I’m in year 6 of my company. And in this entire time, we’ve had more good times than bad times.
But we’ve had tough times for sure. All of our wounds were self inflicted, due to us not having a growth plan (or a pricing strategy).
This post covers both.
Times where we had to surf the payables. Times when had to take a few jobs that we didn’t like. Times where we couldn’t support our friends the way that we’d like. Times where we had to start working with someone that we thought may not be a great fit, but had no choice.
Sure, we wanted to get big, but we were doing it haphazardly. Opportunistically. Taking big chances by accepting proposals, and then hoping it worked out. It worked out a lot.
This is what I wish someone had told me when I started. That fast and sustainable growth is possible. That you can do it and stay sane and stable. This plan is made for service businesses & freelancers between $60,000 a year and $2mm. Above that you have a different type of organization, and a different set of needs.
Another caveat. My friend Paul Jarvis talks about how you want to design your life first. And let the amount you want to work drive growth, and not just grow for its own sake. Take that advice (a good summary is here).
The Consequences of Uneven Growth: Staffing, Client Selection & Cash Flow
The big issue was that we had to staff with a gun to our head. And when we have 45 days to deliver something, we weren’t in position to be selective with the design talent that came in.
Perfectly good designers aren’t always a fit at any given company. Morton’s Steakhouse is a well admired company. So is In and Out Burger. Chances are not a lot of operators would be able to be interchangeable, even if the salary was the same. Realize that someone being “not a fit” isn’t a value judgement on them and we’ll get a lot farther.
Plus, it takes time to learn if someone is good at designing, or good at interviewing. Agency services (24 Seven, Creative Circle, TCG etc.) sent abysmal, unqualified, and inept candidates that “checked the box,” but consumed management hours and were well versed and prepared to chew up clock time without producing deliverables. Example: One guy was waiting on assets and didn’t tell us that he didn’t have them for a few hours of billable time. Technically our fault. But still.
Our second consequence was that when you grow you always have to front money before you get a return. Sometimes there would be a long gap. And so we’d have to take other work with inappropriate clients. People that were demanding, or people that didn’t have an interesting product.
This put pressure on cash flow. You had to sell to make things work to fund your obligations, both past and present. It was easy to get out of balance because entrepreneurs are, by definition optimistic.
Without a rubric, it’s easy to get out of whack.
Is Your Business An Inadvertent Ponzi Scheme?
This imbalance can happen easily. Without malice or bad intentions it’s easy to become an Inadvertent Ponzi Scheme. How?
Simple. When you need new cash to meet past delivery obligations – you are a Ponzi Scheme. Now, every business goes through a Ponzi Period. That generally happens at an early stage, when a business is new and only making $10-20k per month in revenue. That’s the gap that you have to bridge with every enterprise.
At that point, the risk is low because it’s fairly simple to cover gaps with personal resources, and there isn’t a situation where a minor event can create a domino chain of death spiral.
When you get bigger the risk becomes much more pronounced. When you’re doing $80k or $100k, personal resources can’t generally close the gap (nor should they). So you become a Ponzi Scheme.
How To Create a Growth Plan For Your Service Business
So let’s say you want your business to have more revenue, and to grow consistently. You have to plan for it to keep yourself on a good path. You want to grow:
- Without overwhelming stress.
- Without ever letting your service standards slip (hopefully by using new people to increase them).
- With a plan to build a company that creates and stores wealth and value.
- Without having to kill yourself to do it.
To do that, you have to plan for growth and not just be haphazard about your future. A growth plan needs to be in place to make this work. Here’s how.
Step 1: Assess Your Delivery Capacity. It’s Everything.
The first thing you have to do is assess your capacity with your current team. How much can you deliver? I mean perfectly with a perfect process that is impeccable in every area. That increases your Net Promoter Score, and makes people become raving fans.
Hopefully it’s more than how much you can easily sell. However, if you have more capacity than ability to sell, in a lot of ways, that’s even better, because your engine won’t be flooded.
Exactly how many units can you deliver and wow every customer without having any stress or friction internally? That’s your current capacity.
Step 2: Schedule Deliveries & Productize Your Service
The next step is to schedule your deliveries. On a calendar. This will have deep business ramifications because it allows you to sell “slots” which make a service business act like a brick-and-mortar with actual inventory. It doesn’t really matter if you have 2 or 20 slots per month. Putting them on a calendar is the thing that matters because they somehow become “real.”
Defining your service-based offerings is making your business into a “product.” Depending on the complexity, we’ll probably want to tighten up the rules a little bit here for what’s offered and what’s not.
Simplifilm currently delivers six projects a month. Three “mid-month” and three “end of month.” This will keep cohorts in rhythm and save us time. This will also benefit our clients because we’ll be able to deliver a coherent (and, we hope, excellent) experience.
Step 3: Create Margins
One of the biggest mistakes we made was a forgivable reliance on “optimum” conditions for delivery. Everyone will do it. Because founders are gung ho about what we’re doing. And because we always believe things will go well.
Margins are vital. Because you can make mistakes. Because you aren’t reliant on perfect conditions. Because there will be both sick days and vacation days that you have to work with. In our case 6 projects per month is right. It allows room for error, and we’re not overly reliant on luck, good fortune, or good clients to deliver. And, if we WANT TO, and if things are smooth, we can consider selling another slot (we won’t for a while).
You need two types of margins. Money margins and time margins. The time margin is more important than the money margin.
Step 4: Increase Prices on A Schedule
Currently, our average ticket is around $11,000 per project, depending on style. Some clients pay less, many clients pay more, but that’s a good working estimate for us. We will soon publish current pricing and talk about how and when we will increase it as we move towards transparency.
But, before you grow your units-per-month you want to grow your prices.
Some targets:
Design Businesses: 50% gross margins.
Consulting Businesses: 75% Gross Margins.
Professional Services Firms: 45% Gross Margins (less if you’re big).
Development Shops: 50% gross margins.
Mileage may vary depending on the type of business you are, but in general you want higher gross margins than your industry average because margins are the store of value and source of stability.
Remember, you are talking about the per job gross margins here. You would consider the following costs:
- Labor (and founder labor counts, within reason).
- Merchant Services (Square, Paypal, Stripe, etc).
- Production Expenses (i.e. stock art, a design library, a plugin).
- Cost of sale: commissions to sales reps, referral fees, some marketing budget share.
- Omnibus Delivery fee: we now charge $350 (internally) per project to cover things we purchase like subscription services. This is charged to “overhead,’ but it’s a real thing. This isn’t seen by the customers as they don’t like complex invoices.
I would raise prices (and service levels) until our margin is exceeding our industry norms by about 10%.
How do you know when to raise prices? That’s the part that this system makes simple. In step 3 we have scheduled our deliveries and productized our service. We have slots on paper 6 months into the future at any given time.
When they are sold 90 days out – we raise our prices by 10-20%. A 5% raise isn’t meaningful enough to bother with, there generally won’t be much resistance. There may be a gap between intake and getting around to this.
Depending on your market, you may want to go through a couple cycles of this before you increase capacity. My bias is to use Net Promoter Score of +50 as a rubric to determine if we’re OK to grow units or not.
There are more sophisticated pricing models. And maybe you could convince me that one would be helpful. But this is what to do.
Step 5: Add Capacity (Or Increase Service Level & Price)
Finally, you’ll add capacity (units) or increase services (offering & price). Adding capacity is simple for us: we just increase adding the # of units we’re doing, and staffing to that goal.
I would recommend keeping the growth at about 20%, or 2 hires per cycle. Generally – whichever is less. Early stage startups may be different. I’d also bring people in understanding that for a 3-6 month period they are going to be making a smaller contribution than they will in the future, so we want to rely on new hires as .5 or .6 of the capacity of a normal hire as they learn the process and systems that you need to be successful.
Finally. Putting It All Together
The net-net bottom line for a growth plan is that it has to fit with what you want for your business. There is risk – both in too many or too few units per month. On our end, we won’t work when any given client is more than 25% of our total revenue, even though it temporarily curtails our growth.
Now let’s also consider what’s possible. On this program, we can grow about 20% per quarter. That means every 3 quarters we effectively double in size (if we want to). That’s fast enough to be a great growth company, especially for a service business.
The other way we grow is via recurring revenue.
For Other Reading:
Low Quality Clients – Jim’s Marketing Blog
Service Business Growth: Entrepreneur Magazine
How Agencies Can Grow- A well reasoned counterpoint to this piece.