Our Brief Fling With Payroll
More than a few years ago, when STORM was finding out first hand that we still needed to educate the market about flexible benefits, we were scrambling on ways on how to generate more sales.
I had an idea.
“Let’s offer payroll!”
My several justifications were many: to be known as both a compensation AND benefits services company, “payroll wasn’t rocket science”, and the idea that we could just use the current system we developed internally to run it.
Because there were many competitors, we couldn’t put quite a big enough margin per sale. So I figured, we could make up for it with a bit of volume. Our minimum price was around P15-20K per month for a 50-man client. I figured, if I could hire a person at P10,000 to handle 3-4 of these companies per month, well, that’s a profit of at least P35,000 per month for 3-4 monthly clients.
So we added this new business line quickly. After a few weeks, we landed FIVE new clients. I began patting myself on the back.
It was a disaster.
It turns payroll WASN’T exactly rocket science, and we struggled with maintaining the quality of this new offering we weren’t doing before. The person we hired was a total disaster.
It also turns out that the smaller companies we landed were more high maintenance than some of the larger firms we dealt with in our flexible benefits line – making us spend a lot of time and effort on these low-margin accounts.
Worse, we had one current flexible benefits client who agreed to give us their payroll to manage. Because of our inefficiencies with payroll, we were endangering the relationship we worked so carefully to foster.
While on paper, we were making a margin (a small one), in truth, we were losing money on the new business. We were losing managerial hours to it. We were endangering our relationships with the clients of our core business. It was exhausting and frustrating.
In a few months, we closed the business line, and stuck to the guns we were much more familiar with, and where we enjoyed healthier margins.
There’s a lesson here on focus, but the other very important lesson here is that not all sales are equal.
The danger of the “ALL-OUT SALES” mentality
Prior to my startup career, I was exposed to Management/MANCOM meetings with my past corporate stints.
I remember the emphasis on SALES.
“Sell at all cost!”
I think this was something I ended up inherited.
I know entrepreneurs with sales backgrounds who think the same way, that any sale is a good sale.
The danger here is that there are some sales that you actually do not want.
I remember my brief foray in a headhunting startup.
At first, we were making money by placing executives and senior managers. Then, when the going got a bit tough, we decided to diversify a bit and accept junior management posts as well. After all, any sale is a sale right?
The revenue we would generate in placing 4-5 junior managers would equal the revenue generated in placing ONE senior. Moreover, recruiting the 5 juniors required MUCH MUCH more time and effort than placing the one.
Of course, it sounds elementary as I write it down here. But again, when you come face-to-face with the actual job from the client and the short-term money involved, the SALES MENTALITY kicks in and you just say yes. Then you end up regretting it as you psyche yourself up for doing much more work for the same (or lower) payoff.
This is a mistake of many new entrepreneurs. Anyone offering ANY contract to a new entrepreneur (with likely tepid sales) will seem like an irresistible lifeline.
But you have to resist.
Study ALL angles in a potential deal, not merely the cash.
MARGIN VS SALES
Margins are more important than sheer sales.
I would VERY MUCH rather have 10 clients with 50% margin than 50 clients at 10% margin, even if the revenues are the same. Why?
Well, I can better take care of my ten clients than I could the fifty. Moreover, I would spend CONSIDERABLY LESS money taking care of the 10 clients than managing the 50.
Look for opportunities where you can offer a differentiated product/service at a good margin.
Remember, margin is king, not sales. Apple is the most valuable company in the world not because of market share. Its because of their crazy margins.
So be careful of the “I can lower my price to get a larger client base” strategy.
Maintaining your larger client base won’t be cheap.
Think of Your Market – Who Can Give you Good Margins?
I’ve encountered a number of people who want to market their products and services to startups.
I always try to make the people reconsider. Why exactly do you want to do that?
Well, I know from first-hand experience that:
– startups are very cost-sensitive and will only spend if its the last resort
– startup founders will exhaust their considerable creative resources to get products and services for free or near free
– even of they do buy into your product or service, startup founders are going to likely be high maintenance accounts – passionate people who will likely be breathing down your neck and expect you to devote ALL your time and effort for them
These three factors make it extra-difficult for a startup to cater to other startups.
So ask yourselves:
– which market would be willing to give me the largest margins?
– how do I build my brand? (great branding leads to good margins – people’s trust does a lot to open their wallets)
– how do I differentiate my product enough to make my product seem worth the margin it seeks?
Be wary of the ALL-OUT SALES mentality. (do note that it’s hard to ignore) Think strategically and evaluate all factors involved before doing ANY deal.