It’s an issue that faces any project or event-based business – they tend to generate bumpy revenues, which affects their ability to build momentum and secure growth funding. Listen to the podcast from The Money Show with Bruce Whitfield, as Pavlo Phitidis sets down a plan for business owners to escape the project-revenue trap!
WHAT IS A PROJECT DRIVEN REVENUE MODEL?
Any business that sells bespoke or customised work has a project-based revenue model. Examples include event management services to the supply of industrial plant and equipment. Securing deals like this are very appealing. They have lots of adrenalin and anticipation. It takes a real skill to win such deals because the value of these big deals is material. They can have some big numbers to them.
HOW DO THEY AFFECT THE TYPE OF BUSINESS YOU BUILD?
Depending on the type of product or service you sell, these deals require specialised skills. Typically, selling and securing a project, for example to build a piece of software to solve a problem or a massive mixing plant in an industrial bakery needs specialist skills. Specialist skills are by nature expensive. Often, the person with the skills is you, the business owner. You started the business because you had the skills to deliver this kind of product or service.
WHAT CHALLENGES DOES THIS KIND OF BUSINESS FACE?
There are numerous challenges including:
- Skills – access to specialist skills to ensure that you can sell, secure and deliver the project
- Bumpy revenue – its hard to secure reliable, predictable revenue. This makes building the business in an organised manner very hard. We refer to it as sine-wave-revenue. You spend your time chasing the deals because it requires your skill to secure them. Then, if you win them, you spend your time installing, delivering the product or service. in the meanwhile, there is no selling taking place unless you have a base of skills on board.
- Funding – its hard to secure funding n these types of businesses. Funders want and need reliable predictable revenue to service debt payments.
- Valuation – its hard to get a reliable valuation on these businesses. Valuation relies on free cashflow being generated over time. unpredictable revenues caused by the project nature of your revenue makes it hard to forecast a reliable estimate of the free cashflow.
- Sale – it’s a tough business to sell. A buyer would need to have your skills to see themselves buying and running the business.
ESCAPING THE PROJECT REVENUE TRAP
To move into a different revenue model, one that offers more certainty and predictability is a good idea. Such businesses build momentum, enable planning and growth in an organised way and over time yield very attractive valuations. They make for very attractive investments – hence the term Asset of Value.
Here are a few of the many strategies that you can deploy to make this shift in revenue model. However, beware, it’s a painful process and it take time. be sure you want to move there too because there will be some tough choices to make.
- Build products
Take a good look at all your projects. Identify the typical, most requested project. For example, if you are software developer, what is the most common problem that you find yourself building for clients. Correlate the projects against sector and industry. An important element of a product business is to have clear customer segment that you service and very well articulate problems that you solve. Create a workplan to begin building out the products. Try do this with a few of your client’s on-board right from the get-go. Allocate resources to this and deepen them over time. you will need a balance sheet to support this process. Those resources that serviced the project revenues are now going to service product revenues. These product revenues take time to build. Over time, as you deepen your product revenues, slowly switch the selling effort from project clients to product clients.
- Augment your projects
This is a far easy route to take. Think about the automotive industry. They started by selling cars. Once bought, that was it. today, they have added a suite of additional services. From motor-plans to driving experiences to trade-in deals, they have turned a once-off event into, in some cases, a revenue stream that lives as long as you might.
A client who supplied pumps as and when to mining customers took advantage of the recession and collapse in the mining industry to turn water elimination into a service. using technology and I.O.T he no longer sells pumps used to eliminate water form the shaft, but rather, sells a service that sees him being paid per hectolitre of water pumped.
- Deal make your volume
Because clients only buy as and when, look to deals that secure the as” right now and the “when” in the future. Its about selling to a client once and securing their further needs on other projects. For example, an eventing business could make a deal that offers a rebate on the future events if a client commits to 5 events in a year. do 10 such deals and you turn 10 projects with 10 clients into 50 projects in the year. the consistency of project acts to smooth your revenues.
These are some of the strategies we have developed for clients wanting to make the shift from project revenue to regular consistent revenues. Contact us and we’ll be sure to help you step beyond the project revenue trap.