As I have shared many times before, the holy grail of managing any service-based business is understanding your unit economics. Heck, I wrote a whole book about just that, called Free Yourself to Work on Your Business. The reason that understanding unit economics is so powerful is that it allows your company to:
- Understand which clients are profitable and which ones are not
- Course correct unprofitable engagements without waiting until it’s too late
- Gain insight into the dynamics of what makes a client profitable vs. not
- Experiment with your pricing to achieve your target profit metrics
- Kindly offboard a client if they are not profitable for you
This is just the tip of the iceberg of how understanding your unit economics can power your business. (By the way, when I say “unit,” that might mean a customer, a location, a product or service, etc.) A unit is whatever you define for that means understanding its inherent profitability will be actionable for you. For many service-based businesses, the unit is the client.
The reason that unit economics are so important for service-based businesses is twofold:
First, service businesses generally generate revenue based on their people’s time. Service businesses effectively sell time and because of that, employees are the #1 largest cost of sale—a cost that also happens to be the least understood by many business owners.
Second, many service-based businesses are shifting to recurring revenue models so they are pricing on a flat fee monthly basis (i.e., not billing their time) but still incurring time costs in servicing that client. As the flat fee pricing model diverges from the cost of servicing that client, it’s easy to sink underwater quickly.
In general, the challenge of figuring out customer level profitability is that you need to combine both financial data that sits in your financial ledger as well as time tracking data. Now, there’s a big caveat here: YOU MUST TRACK TIME. If you are not tracking time, then stop reading this article and start reading articles on why time tracking is so important in a service-based business.
But I think we have found a better way—or a better proxy—for calculating customer level profitability. We call it the Win4All ratio (or “w4A” for short). It might just be the most powerful metric you employ in managing your business. Let’s break it down:
What is a Win4All Ratio?
Great client relationships occur when both customer and vendor feel aligned. In a measurable sense, alignment is about scope and price. When those factors are off in a significant way, both parties ultimately suffer. If a client is significantly unprofitable, that is definitely an indication of a bigger issue that is simply not sustainable.
When addressed early enough, there are opportunities for improvement. When addressed too late, the relationship may be ruined for good. So, in true Goldilocks fashion, we want a relationship that is “just right.”
The Win4All ratio is a figure that provides an early alert that something is out of alignment.
How is the Win4All Ratio Calculated?
I learned about this ratio from another service industry—outsourced IT services—and the concept is really pretty simple. Here’s how it works.
To calculate the Win4All, you need a few pieces of information: monthly recurring revenue (MRR), hours spent working on that client across that period, and the effective hourly bill rate for each team member’s work—more on that below.
Put simply, a Win4All ratio = the MRR / hours x effective bill rate, where the denominator represents what you would have billed had you been billing hourly.
When the ratio is 1.0 (or close to it), it’s a Win4all.
When you get too far above or below 1.0, something is off. What’s off? Well, that’s where the real work begins. There could be broken processes on our side, or processes that create delays on the client’s side. It could be that we underpriced.
The point is that if the ratio is significantly above or below 1.0, you can guess that neither party is feeling satisfied—and you need to take action. Anything less than a Win4all for a recurring monthly relationship is a recipe for a breakup.
Show Me An Example
Say you have a client that generates $4,000 per month in recurring revenue for your marketing service. Great. Nice job closing that deal! That $4,000 is your MRR for the Win4All ratio.
Your team is servicing that client and tracking their time by function. At the end of the month, you have done the following work for the client across all your time records:
Time Tracking Activity
|Marketing Campaign Development
Now, each role has a phantom or shadow hourly bill rate associated with it. The shadow hourly bill may not be something you disclose, but it is the bill rate that you would charge the client if they were paying for the work hourly.
So in this example, the bill rates are as follows:
Time Tracking Activity & Bill Rate
|Marketing Campaign Development
If we were to calculate the shadow bill, it would be as follows:
Time Tracking Activity x Bill Rate = Shadow Bill
|Marketing Campaign Development
Remember that the ratio is calculated by dividing your MRR ($4,000) by that shadow bill rate ($5,560). In this example, you get:
$4,000/$5,600 = .71
How Do I Interpret a Win4All Ratio?
Now is the important part: what do you actually do with that number? A W4A of .71 is far enough below 1.0 that it needs some attention. First, figure out if that figure was the result just for this month or if it is the average over, say, the last three months. Can the number be easily explained by an unexpected issue—or is it a pattern?
You have to track the W4A over time to really understand if it warrants action, but a result like this should mean your antennae are up. So what does a W4A like this mean?
Well, it could mean the following:
- You underpriced the engagement
- You are doing work that is out of scope
- A process breakdown is creating inefficiency
The goal is to use the W4A to figure out if the relationship is in alignment—and if it’s not, to start asking the questions that lead you to the source of the misalignment.
Do I Share the Win4All with the Client?
Absolutely! If a client isn’t interested in getting into alignment, then that sends a signal about the quality of the relationship. If the client understands and agrees with the concept of the W4A, then they can be part of the solution. It is not in the client’s best interest to sustain a W4A that is less than 1.0.
Kwabena Asiedu, Director of Finance at our client Pavilion, had this to say about our Win4All conversations:
“I appreciated Stride sharing with me the Win4All ratio and allowing me to see where there is opportunity to create a win-win so all parties feel aligned. Just grounding the discussion in data with high transparency allowed us to focus on shared areas of improvement while also feeling comfortable about the investment we are making.”
Who Owns the Win4All Ratio?
The person responsible for managing the overall relationship should also own the Win4All ration. This could be the account manager or client success manager.
If they’re responsible for managing the effectiveness of the relationship, then the W4A should become their most important metric.
Why Not Just Look at Pay Rates for Each Employee to Measure Client Profitability?
The problem with pay rates is threefold:
- Companies don’t usually disclose pay rates by individual. If you are going to let the W4A be a highly transparent metric, pay rates make that difficult.
- Pay rates don’t standardize by function. For example, a CEO might be doing some account management work—but that’s a resource problem that the client shouldn’t bear the cost of. Putting the CEO’s pay rate into the hours will skew the Win4All ratio.
- Pay rates don’t capture the embedded profit margin of the function, which means you really aren’t assessing whether there is sufficient profitability in the engagement.
Could You Make the Win4All More Sophisticated?
There are other ways you can use the Win4All ratio to get even more useful metrics. For example, you could set up a Win4All around direct costs attributable to servicing a specific client. If those direct costs exist, pull the data out of your financial ledger and add them to the monthly shadow bill.
How Do I Get a Win4All in Place at My Company?
First, download our free guide to calculating a Win4All ratio for each of your own clients.
Building a Win4All at your own company requires bringing time tracking and financial data into a single source that will help you run the report. Stride can help you get your Win4All in place through our Stride Vista business intelligence system, and we’d be happy to provide you with some good old fashioned guidance.
Reach out to us here to set up a free consultation.