Archive for October, 2010
One of the hardest questions that a contractor, freelancer or a small business owner has to answer is how much to charge for your product or service. Even if you manage to initially answer the question, it’s not something you can set and walk away from; pricing needs constant reviews to make sure you are making a profit, that you are generating business, and that the competition is not taking your sales.
There are all kinds of ways to work out the cost model for your product/service, depending on the uniqueness of your offering, and how you want to generate revenue. Whilst not every option will work for every service, the following are the most common methods of working out the sales cost for business:
Cost by Return
The most common method is the cost by return – how much you need to sell a product for and by how many to cover the costs and make a profit. For contractors or freelancers with a service, this is normally your yearly costs (salary, tax, etc) divided by the number of workable days (242 when you take out weekends, public holidays and 4 holiday weeks a year). For manufactured or web based products this is more of a tricky calculation as you need to get a balance between number of units sold multiplied by a price, to see if this covers the material/creation costs to provide a profit.
Cost by Competition
Another simple way of pricing a product or service is to cost by competition; what others are charging for a similar product or service. Again, for contractors or freelancers this is easy, as the typical day rates will be listed by agencies or job sites. For small business, it can be a bit more tricky as it means speaking to competitors to see what features their version has and its price. Also, it can be difficult to find a competitor with a true like for like service, but it can give you an indication of what ball park figure you need to charge.
Drop Your Pants
Not sure where the business term of “dropping your pants” comes from, but it basically means selling as cheap as you can in the hope of winning lots of business and therefore make profit through quantity of sales. One disadvantage of this approach is that no matter how cheap you can sell for, there will always be somebody cheaper. Plus, some customers will actually stay away from your products through a drop in perceived value.
Ad Generated Revenue
This is the principle of the internet and smart phone applications – provide it for free with lots of advertising, in the hope that you will get sufficient traffic which will lead to a relatively high number of advert clicks which in turn generates revenue to cover the costs. Personally, I have never met anybody who has made money from this method (I would really love to hear from somebody who has), so I consider this a very, very high risk gamble.
Freemium products are becoming more and more common. Freemium is where your product comes in two forms; a free to use version (with or without the ad revenue generation as described above), and a premium version with more bells, whistles and functionality. The idea is that people use your product for the free version, become hooked and some will eventually pay you for the premium content. With this method, more thought needs to be given in the cost of the premium version as not only do you need to work with the cost/conversion numbers, but you also need to factor in the features you add (or hold back) to differentiate the two modes. Some companies even make this more complex by providing different scales of premium content. Whilst Freemium is highly used now for a lot of products and services, get the numbers wrong (and there are a lot of numbers to juggle) and your business will not last long.
At the other end of the pricing spectrum is the premium cost offering. A lot of brands actually market themselves as a premium product or service, with one expensive price tag in return for an implied quality above and beyond the competition (look at brands such as Stella beer, Twinings Tea, BMW, etc). If your message is strong enough, this can be a good tactic as it means you need fewer sales to make a profit, and will not get distracted by the customers who will spend less money.
Need First Curve
The Need First curve is ideal for companies with very exclusive or sought after products. The idea here is that on launch, the price is high as people demand the service and MUST have it regardless of cost. Then, once the must-haves have been dealt with, the price is generally lowered over time with the excuse of ‘cheaper production costs’. Brands that have used this in the past include Apple (iPAD, iPhone, etc), Sony with the PS3, Microsoft with xbox etc. If your product or service allows for this curve, then congratulations.
Tempt in Curve
As the name suggests, prices are set cheap for new customers by the way of promotions, discounts and trial offers, and then raise once they are hooked and know the quality of your product. A large number of both product companies (i.e, printers which are cheap, but have high ink costs) and service companies (i.e, Sky television, free box for new customers) use this technique.
Ask the Customer
The method of costing that I like more than any other is asking the customer. Its simple – find a target customer (or a handful), put a price structure together and ask them if they would pay. Feedback from customers is the best way to find out if the price structure will work – if they tell you its too expensive, ask them what they would be willing to pay.
Try Different Mixes
But if in doubt, why not try all of the above, and mix it up. If you have a web site with your price list and a ‘buy now’ button, have different web page versions to rotate and see which makes the best sales/profit margin. If you are making real face-to-face sales, try some quotes as low ball, some as premium, some with an introduction offer, some with your calculated return price, and see which sells and makes money.
You want a solution developed? You can have it delivered quickly, you can have it delivered cheap, and you can have it work without problems. But you can only pick 2 of the 3.
Source of Quote: Unknown.
Over the last few months, I have been actively looking to grow my small business using a lot of the techniques previously detailed in this blog. I did this because I could see things drying up, so wanted to make sure there was work for the future. Unfortunately for me, the work didn’t in fact dry up, and I generated more work with the result that I now find my company with too much work to do.
Don’t get me wrong, it’s a very nice position to be in, but at the same time, it can be stressful with so much to do, so little time, and so many expectations set. Many freelancers and small businesses live in a cycle of famine or feast; periods of time with either too little work or too much.
So what can be done to smooth over the work bumps and create a more balanced schedule?
The Lead Time Tactic
Have you ever wondered why when you purchase goods, some say “Allow 28 days for delivery”? It’s because the seller does not actually have the goods you want, so you pay and they make (or buy in) to order, which has a lead time. The same trick is used by big companies who detail in their quotes for work standard lead time to development start (i.e, “Any quotes accepted have a current lead time to start of 9 weeks”). Giving a lead time can set an expectation. The advantage is that everybody knows where they stand (and you can always do it earlier if you have slack time), but the disadvantage is that if the customer really wants it now, they may go elsewhere.
Sometimes, being honest can be the right approach. To say something like “I would really like to work on this project, I am just finishing something else, but give me 4 or 5 weeks to wrap this up and I will get started” has the same advantages and disadvantages as the Lead Time Tactic. However being honest may mean you can sleep better at night.
Outsource or Extra Resource
Where you are overworked and the customer can’t or won’t wait, it may be worth looking at outsourcing or hiring temporary extra staff. Yes, this has a cost, but as long as the cost of the staff is below the cost to the customer, its still profit and far better than a lost sale.
You may be tempted to reduce the quality of the delivery to reduce development/production times and so reduce the amount of time you need to spend on a project. This can be a risky option if the end delivery is unacceptable to the customer, not fit for purpose, or at the end of the day the customer won’t pay.
A middle ground between the lead time and the lower quality is a phased delivery. By breaking the project into stages, and putting a slightly exaggerated customer review phase between phases (review, beta testing, etc), it allows you to phase the project over a longer time period whilst still delivering chunks to the customer. This can also have the advantage of appearing to follow a good practice of alpha, beta and final releases of a delivery for customer approval/feedback at each phase.
Burning the Midnight Oil
Of course, you may prefer to try to do it all by working all hours on as many projects as you can, or working extended days to complete projects as quickly as possible. Whilst this may work for short bursts of time, it is ultimately unsustainable in terms of personal health, relationships and quality of deliveries.
Discounts for Delayed Starts
Whilst customers generally come to you because there is a demand for your services NOW, they may be tempted to delay the start and delivery of the completed products for a discounted day or project rate. Whilst the discount needs to be sufficient to be tempting for the customer, and it of course means less cash for your company, it does mean that you have better control of the scheduling of work.
Last week, I attended a sales conference for small business owners. About sixty of us attended the conference. As part of this event, twenty people were selected to stand up and give their elevator pitch and then the rest of us scored their pitch for impact. This little exercise was used by one of the guest speakers to illustrate a powerful way to get your foot in the door.
Out of the 20 elevator pitches given, most rated a 5 or a 6 (nobody wanted to give anybody a 2 even though there were some shockingly bad ones), but 2 or 3 stood out as 10s.
The difference between these winners and the rest was simply that the best ones included a metric.
Most of the elevator pitches went along the lines of…
“Hello, My name is Sam Smith of Such-and-such advertising, and I help small companies just like yours increase sales through targeted awareness campaigns which result in more quality enquires”
Nothing wrong with that – says who he is, the company he works for, what he does and the results he can achieve. As I say, most people rated this type of pitch a 5 or 6 out of 10. But then compare it to a 10 out of 10 result….
“Hi, my name is Sam Smith of Such-and-such advertising, and I help small companies just like yours increase sales by, on average, 30% a year through targeted awareness campaigns which result in more quality enquires”
According to the marketing and sales consultant giving the presentation, adding the one simple average metric gives a massive boost to interest through:
- Causing the listener to pay attention – numbers call for mind action, whilst words can just wash over us
- Makes the listener mentally project the same metric onto their own situation. This means that they start to sell to themselves after you stop talking
- Gives a subconscious reassurance – its not just a casual claim in the pitch, but a fact based on numbers
- By providing an average, this leads to a listeners best case scenario planning – averages mean that there will be high returns AND low returns, but human nature means we always project the best
Of course, you really need to have some facts to back up the metric you quote, but even if you base it on just your last completed project, it adds value and is more likely to get you to the next step of the sales process.
640K of computer memory is more memory than anyone will ever needBill Gates, Microsoft, 1987
Let me take you back. Way, way back to the early 1980’s. Here in the UK, Sir Clive Sinclair introduced the first home computers called the ZX80 and ZX81, and these computers both came with a staggering, massive, huge, 1k of memory. 1k!!! That’s 0.00009 of a megabyte!! Now with 1k of memory, there was not much you could do, other than to learn how to program very, very efficiently. With that 1k of memory, programmers created chess programs, accounts programs, spreadsheets, games and a whole lot more.
Today, we are spoilt by super fast processors and many megabytes of memory – even on handheld phones. However, this growth in power means that programmers have become lazy – as long as it runs and looks nice, programmers generally don’t care about how fast it runs, how much memory it takes, or how many human actions (mouse clicks, etc) are required to carry out a task.
One of the worst offenders is Adobe with the Acrobat PDF reader. If you want to develop bad software, then follow the Adobe example, and you too can have software which is frankly awful. Just follow the following Adobe steps:
- Have software which takes forever to start, just to view a tiny PDF document
- Because the software takes so long to load, create nice startup splash screens to show the names of the lazy programmers who can’t be bothered to speed up the application by reducing its size
- Have the software so full of bugs, that it needs to be updated every 2 or 3 days
- Now, create an auto updater routine, which runs all the time of the PC, and takes up even more computer resource
- Install the auto updater as part of the core product, but don’t tell anybody its included, just install it anyway
- Even though the software just displays documents, when the auto updater runs, make sure it demands you restart your computer at the end of the install. After all, the updater is more important than the end users other work
- Just in case the users does not want to restart their computer, have a ‘later’ button, but now have the updater remind the user every hour until they are nagged to death
- Whenever an action is required, make sure that the user has to click as many buttons, use as many menu options and press as many keys as possible to perform that action – the extra effort required will ensure they understand the complexity of the software (Microsoft SQL Server Enterprise Manager actually wins the award for the most steps to perform one action).
- Even though other developers create faster PDF viewers that load 20 times faster and are 40 times smaller, don’t ever acknowledge they exist. Just continue to make your original version slower and bigger.
As regular readers of this blog will know, I am massive fan of business automation. Any tool, technique or process that I can use which makes doing business easier makes me happy – the more automated my processes, the less time I spend on them and the more time I have for doing productive (chargeable) work.
One of the newest tools I have found is called Watchy (or Watchyapp if you use the twitter tag). Watchy is another Freeagent bolt-on web based application, and deals with timesheet reporting. Whilst Freeagent itself allows the recording of time spent on projects (and subsequent billing to customers for the time and associated expenses), it does not provide any form of customer portal to view the timesheets. That’s where Watchy comes in.
Once connected to the Freeagent system, Watchy will connect to your Freeagent account on a regular basis and will pull in timesheet and invoice details and then organise the information into project views. You can then create customer accounts so that customers can login to their own dashboard to view invoices, expenses and time spent on their project.
Watchy is still in beta development, so there is currently restricted access to beta testers, but full public access is scheduled for the next few weeks. They are also busy making amendments, changes and improvements, so I am sure this will develop to become the perfect customer time and billing portal as the product evolves and matures. I hope this will include timesheet authorisation and different reporting views.
As a freelancer or small business, it is very common to be asked to sign a non-disclosure agreement. A non-disclosure agreement (NDA), also known as a confidentiality agreement, confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement, is a legal contract between at least two parties that outlines confidential material, knowledge, or information that the parties wish to share with one another for certain purposes, but wish to restrict access to by third parties.
When you are working for or on behalf of a client, they will generally want to protect the data, processes, and systems they have in place. The NDA is the most common way of doing this, and as long as you read through what you are signing, you should be generally happy to agree to and sign such documents.
However, what happens when you hand out work to somebody else? What happens when you outsource some of your work, or work with a virtual assistant (VA), a graphical designer or any other professional? Should you yourself use an NDA agreement? The answer is.. when in doubt, use an NDA.
As a freebie, you will find below the NDA that I use for most situations. Its all been legally checked and verified, and is a nice neat version of a 2-way NDA. That means, it protects you as somebody who is supplying the requirement, and also protects the person providing the service. Please feel free to view, print, download and use.
It’s a quickie from me today as I am tied up in an extended discussion which I want to share, because sooner or later, we are all going to hit this problem – and that is… what platform is the future???
Lets say you come up with an idea for something to do with computers – an idea for a product or a service. This product or service say needs some software or a web site – so which way does the future lead? In the 1980’s and early 1990′s, it was easy.. it either ran on a PC for single user systems (spreadsheets or word processing) or run as a terminal service on a mainframes for multi-user systems (accounts, payroll, etc).
Not now everything is much more complex. Through advances in technology, you have so many choices. You have client applications (with a sub choice of Windows or Mac), or web applications (with a mad variety of development options) and finally mobile options (with sub choices of Android, iPhone/iPAD or Windows7 mobile).
Of course, many companies make choices to either support multiple versions of their applications with multiple code sets doing the exact same thing, or try to provide web based versions that are in some way usable on mobile devices including the iPAD tablets. The first option is impossible to maintain (unless you throw money at the problem), with the second option being ultimately unusable (or deeply disappointing).
Which is why I also believe that the big guns of software are ultimately doomed. Yes, players like Microsoft, Adobe and Oracle will survive for a little longer because of their big name products (SQL Server, Photoshop, etc), but the smaller brands will take over, brands who are happy to adapt to the new technologies or provide cheaper/free replacements.
Of course what ever the choice, the fact that most people expect the product to be free is always going to be the big consideration (when is the last time you paid for a phone app, or a web service?). Which is why I am happy to provide feedback, sit on panels to consider the future, but also happy for other people to risk their money on picking the platform. Which ever platform they pick, I am of course more than happy to support them.
If you have ever been on safari to Africa or India, you will have experienced what is called the mid-day lull. For 2 hours either side of midday, all the wildlife just vanishes. The reason is that it’s also the hottest part of the day, so the herbivores go to rest, and with no animals to catch, the carnivores also take the time for a sleep. But come the dusk, and the animals are active again – the antelopes and zebra hit the watering holes, and the big cats are nearby, ready to make a kill.
Darwin wrote that “Everything organic works in cycles”. Of course we are all familiar with our own cycles of life, most of which are set by society (such as when we start work, end the day, go to bed), but there are many other cycles that we can use to our benefit. Such as buying cycles.
Lions, Tigers, Leopards and other cats know that there is no point in wasting time and energy trying to catch prey that is just not there. They study the cycles of the other animals, learn where they go and when, and go to the killing grounds at the right time. In the same way, your customers will have cycles which mean that there are better times to chase for work, better times of the year to make special offers, and better times of the day to email and make calls.
By doing some quick analysis of your existing customers, looking when they made enquiries for information, when quotes were raised or approved, when invoices are generated, and even when help is requested, trends and cycles are easily spotted. This can then be used for more informative marketing decisions.
For new customers, cycles can also be used. All industries have their own cycles (beyond the Christmas and school holiday dates). Some are based around industry events (major trade shows, such as E3 for computer games, or Ideal Home for home improvement), some are based around set dates in the diary (such as tax deadlines or budgets) and some are effected by news events. Regardless of the reason for the cycle, if you can spot and take advantage of the timing, this gives you a significant sales advantage.
This morning I had a fairly heated email exchange with a freelancing friend who accused me of being confused in what I do. In a nutshell, his email stated “How can you run a web blog about freelancing? You’re not a freelancer”. Hmmmmmm. His argument was, because I worked for a Limited Company (which I help set up) and we now employed a handful of staff, I was… a business.
To some people, there are clean lines which say whether you are a contractor, a freelancer, an SME, or a fully fledged business. For me, the lines are so fuzzy to make any differentiation impossible. Let’s put it this way…
You may a contractor, and contractors work for a contracted period of time, at a customer’s site. But I have known freelancers who work on a project, at a customer’s office on projects with a known end date – so does that not make them a contractor? And contracts generally start Limited companies for the tax breaks, so they are also a business.
You may be a freelancer – which typically means working for customers on generally fixed price work, on a project. But then, for larger projects you may outsource elements to other people, or team up to use other peoples skills, and if its invoiced through one company, doesn’t that make them small business?
So what about me, working in a small limited company, which employees a handful of staff – some permanent and some not so (you pick whether they are contractors or freelancers). My company performs work in the same way as freelancers- for customers, maybe supplying one person, sometimes a small team – so are we not freelancers?
The reason I raise all of this (apart from the fact that I got a little annoyed in my friends branding accusations) is that at the end of the day, however you want to brand yourself, if you have made the commitment to go it alone that you have the right to call yourself whatever titles you want – even if you do end up working in teams for some projects.
So throw away the titles, the slots, the boxes and the stereotypes. Instead, enjoy the freedom that being a contractor/freelancer/business owner provides.
Regardless of the size of your business, as either an owner or a manager, you need to have a plan and a goal for your business. Initially, this goal may just have been to start or manage a business (and get you out of the rat race), but once your business is up and running, you need something else to keep you motivated and moving forward.
When I meet other owners of businesses, most have business goals that they have set themselves. Clearly, with the economic environment being what it is at the moment, a lot simply have the goal of staying afloat, but many want more than just survival. From experience, business goals tend to run in phases….
Phase1 – The creation. Creation of a business is the biggest leap, either by setting up your own business or joining a small existing company, this phase is leaving the standard ‘working for somebody’ job and going it alone. Most small business owners and managers complete this phase normally not by small steps, but by a push or a big jump. Redundancy seems to be the biggest push owner/managers get.
Phase2 – Survival. Once a business is up and running, for the first year or so, the game is survival – to get enough customers and money in to keep afloat. It’s as simple as that.
Phase3 – The Money. Once a business has been running for a few months through to a couple of years, then it becomes about the money – making as much as possible. A lot of companies wind up stuck in this phase, including a lot of multinationals. If money is what drives you, then maybe this phase is the natural place for you.
Phase4 – The Goal. And this is the hardest phase – deciding what you need, what you really want, and what you want your company to become. Some people I have met have wanted to just run a business and end up not doing any actual work, some want to have a business that only takes 2 days a week of their time, some people want their business to be the best in a market, or supply the best quality product or service. Money clearly helps to allow your business to reach the goal you set, but in order to have a really successful business (from your point of view), you need to define the goal and work out what you need to reach that goal.
For me, my business goal is for my company to supply the best products and services it can, to assist other companies in reaching their goals, to provide honesty and integrity where others fail to deliver, and to eventually allow the company to feed into my own personal retirement goals.
Now and again, you need to step away from working in your business, and spend a few hours or a few days working on your business – working out what phase you are in, what you need to do to reach the next phase, and make your business what you want it to be. Doesn’t matter if you run a one man consultancy company, a partnership, or like me, a small business which employees a handful of staff – you need to take the time.
So why not schedule a few hours in your diary to work on your business today.