One of the biggest misconceptions in business is that the customers generating the most revenue are also the most profitable. However, revenue and profitability are not the same. The truth is, the customers you think are the most profitable could actually be draining your time and resources. To truly succeed, you need to run your business by the numbers, and that includes evaluating your clients by the numbers as well.
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Let’s break down how to increase your bottom line by 25-50% without adding a single new client by focusing on proper account management. Here are the three key steps you need to follow:
1. Calculate Cost Per Hour For Service Delivery
Understanding the exact cost of service delivery is crucial. Here’s how you do it:
Direct Service Labor Payroll
First, you need to calculate the direct service labor payroll. This includes the salaries of all your service delivery employees. Don’t forget to include yourself if you spend more than 50% of your time on service delivery.
For example, if you have six employees with the following salaries:
- John: $70,000
- Jane: $65,000
- Paul: $60,000
- Bob: $55,000
- Tracy: $50,000
- Will: $45,000
Totaling $345,000 in direct salaries.
Fully Burdened Rate
Next, apply a multiplier to account for the fully burdened rate, which includes payroll taxes, paid time off, fringe benefits, and other additional costs. Typically, this multiplier is around 35%. This means the fully burdened rate is $345,000 * 1.35 = $465,750.
Tool Costs
Include the costs of tools and software required for service delivery, such as PSA (Professional Services Automation) and RMM (Remote Monitoring and Management) tools. Let’s assume these costs total $82,250 annually.
So, the total cost for employees and tools is $548,000.
Utilization Rate
Determine the utilization rate of your employees, which is the percentage of their time spent on billable work. Let’s assume an 80% utilization rate. For a full-time employee, that’s 2080 hours/year * 0.8 = 1664 billable hours per year.
Service Delivery Cost Per Hour
Finally, divide the total cost by the total billable hours to get your service delivery cost per hour: $548,000 / (6 employees * 1664 hours) = $54.92/hour
2. Determine Client Profitability
Now, let’s identify which clients are actually profitable:
Calculate Total Cost Per Client
To calculate the total cost per client, follow these steps:
- Service Minutes: Obtain the total service minutes for each client from your PSA system. Convert these minutes to hours.
- Multiply by Service Delivery Cost: Multiply the total hours by your service delivery cost per hour.
For example, if Client Ironhide has used 52,000 minutes of service: 52,000 minutes / 60 = 866.67 hours 866.67 hours * $54.92/hour = $47,618.93
Calculate Annual Recurring Revenue (ARR)
Next, calculate the annual recurring revenue for each client by multiplying their monthly recurring revenue (MRR) by 12.
If Ironhide’s MRR is $15,000: $15,000 * 12 = $180,000 ARR
Calculate Gross Margin
Subtract the total service cost from the ARR to find the gross margin: $180,000 – $47,618.93 = $132,381.07
Then, calculate the gross margin percentage: ($132,381.07 / $180,000) * 100 = 73.55%
3. Rank Clients And Take Action
Once you have calculated profitability, rank your clients:
- A Clients: Over 65% margin. These are your top-tier clients.
- B Clients: 50-65% margin. Identify inefficiencies and move them to A.
- C Clients: 35-50% margin. Decide if you can move them to B or let them go.
- D Clients: Below 35% margin. Consider doubling/tripling prices or introducing them to a competitor.
Actions:
- A Clients: Maintain and enhance relationships.
- B Clients: Address inefficiencies to improve margins.
- C Clients: Evaluate for potential improvement or phase out.
- D Clients: Increase prices significantly or transition them to competitors.
Implementing Changes
Implementing changes to improve profitability involves a strategic approach:
Raise Prices Strategically
For clients falling below your desired profitability threshold, consider raising your prices. This might seem risky, but inflation and increased costs justify the price hike. Many clients will understand and accept the new rates, especially when you position it as a necessity to maintain high service standards.
Example: If you decide to double or triple your prices for D clients, you might fear losing them. However, many will stay because they value your service quality and understand the broader economic context.
Address Inefficiencies
Analyze where you are spending unnecessary time and resources on B and C clients. This could involve optimizing service delivery processes, leveraging automation, or adjusting your service agreements to ensure you are not over-committing.
Example: Review the services included in your agreements. Are there areas where clients are over-utilizing your resources? Adjust these to align better with your cost structure.
Optimize Service Delivery
Improve your internal processes to reduce the cost per hour of service delivery. This could involve better training for your staff, investing in more efficient tools, or revisiting your utilization rates.
Example: If your current utilization rate is 80%, find ways to increase it by ensuring your team is consistently engaged in billable work. This could involve better scheduling, more proactive client management, or reducing downtime.
Optimizing New Client Onboarding
Setting proper expectations with new clients from the start is crucial for long-term profitability and satisfaction:
Present Comprehensive Offerings
When onboarding new clients, always present your most comprehensive and premium service offerings. This sets a higher baseline for what clients can expect and are willing to pay.
Example: Instead of starting with a basic service plan, introduce new clients to a premium package that includes all essential services and potential add-ons. This ensures that new clients understand the value of your services from the beginning.
Set Clear Expectations
Ensure that new clients understand the scope, costs, and value of your services. Transparent communication about what is included, what is extra, and what they can expect in terms of response times and service levels will prevent misunderstandings and undervaluation.
Example: Provide a detailed service agreement that outlines all the services included, response times, and any additional costs for extra services. This clarity helps prevent disputes and sets a professional tone.
Leverage Effective Marketing
Effective marketing and a solid sales process are critical in setting the perceived value of your services. High-quality marketing materials, case studies, and client testimonials can significantly enhance the perceived value, making clients more willing to accept higher prices.
Example: Use case studies and testimonials to highlight how your services have positively impacted other clients. This builds trust and showcases the tangible benefits of your services.
Conclusion
Running your business by the numbers and focusing on client profitability is essential for sustainable growth. Start implementing these strategies today:
- Calculate your service delivery cost per hour.
- Determine client profitability.
- Rank clients and take appropriate actions.
By following these steps, you’ll not only increase your bottom line but also create a more efficient and profitable business.
Remember, conquer your numbers, and you’ll conquer your business.
