Comments on: Doing more for less because it’s more

By: Greg

Greg — Thu, 12 Jul 2007 19:44:40 +0000

I have decided to refocus and get back to how we used to do everything – profit wise. Our whole business is based on FCF (free cash flow) and basic data driven economics. Due to tracking issues, financing outflows, and basic search risks, I am re-established a 25% minimum gross margin regardless of volume. This is lower than the 1.5x I reference, but it does allow us to go after lower margin business and still make money in a much safer environment.

So, for those of you in paid search and other highly trackable media, I recommend 33% – 66% margins but getting the occasional 25% is still worth it. No more sub 15% stuff for now.

Great feedback. Revenue, unless it leads to different payment tiers, bonuses, or new opportunities is overrated. Long live profitability.

By: OEIC » Aaron Mentele on business

OEIC » Aaron Mentele on business — Thu, 12 Jul 2007 18:09:08 +0000

[...] Mentele of Electric Pulp, a development/design firm out of Sioux Falls, SD has an interesting writeup and great commentary on the low-margin, high-revenue business game. This is a fascinating topic for me, as I’ve [...]

By: Greg

Greg — Thu, 12 Jul 2007 01:17:02 +0000

Here is the main issue I have with low margin business. You need data, either real-time, daily, or very very reliable historic data to base your outflow decisions on. The only truly reliable data is real-time, yet we work with all types.

Here is how you get killed…today, a client uploaded conversions (out payment metric). In that upload, 3 days were omitted…I say error and give us a make good…they say NO ERRORS. Now, we need near perfection to make the month break even. This is not the norm, yet losing 1 day over 30 happens quite often. In fact, we budget over 10% loss.

Today was it for this account though. They are still a client, just a client that we service much much less and derive smaller, yet much higher profits margins from as I adjusted all outflows by a 50% decrease. Now we should pull a 2x on spend and 2x on anything is better than 1x (break even) or -x on anything.

We always try to hit between 1.5x and 3x so not we are back in line. And, the stress is gone…why did I wait 3 weeks…stupid!

By: Arfeen

Arfeen — Wed, 11 Jul 2007 17:49:23 +0000

I think that for a small firm (somewhere in the startup category) doing high volume/low margin business wouldn’t make much sense. But if you’re a mid to large size firm, Greg’s way of doing things makes sense somewhat. It’s the economies of scale theory adapted to the service industry. You get to hire more specialized people who can do the job more effectively while doing it in less time and therefore spreading the additional costs over all your projects. Your good reputation brings you even more clients and the cycle continues ….. :p

By: Aaron Mentele

Aaron Mentele — Wed, 11 Jul 2007 04:38:11 +0000

I second S. (Greg you need at least one blog.)

By the way (all,) our time in the high volume / low margin segment is almost never related to ongoing project (service) work. I should have made that clearer in the post. I suck at blogging – I think I confused Deane.

By: stefan

stefan — Wed, 11 Jul 2007 04:24:24 +0000

I’m just going to pop in, leave a comment, and pop back out again:

Greg, you need a blog.

By: Greg

Greg — Wed, 11 Jul 2007 01:15:09 +0000

Here is a bit more. We are growing fairly fast. We have a choice, either do $3 million in Rev this year or do $XX million in Rev this year. I suspect we can make 50% Gross with little other expenses on 3, but may only make 4 on say 12 million. Is the additional $9 million rev worth $1 million Gross? It entails financing, staffing, much greater risk for the 11% margin…yet it is $1 million more.

The specific client I referenced to Aaron is about a $60,000/mo rev client. Margins originally were about 40%. Now they are 15%. Net say $10k (yeah, math says $9k but so what). I can most likely cut the rev on this client back to $35K and still make 10K. Why wouldn’t I? I think it may be stupid not to, yet I like the size at times too. It is fun to get $60k checks. I get an additional 25,000 credit card points each month, yet…I had to secure additional financing.

That is a bit more on a specific example. Great feedback. Share more…

When do you take more revenue? I believe if it creates incremental profit (no canibalization of existing margins) then it is still worth it so long as you can finance it and you have excess capacity. Your overall margin shrinks, but you achieved greater dollar profit maximization.

Looking for real life though; not Econ 101. Oh yeah, and most of the deals I set up are ongoing recurring for undetermined time periods. That is somewhat different from most.

By: Sevin

Sevin — Wed, 11 Jul 2007 00:40:40 +0000

I set goals. If I meet or beat a goal, I get my head out of work for a while. As it pertains to work, I’m happy with “good enough” – I have hobbies.

By: Aaron Mentele

Aaron Mentele — Tue, 10 Jul 2007 19:22:14 +0000

Low margin – high volume work is the quickest way to kill a business.

Agreed. If it’s a service only business with limited time. But, we have at least three aspects of what we do that fall outside of those conditions. IDC falls almost completely outside of them.

I agree completely that the sales cycle for projects of dramatically different scope can be exactly the same. It all depends on who you’re dealing with.

By: Wes from Design Quote

Wes from Design Quote — Tue, 10 Jul 2007 18:26:05 +0000

Low margin – high volume work is the quickest way to kill a business. Its just as hard to sell a 10,000 job with a 20% profit margin as it is to sell a $1000 job with a 2% profit margin.

By: Aaron Mentele

Aaron Mentele — Tue, 10 Jul 2007 18:16:32 +0000

The last thing we’re doing is taking “volume work.” But our volume keeps increasing. More for less comes in the form of administrative sprawl caused by business growth. The difference between us and Greg is he does it intentionally.

By: Deane

Deane — Tue, 10 Jul 2007 17:45:38 +0000

I hit a wall on the “more for less” trend about a month ago. It’s just not worth it. I want to do “less for more,” but who doesn’t?

I want to say Blend has grown out of the “more for less” way of doing things, but if EP is still there, perhaps we’re just fooling ourselves.

By: Chris

Chris — Tue, 10 Jul 2007 15:32:27 +0000

As a freelancer, I’d say it’s pretty easy to get happy and avoid the growth frenzy. There are times, though, that I’m taking work just to pay the bills. I’m considering growth that would push me into higher volume and, maybe, lower margin. Hopefully, it will work out. I don’t think G’s a freak, by the way. Everyone’s a Napoleon.