Creating Business Value, Part I
Over the years I have been blessed with several very deep and meaningful friendships. Few have meant as much to me as my friendship with ‘John’. We have that rare kind of relationship where we meet often in both social and business circles. We have shared many of our life stories as well as the ups and downs of our businesses. We have talked and prayed together for many years over both small and large events.
During the past year I have become very concerned as I realized that John has been struggling to stay afloat in his business. He has slowly admitted that several of his biggest clients have gone out of business in the last 18 months. Several other large clients have been slow to pay their bills. And the worst is still to come, as one of his major accounts is on the verge of becoming insolvent.
So, at our last meeting over a wonderful breakfast, we put our heads together to come up with some ideas on how to increase the value of his business.
It was evident to both of us that John’s business needs a serious shot of ‘increased revenue’ right now. There are only four ways I know of to cut thru everything else and get that ‘shot’…
- Get more customers or clients
- Get your customers to spend more per purchase
- Get your customers to spend money with you more frequently
- Get your customers to stay with you longer (so they spend more lifetime dollars with you)
With that in mind, I offered my help, and we took up discussion to develop a logical, systematic action list to immediately increase his business revenue. John’s clients were all very typical of the 20/80 Pareto Principal. 80% of his revenue was being generated by 20% of his clients. So, in order to increase the value of business, we decided to:
1. Ask his top 20% of clients for at least 1-2 referrals to others like themselves.
This could bring new high revenue – high payoff clients. John decided to write notes by hand to these customers, a simple note card made from thick paper, a colored envelope and an interesting 1st class stamp so it stands out in the mailbox. “Thank you for your continual business. Would you do us the favor of recommending us to a friend? Someone just like you. We can help them with business solutions, and we’ll give them a discount if they bring in this card.”
2. Focus on the 20% of his client “stable” that statistically generates 80% of his revenue, and give them superlative service.
This will likely produce other business opportunities for which John will be paid. He decided to pay attention to all the areas of the business where he could enhance the customer experience by doing something unexpected or surprising. In addition to greater revenues it will definitely raise profitability if his customers are completely wowed by their experience.
3. Review the 80% of the clients that according to the Pareto Principal only account for 20% of the revenue and either:
- Increase billing rates to them … thus either generating more revenue or “encouraging” unprofitable accounts to go elsewhere. This is one of the fastest ways to guarantee an immediate increase in income, yet John was most resistant to this idea. We decided on a campaign to raise prices on select products and services only. By restating and demonstrating the value of certain products, John was able to ask a higher price that his clients were willing to pay.
- Sell them to another firm. John did have friendly relationships with a few competitors who would be a better fit for this group of clients and would be willing to pay to acquire them.
- Turn them over to a junior firm and share in the revenue generated. John also mentored some smaller firms who might be in a position to service these clients and John could at least share revenue.
Each of these actions would result in fewer clients for John’s business. However, by reducing the number of low revenue-producing clients, he would have more time available to provide better service to those clients who do generate significant income.
With John’s action list in place, we ended our meeting with a much more confident outlook on the future of the business. We agreed to talk again in 60 days to review the impact of his actions on revenue. We also agreed to discuss ideas on how to increase the ‘Total Enterprise Value’ (TEV) of his business for future sale. Increasing this value could add 1.5M to 2M dollars more to the price John could get when he sells his business in the near future. Stay tuned for an overview of TEV and strategies to increase this value!
I know John is not alone these days in his concerns about his business value. If you want to discuss some creative ideas for increasing your business revenue or your Total Enterprise Value, contact R. J. Kelly. There are strategies that will make a significant difference in the business value even for the most stable businesses.
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Written by R. J. Kelly – May 2013