being of service to growing entities and risk-takers.ready for discussion

Have a great day.

 

Pricing

Happy Tuesday.  On Sunday, we had brunch with some good friends Jordan and Whitney at Tommy O’s in downtown Vancouver.  Kubae and I split a delicious Kahlua Pork Quesadilla and had a great time with conversation about firing ranges and civil liberties.  We then spent the rest of the day driving around contemplating if it is time to move to another spot as we are fast approaching our 2 years in downtown.  How time flies when you are having a great time.

One of the things I think that worry small business owners is what price to charge.  And since most small business owners start their small business after leaving their employer, they typically follow the model they were taught there.  This works, but I think there may be a better way.

When I was working with VSource in the startup of Argentstratus, I decided to approach the pricing model differently.  Instead of first saying, “here is our price”, I suggested the sales team start by asking what the prospective buyers budget was for things like

  • Server replacement
  • Desktop PC replacement
  • Software updates
  • System security
  • Downtime for server maintenance
  • etc

The typical response was a blank – deer-in-the-headlights- stare because most small business owners don’t stop to think about those things.  Depending on their answer though, the sales team could help create a frame of reference for the costs of doing everything in-house versus outsourcing their entire IT.

This had two benefits: First we avoided having the investment discussion too soon and second we ensured that the prospective buyer understood what they were really purchasing.  In essence, we established the value of the offer and then provided a price which was dramatically lower than that value.

To be clear, there is no such thing as the right price.  What the small business faces are buyers with absolute maximum and minimums to their pricing decision.  Many start-ups are willing to pay legal counsel several thousands of dollars: Some will not pay a dime.  Established businesses are willing to pay a million dollars to buy out a competitor but won’t spend $100,000 on an advertising campaign.  Each party perceives the value differently but I honestly believe the main point of differentiation is how the investment is packaged to the buyer.

By the way, I intentionally use the word investment over “Price” or “Cost”.  For most of us, especially in the service industries, we are often considered a “Cost of Doing Business” – an expense.  I go out of my way to explain that using my services is an investment.  By paying my firm you get access to some of the best business, tax and accounting minds in the area.  By deliberately removing loaded words we can continue the conversation in ways that benefit all parties.  If I say your tax return is going to cost  you $1,800 you will try to shop me.  If I say that your investment in assistance in running, managing and reporting on your business is $1,800 and I will throw in a tax return for free… you see my point.

So some guidelines I have learned along the way when it comes to pricing.  Where I can remember the source I will give credit and if I do not actually remember the source I apologize in advance and if you can send me a message with the actual source I will update this post for that information.

  • Do not charge by the hours worked, but by the years it took to get you to this point. Harry Beckwith
  • Price high and offer amenities – it is easier to remove add-ons than raise prices
  • It is always easier to offer discounts than to raise prices
  • Determine what your customer can pay and then figure out if you can service the client profitably.
  • Offer tiers of service (Bronze, Silver, Gold or the like) with very clear differences between them so you can cater to a larger audience
  • Ask the prospective buyer their budget and try to hit it.  Jeffrey Gitomer
  • People hate to be sold but they love to buy.  Help them buy.  Jeffrey Gitomer
  • Your number one competitor is apathy, price accordingly.
  • Your costs are not your customers problem.

What these guidelines suggest is to be open and creative when it comes to pricing your solution.  You are offering a solution to someone’s problem so don’t be afraid to be creative about what they pay for their investment.  As a general rule, if you are looking for new or more business opportunities, look at how your competition is pricing and then do something different.  Make your pricing easy to understand and consistent for a set of prospective buyers.  Test your price and if you are getting 100% of prospects saying yes, realize your price may be too low.  If you are getting 100% saying no, your price is too high.

Somewhere in between is that sweet spot for that group.  You can find it.  If you are interested in thinking about ways to create new pricing models, try talking with your current accounting professional about ways to make your solution and pricing more effective.  If you are looking for a new accounting professional or would like a second opinion, feel free to contact me for a free no obligation consultation.

Have a great day and enjoy the challenge of charting a new course on pricing your solution.

Thoughts on Marketing

Happy Wednesday.  You know, I am typically not much for working out in the evening – I prefer reading and drinking wine – but it does help me sleep much better.  Still a little sore from last night’s routine, but I slept like a rock!

Kubae and I were talking this morning about a restaurant that started and died a few blocks away.  It lasted about 2 months before the doors were closed.  she wondered what they might have been thinking and what lessons we could learn from this.

I think there are several important lessons for anyone starting a business in this story.

First, the old adage, “If you build it, they will come” is no longer valid.  I am not certain there ever was a time you could open business and customers would flock to your doors, but it definitely won’t work today.  Today, your potential customers have a huge array of choices so a small business owner must find a way to get to “top of mind”.  This means marketing.

Second, as I discussed in a prior post, the saying, “Location, location, location” is extremely important for certain types of small businesses, especially restaurants.  In this instance, this restaurant might have had the best Chinese cuisine in the Pacific Northwest.  It wouldn’t matter as it was sandwiched between two other restaurants and on a side street.

Third, whatever you think is the bare minimum you can spend to get the word out, triple it.  That’s right, plan on spending 3 times as much on marketing than you originally anticipated.  Your potential customers are bombarded with thousands of choices a day and your small business competes with those other messages.  Whether you choose to spend money or time, a conservative approach is to plan for more messaging.  A lot more.

Fourth, when in doubt, spend more on marketing.  A good friend of mine, Mike Leitch of VSource Systems, used to joke that the biggest problem he would like to see is having more work than he has time to do it.  With a growing business you can hire to handle the extra work; but if your business never gets going, you will be hard pressed to pay yourself.

Fifth, change your marketing channels.  The first thing you need to do is ask yourself how anyone is going to find out about you.  If you are a restaurant, you need to find out how to get listed on Yelp and Google Maps and any of the other dozen websites that cater to restaurant reviews.  If you are an accounting business you will need to find out how your potential customers look for new accountants.  And then, ask yourself, what other ways can I get the word out.  Experiment with channels, track their effectiveness and if after a few months it isn’t working, discard it for now and try something else.

Starting a business is risky.  If you are ready to take the plunge, then I strongly suggest you create a marketing plan to help you build excitement about your Company.  And if you are looking to expand your business, I strongly suggest you create a marketing plan to help you build excitement about your Company.  Getting more potential customers than you have time to work on is a great problem to have.

If starting a business is in your future, I encourage you to reach out to your accounting professional and create a business plan and budget to help you get through the first 3 years.  If you are looking for an accountant who can help you plan your startup or would like another opinion, feel free to contact me for  your free no obligation consultation and lets see what we can do to help make your dream come true.

Have an awesome Wednesday.