Assessing the health of a B2B services business

Want to assess the health of your services company (e.g. engineering services, product development, software development, industrial automation, system integration)?

You’ll want to make the assessment on a service-by-service basis.

Why?

Because it’ll make it easier to see where to make changes. If you look at this at too high of a level, you’ll likely end up with too much averaging, causing loss of fidelity, which makes it harder to home in on where to make changes.

Here are some useful (though not all-encompassing) topics to assess the health of each service you provide:

  1. Solving important problems
  2. In-house vs outsourcing propensities
  3. Profit margin
  4. Sufficient quantity and quality of sales-ready leads
  5. Repeat business
  6. Ratio of lifetime revenue to median annual revenue
  7. Commoditization
  8. Employee engagement
  9. Barriers to entry

Some of these dimensions are subjective. That’s okay. This assessment is intended to help you as a business owner/leader keep a pulse on the overall health of your (presumably privately held) business, relative to what you want to get out of it.

Solving important problems (that customers are willing to pay for)

If you’re not solving problems that your customer sees as important and are happy to pay to solve, you may need to evolve your service to better align with the market.

A lot of new business ideas fall flat here due to a “build it and they will come” sort of mentality. You obviously think you’re solving an important problem, but what is the market telling you? You may either be solving what the market considers a minor issue, or you may be solving an important problem that potential customers have found an acceptable workaround for.

Indicators for consideration:

  1. Do you have a lot of trouble getting your ideal customer to be interested in the service?
  2. Do you have a lot of trouble closing the sale once you’ve engaged a potential customer?

While these could be indicators of other underlying business challenges like sub-par marketing or a mis-aligned business model, don’t underestimate the possibility that the problem you’re solving just isn’t important enough to your customers, especially if this is a relatively new service for your company. If this is a relatively new service for you as a company, check out Marketing strategy for launching a new service.

In-house vs outsource propensities

For most B2B services, there are some portion of companies that are going to want to do the work themselves in-house, and some portion that are interested in having at least some of a given type of work done externally by a 3rd party.

That 3rd party is your company. The important question is: are there enough companies (potential customers) interested in having at least some of this work outsourced to a company like yours?

If too often you hear that your potential customer already has a team that handles that work (regardless of whether the work is executed solidly or the solution is hacked together), you may struggle to overcome that hurdle and convince them there’s a better way.

If your service is only incrementally better than what they’ve already got (and be honest with yourself), you’ll be fighting an uphill battle. It may be time for a different approach or different service. Even if your service is notably better, you’re still going to be fighting a defensive mindset with those that think they’ve got the problem solved (whether or not they actually do).

Profit margin

I’m not here to suggest what gross/net profit margin you should be aiming for. Why? Because that’s (mostly) up to you and what you’re trying to get out of your business.

Not every business is trying to maximize profit margin, and I think that’s for the better.

There are many other important factors beyond profit that don’t get discussed enough. Some examples:

  1. work-life balance – being able to go on trips with friends/family, going biking/walking/running, etc,
  2. passion – feeling good about the work you’re doing,
  3. flexibility – being able to say no to some work, working remotely, etc,
  4. evolving the business to maintain or improve happiness and sustainability.

None of these factors requires a particular net profit margin (other than > 0).

The most important question here is: does your profit margin give you the freedom to do with the business what you want to do with it?

Sufficient quantity and quality of sales-ready leads

Are you getting enough of the right type of leads? No, you don’t always need more. Sometimes you need less. Sometimes you need less, but higher quality.

Assuming your repeat business is <100% (if it’s not, I’d love to hear your story), you’ll probably need new leads. Even if you’re really good at penetrating existing customer accounts, that has its limits and associated risks (e.g. too many eggs in one basket).

The point is, are you seeing enough reasonable-quality new business opportunities?

If not, check these out:

  1. How should your marketing actually help you as a business owner?
  2. How can marketing actually help salespeople?
  3. Want sales-ready leads?
  4. How to market a B2B service
  5. How to align sales and marketing

Customer Retention – Repeat business rate

Repeat business rate matters because it’s generally significantly more expensive to acquire a new customer than it is to do more work with an existing customer.

This can be especially true for services-based businesses, where you generally want to:

  1. build trust,
  2. build relationships,
  3. increase your understanding of your customer’s business (and their understanding of yours), so that you can work together more efficiently over time.

Repeat business can get a little tricky to calculate, because, depending on the type of service you provide, your interactions might come in project-oriented bursts, rather than interactions at more regular intervals. You need to figure out the duration for which it is likely that, if a customer is coming back to you, they’ll do it by this interval most of the time.

From there you can calculate what % of customers come back to you within that interval, or a multiple of it if appropriate.

Ratio of median lifetime revenue to median annual revenue

What’s the ratio of median lifetime customer revenue to median annual revenue per customer? For example, if in a single active year you bring in $50k from a customer (median), and the lifetime revenue of a median customer was $300k, this ratio would be 6.

Typically (yes, there are exceptions) I’d say the higher this ratio is, the better. Why? Because this gives you predictability and breathing room to make adjustments as the world evolves around you (and it will evolve around you). It also decreases your cost of sales. This is more so the case when your revenue comes in at regular intervals as opposed to large irregular chunks.

Commoditization

Commoditized….. the word sends chills down my spine. This is not a fun place to be as a business.

Some indicators that you might be getting commoditized:

  1. you’re usually going up against 2 or 3 other companies during the sales process
  2. your often winning/losing based on price
  3. the terms of your engagement are being forced upon you and you have little room to push back
  4. you often feel like your work isn’t being valued by the customer

If you’re feeling commoditized, you’ll want to start thinking about how you can evolve your way out. A few ways to start brainstorming:

  1. What can you add to your service to bring it to the next level that a large fraction of your customers aren’t already doing? In other words, where’s the world pretty clearly heading? You may need to bootstrap yourself into a new service.
  2. Are there other industry verticals that aren’t being commoditized?
  3. Do you need to narrow your focus and find a niche?
  4. Is there a way you can modify your pricing model to align better with customer needs?
  5. Is your service focused on solving the wrong problem?
  6. Are you explaining your differentiators well in your marketing?

Employee engagement

Do your people enjoy the work they’re doing overall?

If you aren’t confident you know the answer to this for the bulk of your employees, then you need to take the time to find out, and then keep a pulse on it over time. If you’re employees aren’t engaged, you’re going to be less competitive.

This dimension of business health is a particularly dangerous one, because problems can be subtle and hidden from leadership, and it accumulates (positively or negatively) over long periods of time (several years).

If you’ve been judged as highly empathetic by your peers and you feel anything less than instinctively enthusiastic about your employee engagement levels, you’ve probably got work to do. Alternatively, if you’ve not been given a lot of feedback that you possess high level of empathy, then you’ll want to pull in those that do and dig in on this one to find out where your employees stand.

Barrier(s) to entry

How hard is it for other companies to look like yours?

There are almost always companies out there doing what you’re doing, especially in the services world. That’s not a concern in and of itself, assuming the market isn’t saturated.

If there aren’t other companies offering this service, and you’re just starting out, that’s a caution flag that you may not have a viable business. Maybe you’ve found a unicorn opportunity, but that’s unlikely. If nothing else, you may be too early to the party.

A few examples of stronger barriers:

  1. Many years of experience and/or specialty education are important to do a good job
  2. Significant continuous learning is required
  3. Personality traits that are less common (e.g. analytical mindsets, strong communication skills, hyper creativity, high levels of empathy)
  4. A solid customer base built up from a team of high performers
  5. Less enticing/interesting work (at least from the outside)
  6. Painful qualification / certification hoops to jump through
  7. Smaller market segments
  8. Less scalable businesses

How many of these boxes does your company check? If you only check 1 or 2 of these, I’d generally say you don’t have a lot of strong barriers. If you check 5 or 6, you’ve probably got a fair number of barriers to entry.

So what now?

Once you’ve worked through where you stand in each of the assessment areas (for each service), you should have some ideas about where to focus your energy to improve the health of your business on a per-service basis.

Let’s chat

If you’re in learning mode, check these out: