Increasing Average Revenue Per Customer in a Professional Services Business
Acquiring new customers is often expensive. Especially when selling professional services to other businesses (B2B) as those are often subject to longer sales cycles. Companies typically look at new customers first when trying to increase revenue, without considering the revenue potential of existing customers. What a missed opportunity. Selling more services to existing customers will not only lead to higher revenues, but also to happier customers.
In order to determine how a business can improve its Average Revenue Per Customer (ARPC) it’s important to understand the typical revenue profile throughout the lifetime of a customer. Project-based business models are often front-heavy in terms of revenue; a large part of the revenue is generated early in the customer’s lifetime. After the initial project, retainers and service contracts start generating revenue. This revenue is spread over a longer period of time, at a lower rate. Other businesses, such as cleaning, have a more evenly-distributed revenue profile.
Retainers and service contracts present the highest opportunity to increase revenue for project-based businesses. Assuming that the company has an existing relationship through earlier work, it is a lot easier to get insight into the customer’s needs, allowing for a more relevant offering. Because retainers and service contracts are typically prolonged for multiple years, these types of sales efforts become even more valuable.
Let’s explore the levers a business can pull in order to increase revenue on a per customer basis.
Raising prices
"Just raise your prices" is a popular advice when trying to increase revenue. Especially when higher-than-normal CPI/inflation numbers make the news every other day. While this is good advice, the more important question is by how much the typical rate should be increased. Increasing prices in order to keep up with inflation is a no-brainer. Yet smaller businesses tend to forget this when inflation numbers are more in line with the historic average. If there is only one takeaway from this article, this should be it.
Increasing rates is straightforward when just keeping up with inflation; few clients will reject such an increase. If the retainer and service contracts are structured well, they will most likely include an escalation clause that allows for a price increase based on a widely used price index. This is important as it means you are not required into a new contract. Depending on the type of customers a business services, this can save a lot of effort for both parties.
It can be argued that raising prices in line with inflation is not a price increase at all as the company maintains its relative price-level. When a business is looking to increase its rates past inflation, price elasticity (the ratio of how a change in price affects the demand for a given product) becomes the main concern. Smaller companies are often ill equipped to accurately forecast/determine price elasticity due to the lack of data. This leaves these increases to be judged by gut feeling and anecdotal evidence.
There are other ways to reason about prices increases when an evidence-based approach is not possible. Consider asking the following questions to get a better understanding about the business’ pricing power:
Is the business currently operating at over or near capacity?
How easily can the business add or remove capacity?
Are the current margins sufficient to run at lower capacity for a period of time?
Does the business have a predictable marketing/sales function?
Are the switching costs to another supplier relatively high?
How commoditized are the services offered by the business?
Substantially higher prices in itself might also create a pro-cyclical effect; both in terms of market positioning (premium market), or in positive momentum throughout the sales function. Deciding by how much a small business raises its prices is also subject to the owner’s risk appetite; more experienced or optimistic entrepreneurs might be more comfortable raising prices quicker.
Bonus: Royce Ard wrote a great thread on how he goes about increasing prices.
Cross- and upsell additional services
Discovering what kind of services are of value to a customer is an important part of the sales process. Customers may have a good idea about what they require in terms of different services. A salesperson might be able to expand on this by surfacing additional customer needs. While retainers and service contracts are often in place in some shape or form, odds are, customer needs have evolved over the years, or that the business developed additional services in the meantime.
Upselling existing retainers or service contracts is low hanging fruit. Especially if there is a clear gap between the service the customer needs and the existing agreement. A great example is a long-time customer that originally started out with a single online property, but grew to four properties over a number of years. They are still on the original retainer and the backlog of work keeps expanding due to lack of capacity. Offering to increase the retainer makes it clear the original service level can not be maintained because of the additional needs from the customer and creates clarity either way.
While a customer might have originally engaged for a specific project and subsequent services, chances are that there might also be a need for auxiliary services. This becomes apparent when comparing similar customers and analyzing the services typically purchased together. This analysis might show that some services were never offered as they did not exist at the time. These are the services that have a high probability of successful sales to existing customers.
Royce Ard correctly pointed out that correct packaging can have a huge effect on your ability to increase your average revenue per customer, either by upselling, or cross-selling. For instance, as a digital agency we do not only bid on the initial projects, but also provide quotes for hosting services, service level agreements, security/maintenance contracts and general support. This packaging is based on the typical needs from our customers for a similar type of project. Striking a balance between relevance and succinctness is important here.
Try answering these questions for specific customers when looking to upsell/cross-sell to existing customers:
What retainers or service contracts do similar customers require, but are not in place for this customer?
Is the customer receiving the right service level considering their retainer and service contracts, or have their needs for these specific contracts changed?
Has something changed in the customer’s environment to explore increasing the retainer or offer additional services?
What has been previously offered to the customer and does it make sense to offer the same/different services, in a different/similar message again?
Reviewing customer accounts should be done regularly in order to minimize the time the customer has unmet needs, while maximizing revenue at the same time.
Increasing footprint
Project-based work is typically a one off. After completing a project for a customer, it is not likely a similar project comes to fruition within a short timeframe. Especially from the same point of contact. The cadence of the customer’s business typically dictates the sales pipeline when going about this passively. Over the years businesses can seriously expand their footprint at their customers by simply keeping up with their point of contact.
Simply getting on the "approved vendor" list can mean one less hurdle for other people within the customer’s organization to engage. Some customers also prefer to consolidate the number of vendors they work with in order to reduce the complexity of multiple relationships. Individuals often take a risk when hiring a professional service firm for high-ticket items; a relevant and demonstrable track record can be a huge advantage.
When looking to expand the business’ footprint at an individual customer, consider the following questions for each point of contact(s).
What properties/brands/products/projects is the point of contact responsible for and has the company offered services for each individual one?
What properties/brands/products/projects is the customer’s organization involved in and for which does the business offer relevant services?
Are their opportunities to do similar projects for other properties/brands/products/projects?
Can the point of contact introduce us to colleagues in similar roles and/or to their boss?
Depending on the size of the customer’s organization, these types of sales activities can turn a low-revenue customer into a high-revenue customer. Especially when being able to jump across departments or even different companies within a group holding.
Wrap up
When a business has never paid attention to increasing the average revenue per customer, some deliberate effort can show big results in a relatively short period of time. Ideally these practices are performed on a regular basis, either once or twice a year. If a business has existing customers with unmet needs, it is beneficial to both parties to close the gap. Time to go selling!