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Services Startup Cash Flow Trick!

August 22, 2008

Is your startup in the services business?  Having a hard time supporting your existing clients, much less new clients you want to bring on?  Need to hire a few more employees to make it happen?  We had this experience at one of our companies a while back.  We were having a hard time finding people we wanted to hire.  Lots of applicants, but none of them were a perfect fit.  So instead of hiring people we didn’t like or  losing our existing clients (offering a reduced service level) we increased our prices 30% across the board.  We lost a few clients, but in the end the additional margin from the existing clients more than offset for the client losses.  The real upside was we had a reduced workload ~ fewer clients generating the same revenue at a higher margin! (oh and fewer employees to manage makes life exponentially easier)

My two favorite marketing strategies in the services business are scarcity and exclusivity.  By keeping headcount lean, you reduce your ability to add new clients.  This is not a bad thing assuming you are not funded by a venture capital firm with deep pockets who wants hockey stick top line growth.  In a bootstrapped services startup, this scaricity will work to your advantage.  Imagine sitting with a potential client who wants to hire your firm and trying to explain that your service is so popular and sought after the first available turnup slot is three months from now.  Further imagine having three clients all ready to hire you, but you can only pick one.  Guess what, you get to raise your prices.  Raise your prices to the point that you only have one client begging you to start.  This scarcity and relative price advantage will make your service exclusive.  Not everyone can a) get your service and b) afford your service.  Of course your service needs to be better ~ you can’t offer subpar service for more for very long.

Written by Alexander Muse · Filed Under Blog, Startups 

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