The sales business is about the close. Anyone who has sold anything for a living will tell you that particular fact doesn’t change no matter how specialized or unique a company is. While it can be very exciting and gratifying when you sell through and hit your numbers, the revenue model for a sales-heavy business can be hard on your accountant. Good months are fat, bad months are perilous. Rarely are things as steady as some companies might like.
The service model, on the other hand, is the opposite. Revenue often depends on an ongoing contract, which is predictable income. While limiting a business strictly to subscriptions or rental agreements can stifle the kind of explosive growth start-ups might otherwise enjoy, the revenue swings won’t put the company in jeopardy of running short on cash at the wrong time.
Here are some benefits of the service model to consider.
Sales and Service Combine Well
When the product goes from a one-time purchase to ongoing contract, management might assume per-sale revenues are going to decline. After all, the company has to wait to collect their money. The truth is the longer the service option is available, the higher average revenues can climb.
This means the margins and room for sales incentives can be increased, often dramatically, without affecting profitability or growth. This can be a very powerful combination if managed properly, especially if the service offering can be structured in such a way so as to reward customers for long-term loyalty.
Cost Decreases
Cost of goods sold and inventory management can combine to drive expenses through the roof for some companies, especially if natural sales cycles line up the wrong way, even for a few weeks. A seasonal sales downturn combined with a weakened cash position can put tremendous pressure on finances. However, if a company like American Equipment Inc. both sells equipment and offers rentals or operators for hire, they can reduce the impact of that seasonal downturn.
The revenue model for services, on the other hand, often applies to costs as well. If sales and income are both predictable, costs tend to be much easier to contain. This is often the difference between quarter-to-quarter profitability and too many downturns.
Pricing Flexibility
Customers are always price-sensitive. Hesitancy can often make or break a profitable relationship. But if your sales staff has leave to try and draw customers in, and they have a way of structuring the price so those new customers don’t feel like they are overspending, it can have a big impact on your quarterly growth and year-end bottom line.
There’s often only so much room to maneuver in a sales-only structure, but service can sometimes make the difference.
Insurance Model
Some service contracts can generate 100% profits over certain months or quarters if customers don’t use the service or have no need to exercise their contract options. If your company has a way to build a service offering that may only be used twice a year, but has a monthly “just in case” fee, it could dramatically increase revenues.
The goal for any company is to have flexible product offerings combined with steady and growing revenue. Each strategy maximizes one of these necessities. Combining them properly will maximize them all.
