Hey Monetize Nation,
Do you make 30% net income after you've paid yourself a salary? If not, this email is for you.
Years ago I developed a heuristic to quickly know if a client had a healthy agency or not. It's called the Rule of 1/3. It's designed for expert service businesses such as consulting or agencies.
1/3 of revenue goes to labor, 1/3 goes to running the business (OPEX) and 1/3 goes to profit (EBITDA).
Most companies I've worked with had a minimum of 45% going to labor costs. One struggling client had some of his services taking 86% of revenue. That's like paying a client to work for them.
Divide your P&L into Labor, OPEX and Profit. This way you can quickly see the totals. My guess right now is you're underspending on OPEX and overspending on the labor to deliver your services.
With this knowledge, you can fix your profitability because you'll be able to see which services cost you too much as a percent of revenue generated.
Back to the guy who was struggling with 86% on labor for his services: he did web design, SEO and Adwords as his 3 main services (all sold separately, but that's a story for another day).
We did the Rule of 1/3 on his business. His Labor averaged around 65%. OPEX made up the rest of revenue. He had no profit. Worse still is he frequently had to put money back into his business to keep it running.
Turns out SEO and web design cost about 86% and 70% of revenue generated. Adwords cost him about 40%.
This is where pricing comes in, which is the topic of today's The Monetize podcast -- go watch or listen.
We couldn't lower his costs for each service so we had to raise prices to save his business and his sanity.
He did like nearly everyone starting out. He picked a price that sounded like a price people would pay. He hadn't considered any costs beyond him getting paid to do the service for the client. Then he tried to grow into an agency with the same bad pricing practices.
We raised his SEO prices around 160%. His web design price by about 125% and his Adwords service we doubled the price.
He was undercharging all 3 services, but we focused on getting them in line with the Rule of 1/3 plus making a little more room for increases in costs. But the Adwords service was WAY underpriced and his most in-demand service.
Here's how we implemented it: All new prospects got the new higher pricing. They also could only buy the services as a bundle (this is called utilization, which I teach another time).
After he got 4 new clients (one Client Stack), he raised the prices on his 4 lowest paying clients to the new price. If they quit, he was still more profitable. If they said yes then he was making even more money.
We did that for each stack of clients until he had a solid 12 clients paying his new fees.
Email me if you need help implementing the Rule of 1/3 in your business.
Tim
PS. The latest episode goes into the personal psychology of pricing. It's a topic I'm passionate about because simple changes to what you believe about money can make a massive difference to whether you get rich or struggle.
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