Internet Business Insights Vol #1

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I am putting out a monthly newsletter with insights that I learned from that month with clients or businesses I am involved in. If you want to get added to the list, email me! General Internet Business Concepts: MVP / Lean first methodology is not just for app companies – Many of you have heard the… Read more »

I am putting out a monthly newsletter with insights that I learned from that month with clients or businesses I am involved in. If you want to get added to the list, email me!

General Internet Business Concepts:

  1. MVP / Lean first methodology is not just for app companies  Many of you have heard the concept “Lean Startup” or “Most Viable Product”. This is being thrown around as a term a lot in the software industry, but I have not seen it translate much to lead generation and ecommerce businesses.

    We get a lot of clients that make decisions in a board room after a long day of spit balling. They come up with a new theory for their business model and simply make the decision to do a massive overhaul to infrastructure before testing first. There is no reason to invest heavily off assumptions when one could test the concept first. Here are a couple of recent relevant examples that I have seen in the last few months that articulate how you could involve Lean Startup methodology to your business.

    An Example: Ecommerce Integration – We have a client that is looking to expand their offering. This company has traditionally used the web as a lead generation tool, not a direct commerce transaction. It was decided that they are going to offer a new product line to their website. They then planned internally a massive ecommerce build that will take hundreds of thousands of dollars without even knowing if people are going to buy the product. In this case, my recommendation would be to just throw up a landing page for lead generation and make it appear they are buying the product. Buyers would fill out the initial lead form showing interest to buy, but after they fill out their name, email and phone number, we are going to have a call center person call them up to close the deal and ask questions on why they decided to buy the product. The idea is that if no one is taking the simple tip to filling out the form, which is a really easy-to-convert conversion funnel, then certainly no one would whip out a credit card and buy something either. So, for $10k and 1 month of development and launch time, we can test the theory. If it comes back favorable, we move forward with the full build out. If it fails, we dump it or change up the offering and retest.

  2. Kickstarter I am sure most of you are familiar with crowd funding platforms like Kickstarter and Indiegogo, but there is a lot of misconception on how companies utilize these platforms. You are not raising money and selling equity. This is a glorified discount pre-order platform, plain and simple, and it works. Whether you are an existing brand with a new product, or a new brand just launching, platforms like Kickstarter are an amazing way to get some initial revenue in the door to cover first run manufacturing costs, gauge interest, seed reviews and drive buzz.

    When running a Kickstarter campaign, the expectation should not be that you will be profitable, if at all, on the initial push. This should be viewed to help cash flow a product launch and initial buzz.

    The reason that it is not profitable is because you need to spend a lot of money on driving media to the Kickstarter campaign. Very rarely does a project fund without spending money on Facebook/Instagram media.

    I have very little personal experience in this category, but there are several agencies in the space dedicated to helping drive media and overall funding for campaigns. If you want an introduction to them, you can email me anytime.

Improving Website Conversions

  1. Importance of Website Speed for Conversions One of the most over-looked items when it comes to improving conversion rates is site speed. There is a bunch of data out there that supports this and can be easily found, but it’s becoming increasingly important. It is also the most complex to solve in most situations as there are many things to consider when optimizing your site for speed. 95% of websites are on WordPress, Magento, Drupal or a small handful of other platforms. What is not commonly known is that these platforms, out of the box, are not optimized for speed, they are optimized for convenience to build. Also, the more plugins/extensions you load, the slower these platforms operate. Here are 3 items to look at first:
    1. Site Speed Tool – Google has a very cool tool to help immediately identify items that you can improve on. I would ignore the scoring portion of this, as most sites are not apples to apples comparisons, but they give you very specific items that your site can improve on. https://developers.google.com/speed/pagespeed/
    2. Image Caching and Size – Image load time is one of the main factors that effects site speed. Image size, quality, location/server that it comes from, this should be the first thing you need to tackle.  There are tons of software solutions / CDN’s that can assist in this. Also, a quick first step is to simply reduce the size of images that are on your site. Depending on what you are selling, you can often times reduce images by 50% or more. There are a bunch of ways to do this, here is a good free one: http://tools.dynamicdrive.com/imageoptimizer/
    3. Caching and Database – Database structures, and website caching is the other issue that commonly plagues site speed and is not optimized by default on most platforms. Specific recommendations are above my knowledge set here, but I can point you in the right direction on this if you need it. Most good ecommerce developers can help, and there is a ton of information online about this.
  1. Increase Conversions with Time Sensitive Promotions This might seem like a small item, but hands down if you are selling something on your site, you need to motivate people and give them a compelling reason to pull the trigger on an offer. Have you ever noticed when going to a physical shopping mall, that all Jewelry businesses are perpetually going out of business, all the time? Furniture stores do this too. This is a tried and true tested marketing tactic that has worked for centuries, here are a few tips that we have seen move the needle:
    1. Conversion Enhancement #1 – Main promotion area When someone comes to the home page of your site, there should always be a timed promotion for a product or offering. This could be a weekend sale that resets each Monday, free shipping or a gift. Whatever the promotion, put a time stamp on it, even if it’s something you may offer in perpetuity. For 99% of commerce stores, clients will come to you once or twice a year at most, so alienating a few will be greatly offset by all the new customers you get into your funnel.
    2. Conversion Enhancement #2 – Amazon + Expedia and Creating Scarcity Amazon and Expedia utilize the most effective version of scarcity on the web. On Amazon, when you are on a product page, you will often see “order in 2h 34m and get it tomorrow”. This has significant impact to get a consumer to pull the trigger right then and there. Expedia uses scarcity to show limited plane tickets and hotel room availability. You can use this for digital products and lead generation as well; “First 500 downloads free”. I would always encourage you to have integrity around offerings like this and you should not use it for every product on your site, but there are tons of ways to create scarcity, including:
      1. “Only 4 in stock today for delivery”
      2. “First 500 downloads get a gift”
      3. “Our most popular product, get it now while its in stock”
      4. “Offer expires in 2h 34m”

The more specific the scarcity point, the better it will work. A general phrase like “First come first serve” is better than nothing, but the biggest impact will be when there is something specific, like “2h 34m left until this offer expires”.

Amazon Tips / Fighting Amazon

  1. Direct to Consumer Brands, what to do with Amazon? I have recently gotten into the Amazon management business and many brands don’t know where to lump Amazon as a partner. If you spoke to 10 brands about Amazon, 8 would hate them, 1 would be confused and 1 would be happy. Amazon is a massive platform for brands, you simply cannot ignore it. Consumers are often times more loyal to Amazon than the brand/product they are looking for, so you need your product on there. You just need to know how to utilize and leverage it. Your direct to consumer or retail business can work synergistically with Amazon. Here are a couple of things to think about / consider:
    1. Pricing and Promotional StrategiesIf you have tight control of your distribution and are primarily direct to consumer, I would offer a lower price on your site than that of Amazon. Amazon can get a little upset about this strategy, especially if their price monitoring spiders pick it up, but you can get more creative than just a lower price on your site. Offer up other value ads like product samples, free content, buy 1 get 1 free style promotions, etc.
    2. Use it as a fuel, not as the primary vehicle – Amazon should never be considered the primary revenue source for your brand. It’s important that you de-leverage the Amazon concentration on revenue as they will start putting the squeeze on you (costs, margins, fees) if they suspect they are a large share of a brands revenue. It’s a great starting point for new products, but you need to expand on other channels and focus on your own website sales. Not just for margin reasons, but to better control the consumer experience.
    3. Reputation ManagementConsumers may be sold on buying from your direct brand site to get a promo, but they still may go to Amazon to see what the reviews look like. Amazons review platform is the most trusted review system in the eyes of consumers. So, what Amazon says about your product is probably even more powerful than what Yelp might be to a restaurant. Fund marketing campaigns to drive initial sales into Amazon to seed it with good reviews. And if your product sucks, and is susceptible to poor reviews, the internet is not for you. You cannot drive a successful product online if your products naturally garners poor reviews.
    4. Data and TrendsAmazon offers up a lot of consumer sales trend data that brands can use to find gaps in product categories. It’s a great thing to look at when you are considering a product refresh or trying to find other products that would compliment your brand. I recommend using JungleScout.com, it gives you a lot of great data and is a chrome extension so it gives you the data right on the Amazon product pages.

SEO Insights

  1. Launching a New Website? Keep SEO in Mind This is going to be an obvious one to many of you, but it is amazing how pure play design/dev shops are not planning website transitions with SEO in mind. In the last several months I have seen several very large brands launch new websites only to instantly discover that the tens of thousands of SEO visits they were getting daily were gone. The following are the 2 most important things one needs to prepare for when re-designing or re-platforming a website:
    1. 301 Redirects – it’s a very simply command you put on the server that tells Google the URL of the legacy page, and the location of the new one. Without this, every link in Google will be broken and you will eventually be completely de-indexed.
    2. Title / Meta Data – with all the new page locations, its best to use the existing Title/Meta data structure on the new site when launching. Once Google has re-indexed these new page URLs, you can have go back about your business with optimizing the titles and meta data. The thought process here is to transition your site with the least amount of changes possible.
  1. SEO Ranking Time Expectation Study Our head of SEO and Analytics found this interesting article and felt it was relevant to send out. SEO still has the largest ROI/Profit return than any online marketing tactic with maybe the exception of the influencer model. However, if you asked many companies on the success of SEO, it would be just so-so or negative. It might be that the SEO company or person you hired is not good. It’s also a possibility that the expectation was not set correctly. For new websites, SEO takes times (1-2 years). For existing sites its much quicker to move the needle. If you are in the middle of an SEO project and are questioning what’s going on, this article could give you some clarity:  https://ahrefs.com/blog/how-long-does-it-take-to-rank/

Thats it for Volume 1, I hope you enjoyed it. Again, lean on me however you want as a resource to help you out with any of these topics, I am happy to expand on them through an email or phone call. I may have a solution internally, and if I don’t, I will know a person or firm that can help.

Why Month To Month Contracts Beat Long Term Contracts

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 Traditionally in service businesses, it’s the job of the sales person to get as many months contracted in for a client as possible. However, looking at my own data on month to month versus fixed term contracts (3 months, 6 months, 1 year) for the last 5 years, there doesn’t appear to be correlation between… Read more »

 Traditionally in service businesses, it’s the job of the sales person to get as many months contracted in for a client as possible. However, looking at my own data on month to month versus fixed term contracts (3 months, 6 months, 1 year) for the last 5 years, there doesn’t appear to be correlation between length of contract and lifetime retention of a client.  In fact, there seems to be quite a bit of evidence that month to month agreements last longer and have a higher sales close ratio.

The following of course only holds true if you are delivering on what you sell. If you are a company that provides little value and rely on enforcement of contracts as a means of survival, you may as well stop reading now.

There are several reasons why I believe month to month contracts are typically better to sell than fixed period contracts:

  1. 1. If a company is Non-public and not governmental, your recourse is often limited even if the client defaults or wants to cancel an agreement. How much money and time are you really going to spend enforcing contracts that have values of less than $100k? It would cost more to collect it than just let it go.
  2. 2. If a client does not like what you are producing in terms of work and want out of a contract early, and you don’t let them, you are going to open yourself to potential online reputation problems and negative reviews. Which in this day and age is very hard and costly to fight.
  3. 3. The sales close ratio on month to month contracts versus fixed term is much higher because the perception of it is “I can get out whenever I want if they don’t deliver”. Again, as long as you are not over selling your service, and are selling to the right audience, you should not have an issue retaining.
  4. 4. Fixed termed contracts have an end date, so the accounting department is usually imputing the PO as a fixed-time PO. Once the time is up, your point of contact is reminded of this by accounting, and you have to re-negotiate terms again and go through financial approval processes. If it’s a month-to-month agreement, the PO stays open ended and you don’t need to worry about re-selling it every year.
  5. 5. If a client does not have the finances to pay you, whether you have an iron clad contract or not, you won’t get the money. So what is the point of having it?

The only time that contracts may be important for the service industry is:

  1. 1. It’s a governmental or large public company that you are signing an agreement with. These can sometimes be sold to other companies.
  2. 3. You are getting financing against contracts (PO Factoring or Receivables Loans).
  3. 4. You are planning on selling your company in the near future. SOMETIMES, Acquirers find value in this, but I am seeing this as a factor less and less.

10 Tips on Selling Your Service Business / Agency

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My experience in buying and selling businesses have been entirely in the digital agency space, but for the most part, all companies look at buying service businesses the same. Below is a non-sequential random list of thoughts and facts you should think about before selling your service business. Getting an LOI is the first step,… Read more »

My experience in buying and selling businesses have been entirely in the digital agency space, but for the most part, all companies look at buying service businesses the same. Below is a non-sequential random list of thoughts and facts you should think about before selling your service business.

Getting an LOI is the first step, but the items below will ensure that the original offer price stays somewhere in the realm of the offer, as well, set you up for success in obtaining your earn out.

  1. 1. Earn Outs – The dreaded earn out. 95% of the time, when selling a service business, you are going to have an earn out a good portion of the selling price. I would anticipate receiving 20-30% up front, 30% when a year hits, and then maybe a final 35% when you hit the 2-3 year mark or a specific revenue objective. I have asked around and for the most part only 50% of people hit their earn out as planned.

The most important part to negotiate is that you are in control of meeting the earn out terms. As an example, if you have an earn out that is tied to the company achieving a specific profit %, yet the acquiring company is in charge of hiring/firing, you could without any control miss your earn out.

So while I would not be afraid of the earn out, make sure you are in the drivers seat.

  1. 2. Client Concentration – You don’t want 1 client representing more than 20% of your overall revenue. If you have that, the fear is that once the company is acquired, the client could leave, and the entire acquisition will have failed. So often times if you have one client that represents more than 20% of your revenue, they may discount any revenue/profit for that client. This will affect your overall value.

And while its always difficult to decide how big a single client will be, try to spread out the revenue and sales/marketing focus whenever you can.

  1. 3. Earnings Multiple – 9 times out of 10, you will sell on a multiple of EBITDA. Basically, Net Income less interest, depreciation and taxes. Depending on how big you are when you sale will greatly impact what you sell for. If you are a $2m a year in revenue company, you might get 2-4x EBITDA. If you are a $10m a year in revenue company, you could get 10-12x EBITDA. The main differences being that if you are a bigger company, you probably have less likelihood that a few bad employees or clients could hurt the acquisition, and the business is probably more scalable in general.
  1. 4. Ad backs – If you are like most service-based businesses, you probably use your business for all types of expenses that if you sold the company, they would stop. An example might be that you put your car payment through the company, or you inflated your salary. Often times you have expenses that wont exist once the company buys you. These are called ad backs, and as long as you can explain them, you can put them back into your EBITDA calculation and give you an higher exit valuation.
  1. 5. Net Revenue – Too many times I have seen service-based businesses show their revenue with an inclusion of outside costs like pass through media. In the agency world, a lot of companies count clients spend (Google Adwords for example) in their net revenue calculation. This is not only poor accounting practice, but it will grossly hamper your EBITDA %, which could show you to be a more risky acquisition. A higher or industry average EBITDA percentage implies health and scale. Low EBITDA percentages implies risk. The top line is not as important as fitting into a proper ratio of Net Revenue / Ebitda in accordance with your industry. There is no set percentage, but if you are in the 15-25% EBITDA area you are doing well.
  1. 6. Vertically specific – If you can appear to be more vertically concentrated, you can often times get a slightly higher value. This is something you need to plan out ahead of time, but usually if half of your revenue is in a specific vertical that the buyer cares about or wants, you can usually justify a 20% premium.
  1. 7. Accurate Forecasting – This is a huge point that needs real thought put into it. As I stated in #10 below, where you are going is going to be important. They will want to see this in a forecast. The issue is, they are going to likely tie you to this forecast for the earn out. If you miss it, you will drastically reduce what you end up seeing in terms of cash. But you cannot go too light on it as then your buyout will be greatly reduced up front. So put some real time into it and come up with a realistic expectation of where you can be. Don’t put in a stretch goal, you will lose!
  1. 8. Executive Contracts – This is one of the stickiest topics in any service business acquisition. Even non-equity holding execs that are important to the business must sign an employment agreement or your entire deal could fall apart. One of mine almost did. The good news is that you and the acquiring company are in alignment on doing what’s fair to insure that your most important employees are motivated to make the deal happen. Be transparent to the top guys about a looming acquisition and start early on what reasonable requests might be from him/her.
  1. 9. Advisement Firms – Unless you know the acquiring company well, I would often times use a firm to help find a buyer and negotiate. Usually their connections will run deep with other advisement firms representing active buyers and they can get a bidding war going. Expect to pay a small monthly fee + 5% of the total proceeds of the sale. Select one with industry knowledge specific to you, it will be money well spent.
  1. 10. Revenue Acceleration – Buyers buy companies based off of where they think you could be in revenue/EBITDA 2-3 years out. So if you can sell while revenue is climbing, often times you can get a premium by justifying where the company is going to be. If you sell your company during a couple of years of flat (or worse, down) revenue, you just won’t be able to sell your way into a higher perceived value and most likely will only attract buyers looking for low-cost acquisitions.

If you are thinking of buying or selling an agency or service business, shoot me an email I would be happy to offer up any advice.