Guest Post from Big Bang Sales Director, Kelley Burian

I’ve made a huge mistake.

Some of you may recognize that as a popular line from the TV show Arrested Development. Unfortunately, my love for the show is not the only reason I’ve had that line running through my head all week.

I’ll back up. My name is Kelley Burian, and I am the Sales Director with Big Bang LLC. I am guest-blogging this week in place of our usual Thursday Big Bang Blogger, Nate Bauer. Nate is off tending to the needs of his newest offspring, who is thankfully happy, healthy and appears to have inherited her looks from her mother. (Nate’s joke, not mine.)

Back to my aforementioned huge mistake.

Adam Murphy has spent more than a few bytes writing about pricing recently, and that train of thought didn’t come from a vacuum. Just over a week ago, we released our new product for driver management in SCCM, the Universal Imaging Utility System Deploy Plug-in, or UIUSD. Much thought, research and discussion went into how to license and price the UIUSD, and we changed our minds on how to do so at least twice in the months leading up to the release date.

We had three specific goals in mind, which I have listed below:

1.       Set a fair price for existing and future customers.

2.       Set a fair price for us.

3.       Make it as simple as possible.

While admittedly the first two are the whole ballgame, the third was an important extension of #1. For those not familiar with enterprise-level software licensing, #3 isn’t easy to find. We often joke about the need for advanced degrees in both law and applied mathematics to purchase the most basic, everybody-needs-it-gotta-have-it software. How can the customer determine if they have received a fair price if they don’t fully understand how that price was calculated?

With those initiatives in mind, we took stock of what we already knew. It’s not as if we hadn’t successfully licensed software before. We have been doing just that for several years with much success. Our customers have been happy to pay the price we set for the software, and we were in turn successfully growing a small business. Yay capitalism!

So why not just stick with the tried-and-true? We certainly considered that, of course. The problem was, without getting into the specifics of each product, we developed two different pieces of software for two different kinds of customer. In the end, we decided to change things for this product based on what we learned from both market research and direct input from our beta testers—the few outside of this building that were knowledgeable on the software prior to its release.

Instead of licensing the software per computer, as we do with the UIU, we decided to license the software per user. In doing this, we aimed first to get in line with the growing trend of multiple computers per user. As these devices get more affordable and more mobile, a single employee may have a desktop computer in the office, a laptop at home and a tablet for travel, and a per-user model would only require one license for that one user. This model would also allow for quick and easy math on the part of the software buyer—the number of licenses you need is simply your number of employees. Easy right?

Find out why it didn't work out so well next week.

The pricing structure I detailed for teaching Symantec Ghost courses in the last post was associated with my working as an independent contractor. There were three pricing structures depending on the type of work and client, and that allowed for about $120,000.00 in potential annual profit. As I said, a comfortable salary, or enough to grow the business. I obviously chose the latter.

In previous posts, I've discussed the requirements, that in my mind, must be there in order to hire your first employee. That's the biggest decision a business owner will make, and it will likely have the greatest financial impact on a percentage basis. Here's the math, assuming I could keep an employee as busy teaching as I was:

With a forecast profit of $120,000.00, that meant I could hire someone for approximately a $40,000.00 salary, and with benefits and taxes and such, it'd cost about $60,000.00, leaving me a salary of $60,000.00. To make up for it, adding only $60,000.00 in profit would be pointless, as I'd be at exactly the same profit level with or without an employee. So, if I could add three courses every two months, I'd be a bit better than break even, and if I could increase it to five to six courses every two months for my new employee, then the profitability of the company would grow.

Given that I was already doing that amount of business myself, and felt there was more potential, the decision made sense at my current pricing structure. Lowering prices based on additional volume and capacity, would not pay off. There may have been an argument for raising prices, but given the market and competition, that didn't seem wise.

So, here's the lesson I learned regarding pricing for service oriented products:

Economy of scale does not necessarily apply. An employee can only work so many billable hours, and in order to do so, there is a certain amount of work behind the scenes that must be accomplished, and for a small business, that ratio doesn't change much. Consulting type service businesses are not likely to see much of an increase in productivity as the company grows. It's why a law firm charges $200.00/hr regardless of their size. That lawyer has a limited number of hours, has an assistant that requires the same salary, etc., all regardless of whether there's one lawyer or one thousand.

It's also part of the reason that service based small businesses are challenged to grow. They can't take advantage of economies of scale like a product based business can. It's part of the reason that consultants charge what they do - they have to! (Admittedly, so are ridiculously high.)

Going back to the kid that left FedEx making $16.00/hr, the challenge was not only deciding how much to charge, and why, but also being comfortable with the idea of charging $125.00 to $200.00/hr for my services. In an open enrollment course, I may have been charging as much as $16,000.00 for a twenty hour, three day course. That's $800.00/hr! Those kind of jumps in dollar amounts can be incredibly intimidating!

Without sitting down and doing the math though, I would not have been able to succeed and grow, and Big Bang would not have had the opportunities it has.

The important thing to understand with pricing, is the goal. When you're only working for yourself, what do you want to accomplish? Growth - i.e. employees? Financial stability? Wealth and riches all for yourself?

First, let's talk about pricing services. When Big Bang started, our primary product was providing Symantec Ghost training. I taught directly for Binary Research as a contractor, and offered the courses up as open enrollment in certain cities, and I offered them as on-site courses directly at a customer facility.

When working for Binary, I charged $1500.00 for the course, plus travel, which averaged about $1700.00. When I taught the course myself as an open-enrollment course, I charged $2000.00 per participant, and allowed for a maximum of eight participants. If I taught a dedicated onsite course for a customer, the rate was $3500.00, plus travel, plus $600.00 per person. So a four person course was generally around $7600.00.

So teaching a 4 person course for Binary was essentially $3200.00, while a four person course would bring in $7600.00 - $8000.00. Given that, it would seem that I'd be crazy to ever teach for Binary, wouldn't it? However, they were responsible for doing all the marketing, sales, collections, etc. And because they were pretty busy at the time, it wasn't unusual for me to do two courses in a month. So, the money wasn't huge, but fair. The reason to do it though was that it provided a decent salary, at a dedicated amount and was reasonably consistent.

However, that's not enough to grow a business, which is where offering up my own courses came into play. A four person course could profit about $3000.00 at the time, after travel, lab rental, etc. However, once that first $5000.00 in expenses was cleared, everything was profit. So, a three person course still made some money, a four person course made more than I would working for Binary, and if I could get the number to six, it meant a $7000.00 profit. Well, if I could do one of those every two months, along with three Binary courses, then I was making nearly $6000.00 per month, and had some flexibility to advertise.

What about the math for pricing out an on-site course? Why make it cheaper than an open enrollment? First, there was no rental fee for a lab, which saved about $3000.00. So why not charge $1500.00 plus travel, like I did for Binary? Simple. There's all the overhead that goes along with getting the contract in the first place. So, most customers that wanted an on-site wanted at least four people to attend, but they didn't want to pay travel expenses for four people, plus the course fee. A four person course would cost $8000.00 plus travel times 4, so figure probably $12,000.00 plus.

So, my goal was to make a four person on-site considerably less expensive for the customer, yet still profitable for me. If they wanted only a three person course, that would be $7000.00 which would probably be slightly less than sending three people to an open enrollment, but not much. That became the sweet spot because I wanted at least three people in an open enrollment, but preferably four to be profitable. And any extras were just extra profit. A four person on-site would profit about $6000.00, so somewhere between a four person and five person open enrollment.

Here's the summary of all that above:

Binary courses - $1500.00 profit, but no marketing, advertising, etc. And regular training.

Open Enrollment - $1000.00 - $11,000.00 profit, averaging about $5000.00, but irregular and variable, and a fair amount out of pocket up front.

On Site - $5200.00 - $8300.00 profit. Again irregular but less variable and less out of pocket.

Now, depending on the business and financial goals, I could establish what I wanted to do with the business.

Just working for Binary would be an OK salary at two-to-three courses per month, and would be comfortable, but never allow for growth.

Open enrollments certainly offered the greatest potential, but also the greatest risk and greatest variety.

On Site trainings seem to be the best situation, but getting a customer that wants to train at least four people is difficult.

What finally worked for me was to try to work five to six weeks in two months, leaving two to three weeks of time for marketing, sales, contracts, sleep, etc. If I could do on open enrollment and one on-site, and three to four courses for Binary, I could profit about $15,000.00 - $20,000.00 in two months. Now that allowed for conservative sales for me and growth for the business without out too much up front risk. And if an additional open enrollment or on-site course came in during that time, it was a bonus.

All told, this created a profit range of about $120,000.00 per year, which was either a very comfortable salary, or significant enough to grow. Consequently, when the Universal Imaging Utility showed up as an option, I had the resources to capitalize on it and grow the business.

It happens every year about this time. The slew of Trade shows for the IT world covering a wide variety of specialties, catering to diverse verticals, and scattered across the continental US. As much as I try to spread out our exhibition commitments, invariably April through July  is usually pretty booked.

I understand why it happens. New budget years (for most year-to-year fiscal calendars) come out. New technology expos usually hit first quarter. And when spread across education, government and corporate entities, it’s not surprising they occur in quick succession.

But for a small software company who caters to every vertical, it can be a little challenging. The last three years, we have often had as many as three shows in five weeks. The personal travel challenges of trying to run sales and marketing can be pretty profound. I always travel with our Sales Director, so when the two of us are out of the office for extended and repeated periods of time, goals and items for completion often get pushed back. Let alone this year, I am not traveling to our two shows in April because they coincide with the birth of my daughter.

But the real challenge for a small business is having to find a way to budget for those shows so close together. Show costs and sponsorships keep going up. While the ROI and face-time with leads is easily justifiable, the shows continue to take up a larger portion of my budget each year. Add to that the exorbitant cost of shipping, show marketing and especially Convention Center services ($125 a day to vacuum and 10x20 piece of carpeting?), and we have to be pretty choosy about the shows we attend.

Fortunately we have found a few great shows and are pretty loyal about yearly sponsorships. This year we are trying out two new shows, Microsoft’s TechEd (our new product UIUSD for Config Manager launches next week and makes us eligible for the show) and Campus Technology. But our very successful staples continue to be Help Desk International (HDI), FOSE, and Educause.

Unfortunately, only Educause is in the fall, everything else falls between April and the first week of July. Alas, what are we to do?

Anyone else find themselves exhibiting at shows all at one time?