How to maximise profit when competition is fierce
7 LESSONS FROM A BASKETBALL TEAM
It’s a challenge most professional services firms face in today’s market: how to maximise profit at a time of increased competition and decreased margins. And it’s exactly the same challenge Boston Celtics CEO Rich Gotham faced when he took over the reins of the world famous basketball franchise in 2006.
At the time of his ascension to CEO, the Celtics were struggling on the court - they placed last in the Atlantic Division of the Eastern Conference in 2006/7. They were pretty bad off it too. Ticket revenue was down, sponsorship was waning and the glory days (The Celtics won three championships in the 1980s and two in the 1970s) seemed a long way in the past.
Fast forward to today and things are a lot different. Forbes now values the franchise at US$2.5 billion - making it the fifth most valuable basketball team in the country. That’s despite coming from the 22nd largest city in the USA and not having won a title since 2008.*
So how did Gotham help turn things around from a business point of view, and what relevance does that have for your firm? I was fortunate enough to hear Rich speak at a LSSO I attended in the States. Here’s seven lessons all firms could learn from what he did at the Celtics.
1. Shift the focus from margin to yield management
Whether they’re selling a product or service, most businesses focus on margin. In other words, if a professional charges out at $400 an hour and the firm can account for their salary and all expenses at $300 an hour, they’ll make $100 profit for every hour billed. But that’s not necessarily the way that’s going to deliver you the most profit and it’s not the way Gotham wanted to price his product either.
Now, I’m sure you’ve noticed how the price of airfares and hotel rooms rise and fall depending on demand and supply. If you want to fly or stay at peak times, you’re going to have to pay a whole lot more than in the offseason. If you book last minute, it’s a bit less straightforward: you may face a steep penalty or you may get a bargain - depending on capacity and scarcity. That’s yield management.
After putting a lot of time and effort into analysing what people were buying and when, it’s also how the Celtics started pricing. And, it’s what I know some law and accounting firms have started doing too. When there’s spare capacity they’re willing to sell their services cheap, just to keep things turning over and keep staff busy. But when there’s a lot of work about, or it’s a busy time of year - or they’re selling the kind of work only few people can do - prices go up and profits go up too.
2. Segment, then focus your attention where it matters
Gotham noticed that not all ticket buyers were created equal. At the bottom end of the spectrum were the ‘one offs’ who contributed the price of just a ticket across a season. At the other end were the season ticket holders who would happily fork out the price to see every home game over a whole season (and a regular basketball season is 82 games long!). In other words you needed to find 41 one off ticket holders to produce the same amount of revenue as one season ticket holder. When the amounts both types of ticket holders paid were so different, it simply didn’t make sense to focus the same amount of time and energy marketing to each group. But it did make a lot of sense to turn season ticket holders into repeat buyers.
Gotham also noticed that season ticket holders tended to start getting cold feet about two seasons in. That’s when they’d weigh up whether the cost of going to every game was worth it. So he channelled a lot of marketing dollars into bespoke communications aimed at this season ticket holders - and especially at getting them over the two-year bump.
It goes without saying that every professional services firm can, and should do, the same. First, work out which clients are really contributing to your bottom line. Then work out what their triggers are to stop contributing. Focus your time and effort on these.
3. Take sales seriously
Until Gotham took over, the Celtics had just four salespeople. Within four years he’d taken that to 28. This recognised the simple fact that, if you want to keep growing you have to keep bringing in work.
Too often professionals get focused on today and forget about the need to keep filling the pipeline. But good businesses work in three time frames simultaneously: the here and now (ie getting the job done and keeping current clients happy), the short-term future (ie doing what’s needed to bring in work over the next months and year) and the long-term (doing what’s needed to bring in work in the years and decades to come). A well-resourced sales team, means you don’t have to sacrifice the first (billing) and third (strategic planning) spaces just to keep that second crucial space going.
4. Manage risk
In any business there’s always a risk of losing customers or clients but that risk can be managed. Remember those high value season ticket holders we spoke about before? They receive perks like the chance to meet basketball legends at informal BBQs, a pre-season and mid-season conference call with the coach where they can ask questions about players and strategy, after-game family shootouts and the chance to put their kids courtside so that they can high-five the players. None of this costs the Celtics too much, but all of it makes the fans a lot more loyal.
To manage your own client risk, Gotham recommends assigning a weighted risk score to each account you have and prioritising both those who are at high risk of leaving and those, who if they did leave, would hurt you bad. You should then tailor your communications and value adds to hit those who you’d miss the most. Gotham also suggests holding regular focus groups with high value and high risk client segments where you work out how to service them better... Sounds a bit like client listening to me.
5. Offload excess stock
A basketball team, like any sports team, ends up with a lot of out-of-date merchandise. A lot of fans insist on having ‘this year’s’ kit. But there’s also fans who wouldn’t mind a piece of this old merchandise, especially if it’s sold at cut price. Celtic discounts this heavily and grants members exclusive access to it - but only at certain times of the year. After all, if it’s released at the wrong time, selling it could eat into the higher value merchandise.
Again, there’s no reason professional services firms can’t do the same. When you have excess capacity, could you offer it to your loyal clients at a discount fee? If you choose to do this, just be sure you’re not cannibalizing your existing services and fee base.
6. Create a secondary market
When Gotham took over, the Celtics, like a lot of sports teams, were suffering the problem of secondary markets for their products. In this case it was ticket resellers who’d scalp tickets at inflated prices and pocket the difference so that the Celtics missed out.
To prevent this from happening, Gotham started his own secondary market, where people who couldn’t use their tickets could sell them for a fair price and those looking for tickets could buy them. By doing this he took power away from those who could profit at the Celtics’ expense.
Could your firm do the same and create a secondary market for its services? Maybe. Think about how you could productise, white label, team up with a complementary service provider, or do something else?
7. Spend advertising dollars wisely
Finally, when Gotham put his advertising spend under the microscope he found that a lot of money was going on traditional advertising but it was producing little reward. His analysis showed that the franchise could reach a lot more people and have a deeper, more personal relationship with them if they focused instead on social media, digital marketing and content marketing instead. So that’s where he shifted his money.
The Celtics now have 13 million social media followers and reputedly boast the second largest digital footprint of any American sports team. Best of all, the incredible level of fan engagement comes much cheaper than it ever used to.
For professional services firms, the lessons here are obvious. Advertising and marketing have changed. If you’re still stuck in the old way of doing things - ie traditional advertising - you could be spending a lot more money than you should be, for a lot less reward. If you haven’t done so already, now’s the time to consider shifting some of your focus to online and to start really connecting with audiences.
The Boston Celtics are just one example of how a business in an unrelated field has important parallels in the world of professional services. If you’d like to talk about anything here - or find out more about real life case studies - get in touch.
*For the record, Forbes lists three of the four most valuable NBA franchises as the major teams from the US’s three largest cities - The NY Knicks at one, the LA Lakers at two and the Chicago Bulls at four. The anomaly is The Golden State Warriors from San Francisco, a team having an unprecedented run of on court success.