Silicon Valley hasn't been "killing it" as hard lately. Recently, Twitter restructured by firing 336 employees, as did Rovio, thought at a smaller scale. Startups like LivingSocial are already feeling the crush. These downed Silicon Valley spirits are being reflected by the national press, too.
In trying times, when price reductions and termination letters start flying, everyone starts to look for a break. But the bright entrepreneurs aren't complaining: they're tightening up their operations. As the overall market continues to look "meh," what can be done to protect revenue?
Though there are never guarantees, every company can take precautions to better position themselves against crisis. Let's take a look at some of the ways to protect yourself against the same forces that are giving the companies we started with so much trouble.
How to De-Risk Product & Service Sales
- Research, Research, Research: If you're selling to enterprise, look at the customer's Moody Rating, cash on hand, credit ratings, and any history you have. This should be a good predictable of how dependable your client is.
- Protect Your Deliverables: This may sound like a "no duh," but clients should pay for all work. If you're invoicing work after it's done, consider a cap or limitation. Taking non-paying clients to court will only run costs up further.
- Look at Payment: Speaking of payment, look at options beyond Net 30 for product and services sales, or basic SAAS subscriptions. Look at competitors or across industries for ways to offer and charge for your product that might create new revenue streams.
- Break Work Down: If you're experiencing payment issues or finding customers nervous as they experience the financial crunch, consider scoping the project first, then breaking it into phases. It'll reduce your risk exposure, make payments more predictable, and prevents painful negotiations when you begin to face a money crunch, too.
- Focus on the Tip of the Speak: Watch the responsibilities customers place on you as part of consuming your product, whether that means paying for inventory upfront, insurance, or processing. Examine if your freemium product is converting customers or just costing you money. Sunset unprofitable products.
- Minimum Purchase: Considering your product stocking requirements, you might want to require the customer to buy a minimum amount of your goods every order, month, or year. The excess would need to be paid for even if not sent. This works best when you have a monopolistic hold on a buyer.
- Serve Buyers Who Keep on the Lights: Also recognize the cost of filling tiny orders: buyers who are buying small lines of product aren't profitable when salaries and operation overhead are calculated into their purchases. You should consider cutting them.
- Fees: Startups often build capacity (add staff, buy equipment, and more) to prepare for a project. Early termination fees could ease pain when moving staff off of a project a customer ends early. This could be a fixed fee or percentage of the project.
- Be Able To Make Money: Unless you're paid for it, avoid language keeping you from selling products or ideas developed during a client project. If that’s the case, the client should compensate you for the loss of business.
- Allow Price Changes: Consider the flexibility to increase prices where the environment changes. For example, where the amount of component parts increases or additional staff is needed.
How Will This Work?
Probably the second most common word I say after my name: contracts. I can't emphasize how important they are, but I've tried:
Read next: How to Get the Biggest Bang out of Your Contracts
If you've negotiated in excellent precautions but don't reflect them in the contract, you've accomplished little to nothing. If you and a customer agree to something, put it in the contract. Write it in clear, approachable language that doesn't leave room for misinterpretation -- which could haunt you later.
In Summary...
What's in the contract is important. But it’s also important to talk about the hard stuff.
When times get hard, continuing business as usual will lead to none of the usual business. Things have to change and companies have to adapt. With this conversation, its all in how you frame things. But you'll be glad you got the conversation out of the way.