Increasing Contract Margins Quickly without Losing Sales

Tired of working hard with nothing to show for it. Not every contract is a profitable one and in the business-to-business world there won't be volume to make up the difference. That's why in 1996 when a mentor pointed out that some of my contracts were pulling negative profits, my eyes were opened to a new approach.

In a real eye opening session it was revealed to me that margins for some types of contracts were negative, while others were five times my average. I honestly thought any revenue was good revenue.

Here's the sales and marketing lesson for you. Unless you are factoring in general overhead, taxes, marketing costs, and profit into each proposal you are likely losing money, even if revenue looks good. This happens when marketing and sales can't calculate proper costs plus margin.

Unfortunately this problem is more common than good business owners understand. So I invented a little game that you can play in your business. It's a game I call now, "Let's Find the Profit."

Sitting down with a client and their accounting department, we (a) determine the average cost per lead, (b) outline the proposal process from qualified prospect to accepted proposal, (c) using historical accounting determine several overhead rates by job category, and (d) build out multipliers to produce a rate charge for proposal development.

These multipliers are simplified burden rates. The only rule of this game is that you be honest with yourself and use the realistic numbers. It's better to lose a contract with the right numbers than win a "low ball" bid you won't make any money on.

If you've been with me more than a few months, you know there is no such thing as a second profitable low-price leader.

Since you can't have two low-cost providers, you might as well justify your price with excellent value and charge premium rates. With a properly calculated burden, you'll even make a little money doing it. You'll have stability to serve your clients for years to come.

My mentor showed me how to calculate my "burden rate" then use it in every proposal. The great thing about a "burden rate" was the I could give it to a sales person without revealing actual costs. You can have different burdens for different categories of work, however, start with something simple.

Your burden rate has a lot to do with your marketing efforts because if not properly determined and built into each contract, you may have less money to find the next customer. Worse, you may be doing a lot of work with nothing to show for it.

With this insight, I was able to quickly improve contract margins by NOT doing some kinds of contracts. This insight is most powerful when combined with information from P&L per customer, product, and marketing campaign.

Knowing my burden rate helped me stand firm on proposal prices, while focusing on the types of work my company could do profitability. I focused my sales people on customer segments and particular opportunities adjusted mathematically (instead of by hunch.)

Yes, my rates were twice my closest competitor and I didn't get every contract. However, when I sold on value, I got a contract that was both good for my customer and good for my growing business. This is why I got good at building business relationships, instead of playing the price game.

You can do the same in your business. The problem with many technical and professional services firms is that we understand the complex nature of what we do, however, accounting fundamentals are lost. Get help putting this number together.

I didn't know to ask my accountant for a factor that represented the costs of acquiring a customer, profit per customer, and what it really cost to do business. In truth, I didn't know how to adjust my rates based on project costs (or how to have common costs spread over multiple contracts.)

With burden rate in hand I was a more selective sales person, I now focused on jobs worth having. The same can work for your business. The exciting part is that my closing rations stayed the same, revenue didn't grow, but margins went higher almost immediately.

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Avoid shrinking margins with this accounting exercise, plus write winning proposals. [Read More]

Tracked on August 31, 2008 2:43 PM