“The business enterprise has two—and only two—basic functions: marketing and innovation.” – Peter Drucker
These days, I send one invoice.
Maybe two. Rarely three. Never four.
The first decade of running my firm, I did what most (all?) creative service providers did; track hours and bill monthly, receive payment net 30. It was the only revenue model I knew. I had even hand-built a time tracking system for one of my employers back in 2002.
Once you get beyond a couple of clients, the amount of admin work (tracking time, creating invoices, following up on payment) really eats into doing client work we’re hired to do.
The default solution to this problem is to hire people and for a very brief period in 2011 I was up to 3 employees. Not surprising anyone, this only compounded and calcified the volume of admin work.
So, in January 2012 went a completely different direction, rather than optimizing for admin work, I wanted to optimize for client impact and my own quality of life. I let all my employees go and transitioned my clients to a flat fee, value-based, paid up front pricing model – either on a per-project or annual retainer basis. For many clients this meant their January invoice was the only one they’d see from me all year.
Only one client didn’t join me.
Another client thanked me for reducing their own admin work.
A few months into the transition I was surprised at how much more headspace I had, if only because I didn’t have one part of my brain continually asking, “can I justify billing these 15min?” and then taking more time to document that time. Instead, I have a clear incentive to deliver impactful work as soon as possible, leading to a much closer and ongoing conversation with clients.
This was the first time I realized how much pricing models drive operating models.
Operations will build systems, hire people, and optimize processes around whatever pricing model is set. These systems become self-reinforcing.
And not just in boutique professional services firms.
Restaurants are a tough business.
Day after day, restaurant owners are planning for an unknown number of people to order an unknown selection from wide variety of menu items, each with its own margin, prep time, and inventory to manage. It’s difficult to plan for so many unknowns without massive amounts of food and labor waste across the operations. It’s no surprise they struggle to stay open, let alone make a profit.
Turns out, there’s a different way.
Nick Kokonas founded Tock to improve restaurant profitability. In developing Tock, Nick and his team at Alinea made some seemingly small changes to how restaurants generally operated.
- Rather than hoping for people to walk in – everyone books a reservation.
- Rather than paying after the meal – payment is part of the reservation process.
- Rather than offering a wide menu – offer a pre fixe menu.
The result; predictability & profitability in a business where both are scarce.
“We sold every seat for a year, we made over 30% margins…” – Nick Kokonas
This is why picking the unit of value (Most Valued Noun or otherwise) is so important, as it dictates what operations optimizes for.
This also means, some percentage of operations problems – waste, unpredictability, struggles scaling – are due to, and can be solved by, the revenue model. As transforming the revenue model, even for one product or one customer segment, creates a structural incentive to innovate these problems away.
Which takes us back to Drucker’s quote.
Marketing and innovation. Between them sits operations, supporting, accommodating, and perpetuating what marketing sold. Hiding the waste, complexity, and workarounds caused by a misaligned pricing.
The question isn’t whether there are operational problems.
It’s whether your revenue model is causing them.