One of the challenges of any business is understanding the sales cycle, assuming there is one. Now obviously, some business are seasonal, or can anticipate increased sales volumes for certain times. Christmas is going to increase catalog, retail, and online sales, all of which will increase the amount of traffic for FedEx, UPS, and the US Postal Service. But what about your small business? Is there a semi predictable cycle? In my opinion, even if there is, predicting numbers is still like throwing nails at a dart board. In other words, wildly inaccurate.
However, to an extent, I have learned that dips are far more predictable than peaks. Here are a few examples, and it is all driven by customer reaction.
In late 2008, the world crashed. The markets crashed, sales crashed, credit crashed. Hell in a handbasket. Through the first three quarters of the year, we were up in sales, and looking great. Fourth quarter hit, and we saw a fifty percent decrease in sales from the previous fourth quarter. Now, fourth quarter is generally our slowest with holidays and such in there, but occasionally it surprises us with some end-of-fiscal-year bumps. However, fourth quarter 2008 nearly called for layoffs, and I admit, it wasn't something I saw coming. Having experienced it once though, I now know to be on the lookout for it again. As a plus though, because the UIU saves customers a tremendous amount of time and money, 2009 turned out our best year to date, which very few companies could say. So again, I now have a historical piece of data to work with in the future.
Another example for us has been associated with the release of a new Microsoft operating system. When Vista was close to release, our sales slowed or were delayed because customers didn't know exactly what to expect from Vista. Rumor had it that UIU would be unnecessary. Well, that was obviously incorrect, as sales continued to increase, but it was understandable. Consequently, when Windows 7 was announced, we fully expected the same thing. Customers would delay purchases while reviewing their environment. Windows 7 would cure all their problems. We had several customers not renew their UIU licenses as they were positive they didn't need us. Well, 2011 proved that wrong, with record sales and several customers coming back to the UIU. But, because of our experience with Vista, the Windows 7 hit and subsequent rebound was predictable.
The third scenario we have run into is with our own product updates. It was not uncommon to hear that a customer wasn't going to purchase or renew until we had released a new version - something compatible with Vista, Window 7, containing certain drivers or fixes, etc. The customer always wants assurances that it's going to work in their environment, and despite years of proving our commitment, fear still reigns. Not much you can do, but understand that the process will take time. So, when we heard customers were leaving us for Microsoft's SCCM, because it would do everything they needed (see point two), we listened and waited, and soon those customers started asking if the UIU was SCCM compatible. As those requests grew, we realized we needed a new product that would integrate with SCCM (UIUSD), which we just released in April. That release though has caused a slow down in sales and renewals because for existing customers moving, or considering moving, to SCCM, they now had to do the research and evaluate their environment. And so while sales fell dramatically in April, I was able to warn my sales and marketing staff that it would likely happen. No one is happy about having such a terrible April, but the interest in UIUSD has been awesome, and we can fully expect the corresponding increase in sales shortly.
I don't think business is tremendously predictable, as far as set numbers. We would all like to increase sales by a certain amount every year, but can we predict that with any accuracy or certainty? I don't believe so. What I can do though, is be somewhat predictive as to when sales may increase or decrease based on certain outside events or perceptions. The more cycles you go through the better a predictor you should become, as long as you learn to recognize the patterns.
In my previous post, entitled, "Be Conservative," it's possible to interpret that as supporting a political philosophy. Nothing could be farther from the truth. Honestly, I have to admit I lean heavily to the middle, and find the ridiculous partisanship to be offensive. Like most sane human beings, there are parts of both the Democratic and Republican platforms that I agree with. And there are other components, from both, that offend me to the core. The truth is though, you can run a successful business regardless of which way you lean.
Aside from the political conservative side, there is also the issue as to whether one is personally conservative or risk averse. Like the political perspective, this has little to do with the potential success of an entrepreneur... as long as the extremely conservative nature can be curbed slightly when it comes to the business. A small business owner must take some risks, no matter how small, or the business will never get off the ground. An excessive amount of risk can lead to either quick ruin or potentially mind shearing success. Extreme conservatism will lead to a slow death, and that's really about it.
One of the things to realize as your business grows though, is that the perception of you as a business owner, may be vastly different than the reality. However, that's because your reality changed dramatically, while that of your friends and family did not. As the business grows, we begin to deal with numbers and decisions that others close to us can't fathom, and so what is perhaps a conservative, low-risk decision to us, can easily appear as a crazy, outrageous decisions to those around us.
I can't tell you how many times my grandfather has asked, "You sure you're OK kid? That's a lot of money..." when looking at the property and renovations we've made to our offices. The idea of paying over $1,000,000.00 for a piece of property is unfathomable to him because he never made more than $50,000.00 in a year (if I had to guess.) That's a risk he just can't wrap his head around. For Big Bang though, the far greater risk was staying where we were, in what would have been an undersized office building. In order to allow the business to grow, we needed more space, and this option cost less than our existing lease space.
Anyone that knows me, would likely not describe me as conservative, personally or professionally. We offer great salaries and benefits to our employees. We have a great campus on five wooded acres with golf and volleyball and disc golf. I have played poker in some of the biggest tournaments around, traveled the world scuba diving, and drive an Infiniti convertible. I doubt "conservative" is what friends and families think of me.
But in business, for the most part I am conservative. But that still means providing the support and materials my employees need to succeed, not nickel and dime-ing them on the small stuff. That means sending them to expensive training courses and tradeshows, so that Big Bang maintains the highest quality of employees. That means paying our bills on time or early so our vendors respect us and want to do business with us, rather than holding off payment for 45 or 60 days.
As Sue, one of our employees is fond of saying, "Make good decisions." Well good business decisions are conservative decisions, that are made for the good of the company, even if they look like crazy decisions from outside.
Like so many businesses out there, Big Bang essentially started in my house. As an independent consultant, I did database development, ISO-9000 training, as well as the odd training work for companies like CompUSA and Binary Research. If my wife came home at night and I was still in my robe, she knew I'd been working that day.
How a business grows from there generally takes one of two paths - small organic growth, or funded rapid growth. I chose the organic path, and it's worked well for me. After eight years in business, Big Bang does a few million a year in sales and has fourteen employees. We have a five acre campus, with a putting green and tee box, sand volleyball court, and a recently added disc golf course. We grill out in the summer for lunch and hang out on the patio after hours with cold beer and drinks. We have actually been profitable every year. I can't begin to explain how much I enjoy what I do and who I work with.
However, I'd be lying if I didn't say I occasionally thought about what Big Bang could have done with venture capital. Would we have become the next Facebook? Not likely at all. But, could we be doing tens or hundreds of millions in sales? Potentially. But at what cost? Would I even still be here? What about the staff? Would they be here too, or would the appeal of cashing out stock options have been too tempting? It's both exciting and daunting to consider.
Regardless of the path taken though - slow and steady, or meteoric - the path to smart business is not dramatically different. And what I mean by that, is be conservative.
When it became time to move from the house to an office, I elected to sublease two offices from a law firm I did business with. Now that obviously didn't leave much room for growth, but remember, adding that first employee was a 100% increase in staffing! That's huge. It gave me the opportunity to learn about business outside the house - about employees, phone and internet bills, liability insurance, etc. The risk was minimal, and I think that's something business owners don't always take into consideration. We're supposed to be these aggressive, passionate, mavericks, when in reality, we're far more conservative than most would ever expect.
As Big Bang and the UIU grew, we moved our offices from the subleased rooms to a 3500 square foot office... in the same building. Nothing crazy, but it accommodated the four of us (another 100% increase!) and gave us room to grow to eight people, and have room for our testing equipment and lab. Here was a bigger jump, but the decision needed to be weighed against our growth. Now, did we still buy our desks from Office Max or Office Depot and have to put them together ourselves? Absolutely. The conference room table and chairs? Scavenged from my father's storage unit because he moved his business. Risky at $5000.00 plus per month for rent? Somewhat, but not much in comparison to the revenue of the company. The greater risk was stagnating the business.
Eventually we moved again, this time to our five acre campus with an office building that could accommodate another 100% increase in staff... which we're quickly approaching. And it was the conservative decision. While admittedly we've put a tremendous amount of money into the property, we didn't have to right away, and our loan payment is less that our former lease. So, while the million dollar loan might seem outrageous and frightening, the day-to-day math proved to be an easy decision. Less money being paid for twice the space and an awesome environment. Wild and crazy appearing from the outside, but actually very conservative. Could we have gone bigger and more expensive? Yes, according to the bank. Should we have? Absolutely not.
Where I'm not conservative though, is with my employees. They are the lifeblood of the company, and while I can nickel and dime on desks and chairs, I refuse too with the employees. We generally pay at the high end of the scale. Our benefits are second to none. Keeping these people, and keeping them happy is what allows Big Bang to thrive, not just survive. Spending a couple hundred extra dollars for a bigger, better monitor, or dual monitors, is a no-brainer. And because we're willing to do that, they're that much more productive, which makes Big Bang more profitable, which leads to the disc golf course in the back yard.
The past few posts have discussed my thoughts on the pricing Big Bang used for our training and consulting services. The structure made sense as an independent consultant, and continued to work well as employees were added. However, I felt that significant growth was more difficult with a service oriented business compared to a product oriented business, because the economies of scale are not nearly as great.
The simple math of my example was that an employee generating revenue produced a profit similar to his salary - so a one-to-one ratio. Please keep in mind, that when I refer to "profit," what I mean the direct relationship to the expenses and costs associated with that person. This isn't pure In-The-Owners-Pocket profit. It doesn't take into consideration the overhead associated with running the business, advertising, marketing, research, development, etc.
So now let's consider the pricing structure for UIU. Unfortunately, there was no other product on the market to compare to, so we had to come up with our own. The first thing we looked at was the tiered structure for Symantec Ghost and mimicked that. We started at ten licenses minimum, and went from there. Because UIU was essentially an add-on product to Ghost, we felt it should be priced less expensively than Ghost. (Or education customers continue to complain that we're more expensive, but an 80% education discount is unrealistic.) The other aspect that we tried to incorporate was ROI - Return on Investment. We were able to establish pricing that we felt would provide an ROI of 180 days or so for our customers. Essentially, UIU would pay for itself in about six months for a customer of average size.
To be honest though, we didn't know exactly what we were doing, and we've made changes along the way. For example, the discount for education was initially set at 20%, and the flashback from that decision was ferocious! Despite the fact that the ROI was even greater for education customers because of their discount and that they often times had an even greater disparity of hardware than average, the 20% discount was considered an outrage. We increased it to 30% and the sales started to flow. Sadly, the discount is often times more of a focus than the actual price or benefit.
In the eight years we've been selling UIU, there have been two significant changes made to the pricing structure. One was for annual maintenance. Again, like the initial pricing, we didn't have a model to work with, so we guessed as best we could. Initially, we charged about 25% for annual maintenance and support. Eventually we realized the math didn't work and we increased it to 30%. That doesn't seem like much, but it was really a 20% increase, not a 5% increase, but it was sufficient to achieve our goals. The goal for UIU at this point is that the revenue generated by the annual maintenance should cover all the expenses of the business. In other words, with no new sales, Big Bang would be able to survive. There'd be no profit or new development, but we could survive. Obviously, we want more than that, but that's where new license sales come in.
The other major change was to increase the minimum number of licenses, and the push back on this was incredible! However, in 2008, when the markets crashed, our fourth quarter sales were half of what they had been in 2007, and for the first time, we lost money in a quarter. It forced me to really review our pricing structure, and what I found was that our minimum license orders were costing us money, and they had very little upside. Rarely did the minimum customer ever grow to become profitable. So, we adjusted appropriately, and raised our minimum to 100 licenses. The goal became to bring at least $1000.00 per order in to Big Bang, and we accomplished that, which made every order profitable. It also made it profitable for our resellers, who in some cases were getting as little as $8.00 to process an order. I found that to be a bit rude, personally.
Did we lose some minimum customers? Absolutely - about 50% every year. The interesting part though - that was the same percentage we were losing before. So, the customers that were going to stay with us, did, despite an increase of 400%, and the customers that were going to leave, still left. And in the end, we are profitable on every order we take. We will still continue to review and tweak pricing as the market and the business change, but for the moment, it makes good sense for everyone involved.
Every year we hear that we are too expensive. And we can show the math proving that we do nothing but save customers money. Some will believe, some will not. Every year we also hear that we are too cheap. Sometimes I believe, other times not. Our pricing is designed to be fair, but not necessarily fair to everyone. I am not out to gouge our customers for every penny because I think that's short sighted. We want customers for life, not for right now. At the same time, we want Big Bang to grow and prosper and produce new products, and that all requires profit. Our customers want us around for years to come... and so do I.
About Big Bang Blog
There are many reasons to write a small business blog, we wanted to bring you at least a few reasons to read one. The Big Bang Blog covers the ins and outs of running a small software business, as well as a variety of small business marketing and media topics. Please leave us your comments and questions.
Be sure to visit our UIU Blog for Industry Insights, Product Updates, Support Notes and more.
|About Adam Murphy -
Adam is the President and Owner of Big Bang LLC and espouses a pretty progressive small business philosophy based primarily around hiring the right people and getting the hell out of their way.
|About Nate Bauer -
Nate is the Marketing Director for Big Bang LLC and pretty much spends his days tip-toeing on the pinnacle of how to most effectively implement strategy given the wide open cookie jar of small business marketing possibilities.
|About Kelley Burian - @kelleyburian
Kelley is the Sales Director for Big Bang LLC. Responsible for everything from GSA contracts, resellers and international customers, she has her hands full doing whatever she can to make sure our valued clients are thrilled with our fantastic products.