Alignment

Growing a business can be challenging.  It doesn’t help that there are lots of books and internet articles explaining how so-and-so did it with no investment and no effort.  Those stories might be inspiring, but they don’t always tell you the whole story.  What those stories aren’t telling you might cause you to chase a plan for longer than you normally would.  No small part of that has to do with alignment.

Alignment in business is all about making sure your marketing, your message and ultimately your assets all support your core business.  A great example of this came from a company I was assisting as an outsourced controller.  At a strategic retreat, the leadership decided it wanted to start going after larger commercial construction projects.  This was a great idea but it meant more than just saying “here we are.”

First we had to deal with the fact that most manufacturers did not adequately plan for their liquids and gas piping.  And yet, in order to do the job well, the piping needed to be planned.  Client’s did not have specialists on staff to handle this nor did most architectural firms.  Don’t get me wrong, they had a good idea of how it needed to be, but some things are highly specialized.  To be successful the Company needed to invest in an engineering team.

The engineering team needed the right tools.  Auto-cad, plotter and a quiet place to do the design work.  Not to mention a large space where the team could meet with clients to review the plans and requirements.

The company then needed to get the message out to the construction community.  The company’s sales team needed to be armed with information to help clients in their selection process.  We had to successfully educate them that lowest bid is not always the most appropriate bid.

Finally, the company needed to address its pricing model.  There was an obvious disconnect that was hamstringing the growth and adoption of the new service.  The company was moving from a repair and maintenance service to a construction service

but management was still using their service rate to try and price the construction.

rate analysis

The company was pricing local jobs about 20% higher than out of town work.  This was driven by two issues – first daily mobilization from an office no nearer than 15 miles from the nearest likely construction site and second applying the service rate to the total time.  The service rate worked well for service – it required some technical skill to diagnose a problem with a gas distribution system and the client expected to pay for the “emergency” nature of the call-out which included travel time to get to the job.

This doesn’t always apply in construction.  And because of this, the company was not completely aligned.  Local jobs were being lost and the company had work coming out of its ears hundreds of miles away.  The crews were tired of being away all of the time and it was harder to manage if things went sideways at the jobsite.

So, the sales manager, the engineering manager and I sat down and figured out how to get aligned.  The estimate was redesigned to charge a lower rate for mobilization in town.  The engineer generated a bill of materials for every job – one problem was that local jobs were not getting the same supporting documents since it didn’t seem like a problem to run around town and pick up parts when the crew was local – all of which allowed the company to still make a substantial profit on jobs, since the company was now able to land local contracts which reduced wear and tear on vehicles and employees.

rate analysis rev 1

As your company leader, always make sure your entire business is aligned.  The greatest service in the world won’t make you a dime if customers don’t agree with the pricing.

The Traveling Salesman

I love telling stories about the good, and not-so-good, things clients have done over the years.  Actually, to be honest, I like the not-so-good stories as they are educational and hopefully stop others from going down a path they might regret.

Part of my role is technical compliance and final reviewer of tax work.  My responsibility is to make sure that any significant tax position taken was backed up by adequate documentation and research.  I couldn’t stop clients from taking risky positions, but I could stop the firm from agreeing to dumb things that we couldn’t defend.

One tax return comes to mind.  It was a new client and I was having trouble getting my head around his small business.  It was on Schedule C and reported a loss of about $100,000.  He had a W2 for about $150,000 so was getting about 30K back in refunds.

What stood out most were two items.  Negative gross profit of $60,000 and an RV on the books which generated about $25,000 of depreciation.

Negative gross profit, by the way, comes from when you sell your product for less than the total cost of those products.  In this case, he had revenues of $12,000 and Cost of Goods sold of $72,000.

I wouldn’t sign off and the partner wanted to know what my concerns were.  I asked him if he talked to the client about his “business” and the answer was, “Not really.”

So, I was indulged and the client came in for a meeting.  I asked him to explain how his business worked.  He bought product, he told us and traveled up and down I-5 stopping at county fairs to sell his product.

Interesting.  We didn’t notice any fees for space rental at any events, though.

That’s because he parked his RV in the lot and sold on the outside.  Ok.

How many customers did the $12,000 represent?  We inquired.

One, he replied.  One client.  So what was the $4,000 of meals and entertainment?

He took this client out to dinner and to various ball games and other events because of their loyalty.

Who is this client? we asked dreading the answer.

His wife.

Yeah.  He and his wife took the summer off to travel and he bought stuff and he “sold” it to her.  Because she was such a loyal customer, he gave her a substantial discount on buying the stuff she “wanted”.  And he rewarded her loyalty with dinners and events.

Now, I know you are thinking BS, I am making this up.  I swear I am not.  Public accountants get some of the most entertaining and too-good-to-be-true stories out there.

Our main problem was that his prior accountant let him get away with it.  We suggested that he face the fact that on audit, the IRS would probably say this was a hobby (we didn’t bother to let him know it was probably outright tax fraud) and to protect the prior losses, he should shut down his business and maybe consider starting it up in 2 or more years after a cooling-down period.

He said no thank you but appreciated our advice.  He paid us for the work we did, took his “records” and went to find another tax preparer who wouldn’t be so nosey.

The moral of the story?  You may have heard the old saying that “Pigs get fat and hogs get slaughtered”.  Sometimes, it doesn’t pay to push the boundaries of acceptability.  He may never have been audited – hell he might have even been turned down by the next dozen tax preparers and decided he wasn’t going to win and dropped it – but it was still an extremely risky position to take and there was no real defense.

There are ways to make a business work while you travel.  But the odds are, the bigger the loss, the greater the risk, so documentation is vital to winning.  So, as you prepare for the end of the year and are looking to work with someone who wants to help you be successful, consider an accountant with integrity and who is willing to help you get everything right to protect you from major risks.  If you need the name of one, feel free to write me and I will send back the contact information for one or two to help you.

Have a great Tuesday.

 

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.