Selling More vs Overselling

Thursday, December 18, 2014

There are two obvious ways to make more money by selling a tangible good: you can sell more of that good, or you can raise the price.

Of course, raising the price isn't always easy, for reasons that I've described in my book on software pricing as well as my pricing economics blog.

Selling more goods is often a hassle too. With tangible goods, you have to acquire more before you can sell them. Sure, there are some fancy tricks you can do with inventory, but eventually, to sell a widget to your customer, you have to be able to supply a widget to your customer.

Wouldn't it be great if there were a third option? What if you could sell more products that you never actually had to deliver. Sound impossible? It's not. In fact, it happens all the time. Behold the magic that is overselling.

A diverse collection of industries oversells its wares - airlines, insurance firms - even consultants have made use of this practice.

Let's take the example of a consulting firm. Its employees are on salary and work around 20 days per month. The managers realized that the firm would only make money for days their consultants were billed out to other firms, so they targeted 100% utilization and sold a one-day per month retainer for each employee to 20 different companies. At this point, the company was rolling in dough, but there was just one problem - it could be rolling around in a whole lot more dough if it could sell even more days.

The managers noticed that half the time, a company wouldn't request any help on its allotted day, so the consultants were just twiddling their thumbs. Then one manager had a great idea to generate greater revenues (and profits!) - What if they could sell 200% of each consultant's time? They could sell 40 days of consulting retainers for each consultant. Odds are that this would work out to about 20 days of actual work. They'd make twice as much money as before, with no additional costs!

Of course, overbilling isn't just a way to earn more money, it's also a way to add more risk. Most months, this plan worked out well. Occasionally there was a bit of overtime if one or two extra customers needed help, but it was nothing that the firm couldn't manage. A few months went by and then all of a sudden... BAM!

Every single customer decided he needed immediate help that month. The firm was swamped! They didn't have the resources to meet the needs of their customers or to make good on the services that they had promised. As a result, the firm's reputation took a tremendous hit, and its customers (who hadn't walked away) were unwilling to pay premium prices for a company that was unable to meet its commitments.

Overselling is great when it works, but firms must understand the risks that they take on when it is used as part of a pricing model. How would they go about managing risk? Why not find out in my book how to price software, or just contact me for a consult? At TapRun, we don't oversell, we only over-deliver.