Understanding Business Model
Business Model means a method to make reasonable profits at a price point, that client sees adequate value. Naturally, this is a tough balancing act in between – our need to maximize revenue and the client’s need to minimize costs.
The question is – which type of clients you are going to serve? Age group? Income? Any Niche? How much revenue do you expect per client? Do you like to have any common theme factors amongst your clients? As an example – Our ‘One thing’ is ‘To help Corporate Executives to manage their personal finance’. The segmentation can tremendously help to standardize and refine your services, year after year. When you have the clarity on how you want to grow your firm, you will see this reflecting with your team members. It would be very easy to groom them.
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Two tricks on the business model that has worked very well for us:
- The fee is a GREAT leveler so you can use it smartly to filter out unwanted clients. One of the ways is to have minimum billing criteria. Say ~1.25 Lakhs a year + Taxes. This keeps lots of unserious people away. And as Nick Murray says, remember that client is not selecting us, we are selecting the client to work with. We typically decline 6 or 7 out of 10 referrals with a polite suggestion that ‘One of our goals in life is to give you a great value for money and for the kind of fees we charge, we will not be able to offer you a great value’. Dan Aerially says when you have a rule, life becomes easy. A rule-based business model would lead to dispassionate decisions and reduce biases while selecting clients to work with.
- I learned the concept of ARPU (Average Revenue Per User) while working for telecom companies in my previous career. My experience and results overwhelmingly suggest that focusing on our Average Revenue Metrics can significantly boost revenues and transform our practice. Let’s say that an advisor has 20 Lakhs of revenue with 20 clients. So, the average is 1 Lakh revenue per client. The advisor may question those engagements where he is earning < 1 Lakh & move out, appropriately. The average will automatically GO UP. Of course, you will need to back-fill clients, and assuming your minimum billing criteria for new clients is far higher than your current average, your new average, will again SIGNIFICANTLY go up.
That said, more than the revenue per client, the fitment to your firm’s philosophy is super critical to the success of the engagement. As an example, the fee criteria can be relaxed for growing families, who are in sync with your firm’s long-term planning & investment framework. It’s best that non-suitable clients are not allowed to enter your practice. I would recommend you consider asking the Key Question by Dan Sullivan– ‘Imagine if we are working for three years, what would make you feel great about our relationship?’
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And then let the prospect speak. As Nick Murray suggests, let the chips fall where they may. Understanding the why of the engagement can eliminate many conflicts at a later stage. So deep listening would be a supercritical skill to have, for powerful prospecting success.
Because the challenge in life is that there is always a zero missing in our fees, at the end. And compounding works in every sphere of life. So, it’s best to accept responsibility for those who have a clear long-term vision and are open to paying reasonable compensation for the value we can generate.
If you look around the services business, you will notice that all high-quality service providers demand a huge premium and work on their terms and conditions. As an example, an annual program with Rujuta Diwekar will cost you ~13.20 Lakhs*. And by the way, there is a waiting period!!!
When a prospective client starts excessively focusing on the price & asks for discounts with random comparison, the question is this – ‘Is price the only differentiator?
The value is different for different people. And we are dealing with something that is abstract. The value of an engagement cannot be quantified like CAGR in the portfolios.
When a client works with an advisor on a perpetual engagement model and follows the advice, it very likely means that the client’s retirement is secured. An advisor has a great amount of ownership and responsibility at stake. There is no mathematical model to factor such non-qualified aspects in the pricing.
One of my advisor friends gave me this million-dollar tip. Now, anytime a client questions us on pricing, I always look at it from the point of view that – will this client allow us to earn? If the answer is not comforting, then no point in moving ahead.
And the business model takes time to shape up. So, you need thinking time left on your table. Like we ask our clients we need to ask ourselves as to what’s our goal? When was the last time you took a thinking break?
There is a HUGE demand for a high-quality advisory and hence all models will grow. So, find out what works best for you and focus on that.