Pricing: Your Fees are Obsolete, Now What?
What should a company do when it can't make money the way it used to? Travel agencies face this predicament, but they're not alone.
Patty DeDominic, CEO of $15-million PDQ Personnel Services, in Los Angeles, knows how tough it can be to run a profitable service. She recalls when the employee-placement industry began to change and she was forced to slash some fees by half. "It became an all-out war."
PDQ's original pricing model had been simple: charge a recruitment fee for permanent employees, and charge by the hour for temporary placements. Today, however, PDQ negotiates each contract individually. Its clients are hiring less frequently and are more likely to use contingency workers for projects, whether they last a few weeks or several years.
"I don't like the word temps, because it doesn't describe the way people work today," says DeDominic. Here's her advice about pricing:
· Educate your staff. Tempting as it is, as your company grows "you can't have the founders filling every order," DeDominic notes. Each week, she scans sales to evaluate billable hours, new accounts, and the cost of sales. But the scrutiny doesn't end there. In monthly meetings open to all 40 staffers, PDQ's chief operating officer reviews the financial results. "We want employees to know what factors drive a business," says DeDominic. Popular topics: corporate overhead, the economy, competition, and supply and demand. About 10 to 15 people attend each session.
· Set parameters. "I've made some bad pricing and credit decisions," admits DeDominic, who believes in learning from mistakes. So she provides guidelines, not inflexible rules. The 13 employees who price contracts know that costs are about 30% above direct labor, and so they add a markup of 30% (for breakeven) to 80% -- depending on who the client is, the length of the assignment, and the risk factors.
· Get a second opinion. When DeDominic recently hired accounting firm Deloitte & Touche to do a top-down review of PDQ's strategy, she found that too often her company was "pricing long-term projects at the same level as short-term." She realized PDQ could discount the rate on its longer-term, more lucrative services and increase the value to customers.
While margins remain a far cry from what they were in the company's heyday, they're on the mend. DeDominic has doubled PDQ's profit-sharing contribution for two years running. Last year's distribution was 10% of profits, or $100,000.* * *