Episode 33: The Boutique: A Practical Guide To Monetize Professional Services
Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host on this episode, I will make the case that boutiques constrain their growth by thinking too narrowly about monetization. They often think there is only one way to charge and only a couple of revenue sources available to them. When in fact, there are nine common ways to make money in the professional services industry. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is a monetization wizard of sorts. He’s going to present a practical guide to monetize your services. Greg, good to see you. Welcome.
Greg Alexander [00:01:22] It’s good to be here.
Sean Magennis [00:01:24] OK, let’s jump into it. Greg, tell us about the nine common ways to monetize professional services.
Greg Alexander [00:01:30] OK, so the nine most commonly used sources of revenue in professional services are, so number one hourly billings. Charging clients an hourly rate has the benefit of being easy to implement. However, it limits how much revenue you can generate. There is a fixed number of hours and there is an upper limit on how much you can charge for each hour. OK, number two, retainer. This is when a client pays you upfront to secure your services when needed. This has the benefit of getting paid in advance in a predictable cash flow. However, there are only so many retainers a boutique can handle at one time. OK, number three, fixed bid. This is using a flat amount, regardless of the hours worked. This is profitable work for boutiques if they can scope projects correctly. Clients are buying the deliverables, not the boutiques time, if a firm struggles with estimating the level of effort for a project, this can be a money loser. These are the first three let me pause here and check in, should I keep going?
Sean Magennis [00:02:36] Yes, Greg, I’m I’m tracking right with you and hopefully the listeners as well. So taking note, hourly billings retainer and fixed bids, got it. So a good refresher on the differences between the three, for example, many boutiques, confused retainers and hourly rates.
Greg Alexander [00:02:57] OK, good. So, number four, let’s move to performance based contracts. So goals are established. If the firm is successful, they get paid. And if they fail to deliver, they do not. This allows a boutique to capture upside as they are usually uncapped. The risk, of course, is if you do not produce, you lose your shirt. Hey, let’s go to number five membership dues. This is when a client pays a boutique, if they see value in being in a group with other clients. The annual dues grant access to a group of people in similar jobs dealing with similar issues. This is profitable for boutiques as it scales nicely. Small amounts of staff can manage a large number of clients. The risk, however, is if you have unhappy clients, word is going to spread very quickly. OK, number six, licensing revenue. A licensing fee is paid by a client to a boutique for the use of intellectual property. Many boutiques have methodologies and tools that clients want unlimited access to. They pay a license fee for this right. The risk to a boutique with this is an inability to productize this service offering. If every project is a snowflake, this does not work. And number seven, a subscription based subscription is paid to a boutique by a client to gain access to an asset. For example, many boutiques have proprietary benchmark data. Clients who want access to this data pay subscription to a database. The risk with this is managing the asset. For example, in this case, if the data ages, it becomes worthless and clients attrit. So Sean, let me check in again. You still tracking?
Sean Magennis [00:04:45] Yes, I’m right with you. So let me recap for five, six and seven. We have performance based fee memberships, licensing and subscription. Tell me about the last two, eight and nine.
Greg Alexander [00:04:59] OK, so number eight is events. This is when clients buy a ticket or tickets to be granted admission to an event the boutique puts on. This is very profitable as typically sponsors cover the cost of the event and ticket sales are all profit. The risk is, of course, if no one buys tickets and no one shows up and that can be embarrassing. And then lastly, number nine is royalties. This is when a boutique does not monetize the client, but instead they monetize other boutiques. This is often used by boutiques who have training products in their bag. They allow other firms to use their training materials and collect a royalty every time they do. The risk with this is theft. A boutique who chooses this monetization strategy needs understand paywalls and royalty agreements. So there you have it. Nine ways to monetize professional services.
Sean Magennis [00:05:54] This, Greg, was an excellent overview of the practical ways to monetize. I have a nagging question in my head. So how do you pick the right one?
[00:06:04] Well, you don’t. So go in to market with a single revenue source is a mistake. The important lesson here is to have multiple revenue sources. Therefore, the question our listeners should be asking themselves is what is the right mix for me? If you have one, try to get the two. If you have to try to get the three and so on, it is not uncommon for me to meet an owner, look at her business and locate two to three additional revenue sources inside of an hour. This opportunity is often right under an owner’s nose. They just need to know where to look.
Sean Magennis [00:06:38] Greg, again, really connecting hard and a little creativity and courage can also go a long way.
Greg Alexander [00:06:45] Yes it can.
Sean Magennis [00:06:46] So thank you, Greg. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.
Stephanie Groschup [00:07:16] Hello, my name is Stephanie Groschup and I’m co-founder of GM Wealth Group. We serve women entrepreneurs and other business owners, corporate executives and high net worth individuals across the United States. At GM Wealth, we create strategies to address tax efficient growth of their businesses, planning for concentrated positions of company stock and other financial issues affecting them and their families. We create solutions by understanding those challenges that they face. Each solution is customized and client specific. Please reach out to me if you’re facing some of the same challenges with company stock, tax efficient growth in your business, or if you need help with addressing specific financial needs for you personally, you can reach me at www.GMWealthLLC.com or [email protected]
Sean Magennis [00:08:12] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your monetization strategy is working for you. If you answer no too many times your monetization strategy is not working and you are more than likely getting in the way of your attempts to scale. Let’s begin.
Sean Magennis [00:09:13] Number one, will the client pay you more than five hundred dollars an hour?
Greg Alexander [00:09:19] So this is important if you’re going to charge by the hour and many of our listeners might say, boy, that’s a big number. Well, the reason why it’s a big numbers because you’re going to have wage inflation. So if you hire somebody today and you pay him one hundred thousand dollars next year are going to pay 110,000 the year after that and pay them 125,000. So you better be able to charge a high hourly rate to accommodate for wage inflation.
Sean Magennis [00:09:37] Yes. Number two, will a client pay you in advance to secure your services on demand?
Greg Alexander [00:09:44] If yes, then you have a retainer.
Sean Magennis [00:09:46] Number three, can you scope your projects with precision?
Greg Alexander [00:09:51] If yes, and that’s a fixed bid.
Sean Magennis [00:09:54] Number four, can you prove direct attribution of results in your project?
Greg Alexander [00:09:59] Which goes to performance based.
Sean Magennis [00:10:01] Number five, will your clients pay you for the privilege of speaking to your other clients?
Greg Alexander [00:10:06] If yes, that’s a membership.
Sean Magennis [00:10:09] Number six, will your clients pay you for the right to use your intellectual property?
Greg Alexander [00:10:15] If yes, that’s a licensing fee.
Sean Magennis [00:10:18] Number seven, do you have proprietary data that clients would like to subscribe to?
Greg Alexander [00:10:23] If, yes, you have a subscription business.
Sean Magennis [00:10:26] Number eight, do you put on events that are clients willing to buy tickets to attend?
Greg Alexander [00:10:32] Obvious.
Sean Magennis [00:10:32] Yep. And number nine, are other boutiques willing to pay you a royalty to distribute your intellectual property?
Greg Alexander [00:10:40] You know, have the most profitable rock and roll band of all time?
Sean Magennis [00:10:44] It’s got to be the Rolling Stones.
Greg Alexander [00:10:47] Kiss.
Sean Magennis [00:10:48] Kiss, great band.
Greg Alexander [00:10:49] Because of their royalties and their licensing.
Sean Magennis [00:10:51] Wow.
Greg Alexander [00:10:51] They figured out how to make money without touring.
Sean Magennis [00:10:54] That makes total sense now that I think about it. And then finally, number ten, does your business model include at least three sources of revenue?
Greg Alexander [00:11:02] And that’s the most important one.
Sean Magennis [00:11:04] Yep. Greg, thank you again. This is brilliant stuff. So in summary, there are many different sources of revenue available to boutiques. Develop a clever monetization strategy. Think about a mix of revenue, not just one source. If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.