The power of pricing and planning ahead
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When Covid hit, some businesses saw their revenue drop by 90 per cent or more. I had interests in both the hospitality sector — where I was an investor in The Conduit, a social impact private members club that closed — and education, as an investor in School Space, which helps schools to generate income from their underutilised facilities.
For other sectors Covid has been described as the “great accelerator”, flipping them forward about five years in how technology is used for online goods and services, as well as how IT can support supply chains. In these cases, agile businesses prospered, while the slow suffered.
As we approach what will be a challenging winter, with everything from energy to distribution in flux, every business needs to try to plan ahead. Certainty has huge value at the moment. Bosses will have an easier winter break if they know where revenues will come from in the new year.
I learnt a big lesson when I joined the software group IRIS as chief executive in 2001, having just emerged from a rollercoaster dotcom experience. Now that I had a “proper” job, my wife persuaded me that we could “invest” in a Sky box on a low monthly subscription fee. It proved a good investment.
The following week, as I was at my desk trying to get to grips with how our business-to-business accountancy software pricing worked and how we matched up against our biggest competitor, Sage, it dawned on me that Sky were on to something very interesting.
Somewhere in my travels, I’d read about the four Ps in the marketing mix: product, price, place and promotion. Surprisingly, price doesn’t get the attention it deserves. It’s more than just up or down. I realised there is actually so much you can do with it to create a more agile and flexible business model.
Back then, business software pricing was either a one-off perpetual licence fee or an initial fee plus usually 20 per cent annual maintenance. As a “David” with £9 million revenues to Sage’s “Goliath” at several hundred million, we realised the benefits of shifting to a subscription model (now called SAAS) with a low initial fee, a recurring annual fee and add-on subscriptions for new modules (a bit like adding Sky Sports or Cinema).
This lowered the cost of entry for our new customers, giving them access to software that brought them productivity improvements, plus removing the uncertainty of upgrade costs. For us, it provided annual recurring revenues to support our product development and enabled us to build market share very quickly: our biggest competitor couldn’t easily respond as it lacked the agility to rapidly change its business model.
It taught me to look beyond the impact of today’s decisions on the year’s budget and to plan business growth in multi-year cycles — because the investment we make today can pay off over multiple years. Within three years, over 90 per cent of our annual revenues were underpinned by recurring subscription-based revenues. We had more than doubled both profits and revenues organically. So thank you Sky, and my wife, Emma.
There was another lesson that came with this shift, which supported our growth. When I assessed our competitors, most of them seemed what I would call “unbalanced”. Some businesses were overly focused on product, but lacked the sales and service capability to grow. Others emphasised sales and marketing, but the product and service left customers underwhelmed.
In 2001, we had a team of 100 people: 30 in product, 30 in sales and marketing, 30 in service and 10 in admin, which gave us the balance to deliver on all areas to support growth through the total customer experience. Ten years later, even though the team had grown to about 1,200 people we kept that ratio broadly the same. At the helm, I kept an eye on the bookings pipeline, customer net promoter scores, as well as customer and team retention rates.
Roll forward another ten years and what does all this mean for businesses today? I chair two firms: Ground Control in outdoor maintenance and Leathwaite International in C-suite executive search. In both cases, we are thinking much more like software companies, visualising what our world might look like in five to ten years and how we need to respond today. In particular this involves investing in technology that allows greater automation of unnecessary manual processes.
To achieve this requires a shift from a transactional mindset (fairly typical in both sectors) to one that focuses on long-term relationships. The technology you deploy then supports this goal. For example, data insight around key pain points at Ground Control relating to the weather, the logistics of managing our field teams and customer communication. For Leathwaite it is improving the speed and accuracy of matching in-depth candidate skills with client requirements.
I used to remind our sales team at IRIS that no customer wakes up saying: “I must buy some software today”. But if you can demonstrate how it saves time, money, generates revenue or improves customer retention, a compelling case can be built to convince even the most cautious finance director. In today’s challenging environment, that observation rings even more true than ever.
Martin Leuw is chairman of Ground Control, based in Billericay, Essex. He and his fellow directors Simon and Kim Morrish are sharing their experience of trying to double the size of the business over the next five years while keeping sustainability at the core of what they do.