What if there was a system that allowed you to consistently price your projects and ensure profitability?
Ding, ding, ding!
Enter The Profitability Triangle, our foolproof process for perfectly profitable projects.
Establishing a rate for a project shouldn’t be a game of hope. But oftentimes we are so busy and hungry for business that we quote a client before we’ve even established scope or budget. This is backwards. And it can result in a lot of nasty byproducts: overstressed teams, overstretched financials, and oversold deliverables.
A profitable project requires careful attention to pricing, scope, and budget, but it’s all about your order. We’ll break it down for you.
An important caveat: The Profitability Triangle is designed for service industry businesses and ensures projects are profitable (but it doesn’t directly address the overall profitability of a business).
Step One: Clarity of Scope
Before you do anything else, you need clarity of scope.
Scope is where profitability gets eaten alive. We know because we’ve been there. Let’s look at a concrete example:
Many of our clients ask us for a Financial Systems Analysis (FSA) of their business. This service requires our team to complete five tasks:
- Client Interviews
- Data Hunt Within Client Systems
- Report Compilation
It all feels pretty clear when we map it out, but before we move on to setting a budget and establishing a price, it’s essential we review the process and identify potential places where scope creep can occur.
Perhaps the client asks that we also talk to a recently retired employee.
Maybe we anticipate the client has three systems we’ll need to review, but it turns out they have five.
What if one of our recommendations is to clean up a specific balance sheet? It’s not a large task, so we decide to go ahead and just handle that for the client.
Or a journal entry needs correcting. That doesn’t take much time. Let’s just do it.
All of a sudden, the project that we thought was clear in scope has expanded. We’ve broken boundaries with an extra interview, five systems analyses instead of three, and a couple recommendations that we went ahead and took care of for the client. (You know, to be nice.)
Scope creep is cumulative. All those little add-ons can make a big difference on your bottom line. So understanding your scope and getting really clear (and honest) about where your scope could creep (and learning to enforce those boundaries) is essential.
An enforced project scope can also create a snowball effect. When we throw in a few complimentary add-ons, our clients come to expect the special treatment. When we break our boundaries, especially more than once, they become the new expectation. And walking back client expectations can be hard. Essentially, scope creep doesn’t happen in silos. It can impact future projects with repeat clients, and can even impact future clients (when referred to by a current client). Set the scope, define the parameters, and then stick to them.
Once you’ve established your scope, then you need to set a budget, which takes us to step two.
Step Two: Truthful Time Budgets
Budgets can derail quickly, often because of our most precious (and elusive) resource — time. Here are the two most common problems we encounter:
- We’re implementation optimists. To be blunt, many of us suck at estimating time (even Brené Brown admitted she undershoots how long tasks take on her Netflix special, The Call to Courage). We think it will take an hour to plan a party, but instead it takes us days. We think it will take a half day to build a new slide deck, but we blink and it’s already time to pick up our kids from school. (How did that happen?!)
- Death by a thousand cuts. When estimating our time, it’s easy to forget the little things. Back to our FSA example: We know that we’ll spend six hours interviewing the client, but what about scheduling the interviews? What about rescheduling interviews? Have we factored in prep time? What about travel time? It may only be 15 or 20 minutes here and there, but when we add up all those little extras it turns out the interview process takes eight hours, not six. Oops.
Setting realistic budgets requires brutal honesty. Don’t rush this process. Take a step back and ask yourself some important questions:
- Is this realistic?
- Have I accounted for potential roadblocks?
- Am I thinking about all the little details that lead up to (and come after) the primary components of the project?
Once you have a clear sense of scope and a realistic budget, then (and only then) are you ready to set a price, which takes us to the final step of The Profitability Triangle.
Step Three: Value-Based Pricing
Pricing is an art, not a science. If you’re using a formula to establish your rates, you’re likely leaving money on the table.
Formulas are great for establishing a base rate, but many of us use formulas to establish our ceiling. Yikes! This requires a change in mentality.
Once you have a base rate, you need to also add the value your service provides to customers. Let’s return to our FSA example:
Our floor may be $250 per hour. But does that reflect the value our client receives? What if during our FSA we uncover theft, opportunities for automation, or new ways to evaluate data that supports growth of the client’s business?
How much are these discoveries worth to our client? 10x our base rate? 20x our base rate? Of course, we can’t take all of this value or there’s no reason for our client to purchase the service, but could we take 20%? 30%? More?
Value-based pricing can feel uncomfortable for many of us who aren’t seasoned in shouting our worth. It feels subjective, but it’s important.
For a deep dive into this approach to pricing, download our free eBook, Value-Based Pricing: The MACKEY Guide.
Never Fail Profitability: It’s a System
Scope, budget, price. The order matters.
And it takes more time and energy than throwing out a price and hoping it sticks. But it’s a process that works and it’s a process that not only protects but grows your bottom line.
Once you’re comfortable with the basics of The Profitability Triangle, you’re ready to level up your process with these three effective enhancements:
- Establish a data loop. Conduct a profitability analysis after the conclusion of each project. Find the places where you scoped properly and identify the areas where you fell short.
- Institute time management techniques that actually work. If your projects aren’t proving profitable and your team is telling you that they’re off-the-wall busy, they’re likely struggling with time management. What do they need? And how can you help them? Can you train your team in time blocking? The pomodoro method? Perhaps it’s time you implemented a no-meeting day to allow for deep work.
- Embrace iteration. How can you fine-tune your processes? Is there a one-off special project that you completed for a client that could become a plug-and-play for other clients? Is there new tech that could increase efficiency during a key stage of your work? Is it time you hired a project manager? There’s always room for improvement. Keep an analytical eye on your business and adopt a continuous improvement attitude.
Change is hard — and uncomfortable. But with practice, planning, and our systematic approach, you’ll soon reap the rewards and find yourself pitching profitable projects to clients — every time.