Lead Article (Self-help topic – FINANCE AS A SALES TOOL)
Many businesses work on attracting new clients and selling more equipment. There is logic in that process. Some of the statistics from a recent survey though may scare a few people. The survey focussed on the business environment over the next 12 months. 28 percent of businesses surveyed said that they expect difficult conditions over the next year. A worrying stat for the IT sector is that 32 percent intend to reduce capital expenditure over the next year. Firms were decidedly still struggling with cash flow with firms seeing their bills 52 days overdue on average. The only light at the end of the tunnel was that 51 percent intend to increase productivity over the next year. Often firms would see capital expenditure as a way to increase productivity so there is somewhat of a disconnect between productivity gains and reduction of capital expenditure.
I often quote the McKinsey Report in relation to the way to improve profitability in a business. The report concluded that, if all other variables remain constant, if you reduce costs in your business by one percent, you improve net profit by two percent. If you increase sales volume (turnover) by one percent you improve net profit by eight percent and lastly if you improve your margin by one percent you improve your net profit by a whopping 12 percent. These figures were a conclusion across a range of industries and business types. If you start to use leasing or finance as a sales tool, the process to increase your margin by one percent becomes dramatically easier.
Have a look at a simple calculation. Assume that you sell a new computer system worth $100,000 and in our current tight margin environment, you make 10 percent gross profit on the sale for a $10,000 profit. Now assume you keep all other variables identical and increase your margin by one percent. The same system could be sold for $101,123.60. This would give you an 11 percent gross profit for a figure of $11,123.60. This one percent increase in GP has resulted in a net profit increase of 11.2 percent. Close enough to the 12 percent that the McKinsey report quotes.
The beauty of these calculations is that if you quote a client monthly lease figures as the lead figure as opposed to the total sum for the system, the difference between the two figures is approximately $30 per month on a three year 10 percent residual lease. Not bad really – quote a monthly figure to work towards increasing your margins by that magical one percent.
When you start to consider the advantages of using finance as a sales tool, it makes the entire sales process dramatically easier. Firstly you avoid ‘sticker shock’. When a client hears a network will cost $600 per week it sounds dramatically better than $100,000. That is nice – but the real advantages for an MSP start to come through when you consider the bundling opportunities. If a client has all of their computers leased with a set monthly fee, it makes it a simpler process to bundle an SLA with a set monthly fee and the client then has a total amount for their computer system including all maintenance. If you want to go even further, you could bundle Internet and telephony requirements into a bill. Not only does this concept deliver you multiple income streams, but you have an incredibly ‘sticky’ relationship with a client. The client trusts you to deliver on their total IT requirements and they are unlucky to leave you to save a few dollars elsewhere. You have largely taken price out of the equation and your organisation will now be judged more on service delivery rather than price. And that is exactly the way you want it to be.
With 59 percent of all computer hardware now financed in some form or another, there are now more dollars financed in computer hardware across the world than aircraft financed. That gives you an incredible opportunity to take advantage of more and more clients who see financing as a sensible option.
Tell me if you use finance as an essential component of your sales processes at email@example.com.
Business Tip of the Month
Rule 54: Clients Remember CapEx Not Opex
In a recent survey of electricity users, random people were chosen and asked if they could remember the amount of their last electricity bill. The target figure was for clients to remember their electricity bill within 10 percent of the actual bill. When the accuracy of their memory was checked, it was found that less than 10 percent of people could remember their last electricity bill within the required 10 percent. The same people were asked the amount of their last vehicle purchase. Over 70 percent could remember their last vehicle purchase within the required 10 percent – despite the fact that, for many people, their last purchase was years ago. In fact 28 percent of people could remember the purchase value within one percent.
My point here is that people tend to remember large capital expenditure values but they don’t tend to remember recurring monthly fees.
The lesson here is obvious.
Turn CapEx into OpEx.
If you can change client behaviour in purchasing large capital items – like IT equipment – from a large irregular capital outlay into an ongoing operational expense, you will generate more sales. In addition, clients will have the equipment they require to do the job properly. I have heard countless clients tell me that they are holding off on a major capital purchase as they still don’t feel as if they have received the full value for the last capital purchase they made – and yes they will quote the exact amount they spent on that equipment three years ago.
Most businesses have moved to this method of purchase with their vehicles as they realise it is better to have modern well-serviced safer and more efficient vehicles and they generate a habit of replacing a vehicle when the lease expires.
How often have you heard someone complaining about equipment they are using, but they need to keep using it because it cost them so much money (years ago)? All the while, they are losing productivity benefits they would achieve by putting in the correct equipment.
We sometimes persevere with something inferior when we should strive to use the best.
Science Quiz Question
Heading into summer in Australia, my favourite drink is a glass of freshly squeezed Orange juice with ice cubes in it. I felt like just such a drink last weekend, but the kids had used all of the ice cubes in their drinks. I wanted to freeze some ice cubes as quickly as possible so I boiled a jug of water and poured the boiling water into my ice cube tray and placed it in the freezer. My wife saw me do this and thought I had gone completely crazy. She filled up another ice tray with normal room-temperature tap water and put that in the freezer and told me that would freeze before my tray because it was a lower temperature to begin with. Had I gone completely crazy or did I know some scientific fact that my wife was unaware of? (Of course I didn’t argue with my wife – I simply said “Yes dear” and left both trays in the freezer.)
Science Quiz Answer
A thirteen year old Tanzanian student, Erasto Mpemba, noticed a strange phenomenon in 1963 when making ice cream at Magamba Secondary School. Dr. Denis Osborne later visited Mkwawa High School, where Mpemba was now a student, to deliver a physics lecture. At the conclusion of the lecture, Mpemba asked why two similar containers of water with equal volumes in them show that if one container has water at 100°C it will freeze before the other container with water that starts at 35°C. Mpemba’s classmates and teacher ridiculed him (in much the same way as my wife ridiculed me) but Dr. Osborne was intrigued and conducted experiments and confirmed Mpemba’s observations. They published the results together in 1969. Of more interest is that there is no definitive answer as to why this occurs. There are hypothesised components that could account for the effect including evaporation; convection and supercooling but no definitive universally accepted theory has been adopted by the scientific community. That doesn’t mean that the Mpemba effect isn’t real – it just means we don’t know why it is real.