Cost Efficient Mediocrity

pennies-15402__180

Penny Wise?

Running your business, be careful that the cost savings you experience may move you rapidly to cost-efficient mediocrity. Within the context of many organizations, decisions from the top can move an organization toward a more “efficient” business model that is “mean and lean”. Yet they undermine the fundamental service aspect of the business so that cost savings turn out to be easy cuts that paralyze the vital organs of the business and contribute to its demise.

This pattern has been repeated many times in business models that are driven by cost accounting without the vision necessary to see the impact on the consumer and slow progression to the organizations demise. Unfortunately, by the time it is clear that the cuts which were critical to satisfy the “bean counters” mandates, they have taken the company into a death spiral which is discovered too late.

A True Story

Years ago while I was in sales, I had dealers who were instructed by their accountants to hold the product (tractors) until they made 20% a margin on each piece of equipment. The accountants explained to those dealers that it was essential to cover their overhead. I could visit those dealers and find they would sit on inventory for 6 months or more and pay interest to cover the floor plan costs. In the end, if they sold it, they may have held their price, but their margin continued to shrink as they held out for their price and paid floor-plan interest.

Other dealers took the stand that if they got a piece of equipment in their door and could turn it around and make 5% within a week or two, they sold it. It was much less than 20%, but it was almost pure profit. What was interesting was that the customer sought the discount on the tractor, but would pay full price on the attachments. And the dealer who held out for full price ended up dickering over the implements with the customer so that they often ended up making less on the implements and less on the overall sale than the dealer who discounted the primary object of the customer’s attention. The dealers who discounted sold more product, sent more equipment out into the field, which ended up getting more customers. This was because they had a reputation of being willing to “deal”. The dealers who held out for price also had reputations. . . .

The dealers who held out for price were the mediocre dealers in every case. The dealers who discounted were volume dealers who got wholesale discounts as a result and made considerably more than the dealers who held out for their price.

Now, I am not suggesting you discount your services. In fact, I would argue the opposite. But to succeed, you will need to help your clients understand the value of your services and be willing to do value billing or use set fees as opposed to hourly billing. If you don’t know it, that is the trend and one that the clients appreciate because of predictability. Look not at the initial pricing, rather look beyond that to the total package that the client may purchase in the end and the future business that that satisfied client may refer to your office. Some of the best sources of business are your existing clients and referrals that they can bring in. And value billing coupled with efficiency using technology can actually bring in more income than hourly billing.

How many tasks can you accomplish using document assembly in an hour vs what is the maximum hourly rate you can reasonably charge for your services? Think about it – value billing will win out almost every time.

 

 

Posted in Uncategorized.

Leave a Reply

Your email address will not be published.