Companies that provide most of their value through independent contractors are always at risk. Here’s how to create a model that's win-win for the business, contractor and customer.
Relationships–internal and external–are absolutely critical to business growth. In many cases, the customer value in your business lies wholly or partially with a key employee or subcontractor.
Case in point: How many of you visit the local coffee shop because the barista is so friendly, or do our banking with one of our golfing buddies? To maintain its business, the coffee shop is dependent on the barista, and the bank is dependent on its relationship manager. If these relationships sour, they can severely hamper or even destroy your business.
Service-oriented businesses that are built on the strength of individual relationships can pose an additional challenge when the individual becomes stronger than the brand. We have a friend who’s building a small business in the personal fitness space. “Amy” does personal and group fitness training and, while she teaches classes herself, she also relies on a number of fitness instructors who are either employees or contractors.
As she focuses more on the growth of the business, Amy is increasingly relying on these business partners–after all, she can’t grow the business if she is the only fitness instructor.
Amy recently reached out to us with this question:
One of my personal training customers has been working with Julie for a few months and is very happy with the results. Julie is one of my contractors and also has her own clients. When Julie works with a customer, I take 25 percent of the fee and pay 75 percent to Julie. Recently the customer approached me and said, ‘Amy, I’m very happy working with Julie, and want to continue doing so, but I realize that I’m paying an extra cost because she is affiliated with your firm. Can I train with Julie independently and pay less?’
What should I do? I don’t want to lose my customer.
Well, Amy and Julie have a smart customer who understands that she is not receiving value directly from Amy and can save money by working directly with Julie. Furthermore, Julie can make more by working directly with the customer and eliminating Amy’s cut.
There are a number of businesses–big and small–that face this fundamental issue. Construction firms hire subcontractors, limo companies hire drivers, and technology companies outsource programming to India or other low-cost labor markets. In each of these cases, the customer has the ability to disintermediate their supplier and go directly to the subcontractor.
As we thought about this, we asked a few questions about Amy’s business model:
What is in the best interest of the customer? How can Amy make money by creating customer value in this situation?
What’s the value of Amy’s long-term relationship with Julie and what value does she provide to the contractor?
What options does Amy have to scale this business beyond herself? How should she structure the business to create sustainable growth and customer value?
From our perspective, it’s important for any service-oriented business to create a model with three principles in mind:
1. Add value on top of your core services
As long as you are providing value to your customers, they should be willing to pay for it. In Amy’s case, it wasn’t clear to the customer what value she was receiving beyond the training from the subcontractor. If your employees, salespeople, or sub-contractors are the source of 100 percent of the customer value, you’ll find yourself paying 100 percent of the value to these partners in order to retain the business. Your business needs to create value in excess of these sub-contractors. Most importantly, you don’t want your business model to be in conflict with providing customer value. In this case, Amy wanted her customers to be happy, but she had a financial conflict with the customer.
2. Create a win-win-win environment
Amy was providing a lot of value to Julie by offering a strong flow of new customers and taking just a 25 percent share of the fees. Amy could easily structure a fixed “finder’s fee” or “buyout price” for any subcontractor that wants to take on a customer independently. The subcontractor should be willing to pay the fee to preserve the long-term business relationship and ensure a pipeline of new customers. The customer receives value by continuing to work with the subcontractor for a lower fee. Everyone wins.
3. Know when to lose a customer
Some customers are bad for your business, and it’s okay to let them go. If they don’t value the product or service you are providing–such as an independent, lower-cost option–you can’t sustain a premium price. Release this customer to go find a better (and cheaper) deal and focus your efforts on finding and attracting customers that value your premium offering.
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark