Six Steps to Combat Eroding Margins

It's worth repeating especially in a down economy....

Six Steps To Combat Eroding Margins

1. Analyze the lifetime value of each potential customer. Look at overall impact of making particular types of sales, and invest sales resources in only those that have the best chance of driving profit in the long term. In our experience, those customers most likely to be won over by price concessions rather than other factors tend to have the least long term value. The desire for rock bottom pricing doesn’t go away (so follow-up contracts don’t recoup upfront investment in winning this customer), and their focus on price is an indicator that they discount the unique value your firm can offer. It is your return on customer acquisition costs that matter, not the total number of customers. If the return for each customer is positive vs. the investment required to get them, your business will thrive.
2. Differentiate based on added value, not lower prices. Winning customer through deep discounts kills the customer’s value to you forever. Your customers expect you to be able to articulate your unique value.
3. Sell solutions to specific business problems, not technology. Selling solutions to business problems makes it easier to price by the business value of the solution, rather than the cost of the technological components that are part of the solution.
4. Provide discounting guidelines. Discounting works in the long term only when discounts are tied to corresponding changes in value delivered or costs. If a customer pushed for a discount, consider changing the offering so that it costs less to deliver, by taking out something that a customer doesn’t value. For example, delaying service delivery several weeks to better manage your capacity may lower your effective cost, justifying the discount.
5. Align sales incentives. In the end, a salesperson’s performance will follow their incentive structure, so make sure their bonus structure reinforces the above strategy. Consider a rolling 90-day sales view, rather than quarter to quarter. By constantly looking at the last 90 days, you can see performance trends. The end of a quarter becomes less ‘make or break’ for your salespeople, and there are fewer transactions in the short term that can hurt the long term.
6. Invest in sales training. To deploy this approach, salespeople must be taught to articulate the value of your company’s offering, and differentiate it from competition. The better the sales force can do this, the higher the win rate against competitors competing based on price. Most importantly, teach salespeople to respond to customer’s requests for price reductions by rearticulating value.

All of this is easy to say, but can be hard to do. Behaviors are deeply entrenched, and in a competitive bid situation it is hard to get past the mentality of winning the business regardless of long term cost. The steps above reduce the discounting-first mentality, and can lead to a more profitable customer base.

Protecting your Business in Today’s Economy?

Observing the gloom and doom which is manifest in today’s financial markets, particularly in the financial sector, you may wonder what impact this will have on your client’s expenditures. It is unknown how much longer the present financial shakedown will continue and how many additional banks will experience failure. That being said, you might also want to ask the question “What impact this will have on my business beyond customer spending?” Below are several items to consider and steps you might take to avoid headaches down the road:

1) Protect Cash Balances in Excess of $100,000

The Federal Deposit Insurance Corporation (FDIC) insures depositors up to $100,000 per institution. If you have or carry balances greater than the $100,000 in a particular institution and that institution happened to fail could your business survive? Consider using Certificate of Deposit Account Registry Service (CDARS). It is a convenient way to enjoy full FDIC insurance on deposits of up to $50 million. Select financial institutions can offer CDARS because they are members of a special network. When you place a large deposit with a network member, that institution uses CDARS to place your funds into certificates of deposit issued by banks in the network. This occurs in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC insurance. For more information on CDARS go to www.cdars.com

2) Preserve and Insure Available Lines of Credit

You currently have a Line of Credit which you may or may not need to use. As Banks start to respond to the current market conditions they will tighten their credit extension policies, lower credit limits, in some instances withdraw from certain markets (geographies and/or market sectors) and call or cancel lines of credit. It is a prudent course of action to always have two or three suitors competing for your business. Look at vendors as alternative lenders and push them for higher credit limits based on your payment history. Investigate whether or not any of your strategic partners have captive finance subsidiaries. A captive’s primary business object or charter is to promote the flow of the parent’s goods and services into the marketplace. If you do not have a relationship with a captive finance subsidiary, then you should consider establishing one.

3) Safeguard Your Banking Relationship

When was the last time you met with your banker for no particular reason other than to say hello and keep them posted on your business’s health? Bankers still have lending requirements and can never hear enough good news. Invest in the health of your banking relationship by spending quality time with your banker. Additionally bankers routinely move between jobs and are always looking to carry solid relationships with them.

4) Update Your Credit Policies and Customer Credit Limits

Do you have signed Purchase Orders, Statements of Work, Customer Agreements, Security Agreements and UCC-1s (A UCC-1 filing will record and protect a secured party's interest in the collateral) in place for all of your customers? When was the last time you updated your credit application, reviewed your credit extension policies or obtained and studied your client’s financial statements? You should consider having your legal agreements reviewed and updated by outside counsel due to continued changes in laws and regulations. Encourage your counsel to use a “Plain English” style in order to avoid wasted time due to your painful explanation of unduly structured legal language to your clients. Consider filing UCC-1 statements with your most material clients. Consider a courtesy collection call with your clients ten days prior to the due date of an invoice. This can be done under the pretense of customer satisfaction, sets their expectation as to the due date and seeks their affirmation of timely payment.

5) Consider Third Party Financing Alternatives

Do your customers always pay with cash on a timely basis for all their purchases? More likely they do not. Consider exploring third party financing such as a leasing or third party billing services provided by your strategic business partners and/or their captive finance subsidiary. It is a convenient and useful way to spread your collection risk outside of your business.

About the Author: Warren R. Turner is the Managing Partner of Cardinal Points Group. He coauthored and teaches “ Dancing with the Elephant, Managing a Profitable Services Practice”. The course has been delivered to over 4,000 VAR and SP business owners in 25 different countries. He may be reached via email at wturner@cardinalpointsgroup.com or by telephone 770-913-0048.