The Cost of Fulfillment In Your Online Business

If you calculated your cost of fulfillment, you'd understand, am I charging enough for my services?Am I, am I charging enough for the, you know, the value that we're creating?... And then is there enough money left over for us to actually deliver on the promise that you know we've sold them.

For three years my agency built funnels and automation systems for the biggest names in marketing today since then has transformed that agency into a hyper profitable training and consulting business. While everyone is out there and talking about scale like it's some sort of destination, we'll be asking the real question, how do you transform your business into a more scalable model using the knowledge, skills, and expertise that you already have? This podcast is here to give you the answer. Join me and follow along as I learn, apply and share the strategies I'm using to build my multimillion-dollar business. My name is Greg Hickman and welcome to Scalable.

What's going on guys? Greg here and in this episode I want to talk about the cost of fulfillment.

So I want to talk about this for two reasons. The first reason is that internally we just went through an exercise where we were looking at, um, our two programs, foundations, which is our flagship program. And then leverage, which is, um, our 12-month coaching program. And we wanted to add some new things. We wanted to add some more one-on-one touchpoints, one-on-one support, some expert coaches to dive into, make sure our client's experience is a lot better and that they get the results that they came to us for and they get them faster. And so we looked at, um, kind of almost like we projected out, well, if we add these pieces to the experience, how does that impact our costs? And then how does that obviously then impact what we're charging for these programs.

And it really just got me thinking about when we started our agency, how we sort of arbitrarily just picked a number out of the sky, uh, for our pricing with no real understanding of what it actually costs us to deliver the results that our clients came to us for. And I see this a lot with, uh, with agencies and service providers specifically. You know, they, they care more about recurring revenues so they jump out of the Gates and they'll charge like 1500 or $2,000 a month because it sounds good in the beginning, right? But what they end up not doing is actually tracking how much it costs for them to deliver the work that they're selling to those clients at that retainer. And oftentimes they actually, I'd say 95 probably 95% of the time, most agencies that are charging retainer are doing so because it actually benefits them, not the client.

Most agencies actually shouldn't be retainer unless you're like a paid traffic agency. Um, that's a good good example of one that should, should be on retainer. There aren't too many agencies that actually sh should be on retainer at least as the entry level product. And a lot of the struggle that a lot of agency owners have and service providers have is that they jump into a retainer and they churn out before they've actually ever even maximize the value of that client coming in. That's a whole nother episode. But if you calculated your cost of fulfillment, you'd understand like, am I charging enough for my services? Am I, am I charging enough for the, you know, the value that we're creating? And then is there enough money left over for us to actually deliver on the promise that, you know, we've sold them. Right? So often I find that service providers, agency owners, they again pick the number out of the sky and they, when you like really boil it down, you look at the amount of hours that they're spending.

If they're billing hourly, either the owners rate, which there's probably a high hourly rate indoor, if they're farming that out to different contractors or employees, what are, what are those people's time breakdown to? And this actually happened to us, uh, many years ago when we first started, we kind of hit a cap on how many clients we were able to serve. And we had done the whole like, let's just charge twoK a month thing. Um, and it was a monthly retainer, which was great cause we had stability in the beginning. But what we realized was there were a couple of clients that when you looked at how much time we spent on their account, we even at $2,000 a month, like we were losing money, in fact bleeding the money, yet a handful of those clients consumed about 80% of our team's bandwidth. And so the clients that were paying us, you know, that weren't utilizing us to the capacity that these handful of clients were, we're getting less service because we were too busy with the ones that were, you know, bleeding us dry.

And we didn't really understand that until we looked at calculating our costs of fulfillment. And so if you're at a position where you feel like you can't take on more clients and, or you're not sure if you're charging enough or you're keeping enough money, which is super important, you really need to understand your cost of fulfillment. Now, the second reason I'm doing this, this training in this video is not only one because it's timely like I just mentioned and we've been going through it ourselves, but to, I see, I've seen a couple of Facebook posts recently. Um, where, well, it looks like Siri was thinking, I was talking to her. Um, I've seen a couple Facebook posts recently where people are talking about how, um, they're at 50% margins because they are using Facebook ads and they spend $1,000 to get a client using Facebook ads and they're selling like a $2,000 course.

Now that is not cost of fulfillment, right? That is your return on ad spend. There are two completely different things. If you are selling something for 2000 and there is nothing that you need to do for cost of fulfillment, I would 99% confident that you are over estimating what it actually takes to deliver on the thing. Right? And so I just want to break down some examples, right? Um, I just put together some arbitrary numbers so you can wrap your head around how you might be able to do this. And now I'm going to do this through more of like thinking of like a, a productized service business. Cause that's obviously what we help our, our agency clients and service providers, uh, transition into. And that could look like a traditional productized service where they're actually selling a specific outcome and delivering a done for you and or kind of taking that whole model and flipping on its head and actually delivering it done with you as more of like a call it a high ticket consulting program.

Um, we call it the hybrid model because I think there's a, I'm not going to go on the whole thing, but the hybrid is really the benefits of online course business. Also with the benefits of being able to deliver done for you, for your clients, packaged up in a nice little package so that your clients get exactly what they came for. You can still charge premium, but you still have the margins and leverage of an online based business. Now here's the dealio, so well let's say you have obviously a small team and we're going to try to calculate costs of fulfillment. Say you have a kickoff call, right? Every new client is pretty common. You have a kickoff call and the person conducting that kickoff call is $25 an hour and you do a 30 minute kickoff call. Well that's just say, sorry, the kickoff call is 60 minutes.

So that's $25 an hour. And then say every single month you meet with that person for 30 minute check in call, right? What's, what's working, what's not? Let's check in. What do you need? Right? Very common in a lot of the service based businesses and agencies that we talk to. There's a kickoff call and then, Hey, we meet at least once a month. Now let's say you meet for 30 minutes, and that same person who's $25 an hour is doing these calls. So that's $12 and 50 cents every single month, right? So say that the average length of contract is six months, right? So you have the kickoff call, that's month one. Then there's five 30 minute calls that cost 1250 each. That's 62 50 right? Totally. In 87 50 now a client comes in, maybe you send them a nice welcome kit. We just revamped our new welcome package.

Every single client that comes in receives like a nice welcome pack, a welcome kit. There's some Schwab schwag, there's some swag, uh Oh a workbook and some other materials that that we give them like notebooks and stuff like that. Water bottles, socks, and that has a cost, right? Every new client gets that welcome kit, right? So say that welcome kit costs $100 right? So now let's say you're in a done for you business and you do the math and you realize that for us to do what we need to do, we spend 16 hours. I'm just, again, this is for the example, say you spend 16 hours, but the person doing the build out or the implementation on this is $30 an hour, right? So 16 hours, $30 an hour, that's $640 all right? Now let's say you add your cost of acquisition, which is really more of an investment, but in this case we'll look at it as every new client costs you a certain dollars to get, especially if you're doing through paid acquisition.

So say your average cost per acquisition is $1,000 right? Like that example I gave earlier. So you take the cost of acquisition for 1000 bucks and all of the things that just added up and that's $1,827 and 50 50 cents. So if you were only selling them one thing that say, well like I just talked about, took 16 hours on the big picture to deliver and you charge two grand and you're paying people 30 $25 an hour roughly around there and it's taken you roughly 16 it costs you $1,827 and 50 cents to deliver a $2,000 product, which leaves little to zero margin for you to really do anything right, to have profit, right? You need to position yourself and your service obviously from a being able to deliver value. Um, but also it needs to be priced in a way where there's actually a profit for you to grow.

And I don't know where and when it happened, but this whole like 1500 or $2,000 a month thing because it sounds nice and let me get a handful of those clients very quickly backfires. And I know because it happened to us. So you need to understand how much is it actually cost for you to fulfill on that? How much of your team's time are you spending on that account? If you're not tracking time, you probably should. And we weren't. And then we did and we were like, Oh my God. Like if you add up Greg's hourly rate plus Lisa's hourly rate plus Morgan's hourly rate plus Megan's hourly rate on each of these clients, and you added up to how much time we were spending, it was over $2,000 a month, but they were paying us $2,000 a month. The worst part about that was that you have to look at how much time you're spending with those clients, right?

So say you're charging, you'll say you charge, you build a website or some sort of specific outcome and you only charge 2000 and it's costing you 1800 plus, right? There's not that much money to pay you. There's not that much money left over to really grow your business quickly. It's, it's really difficult to, to grow, and that's where you're going to hit the ceiling on the growth because all of your delivery is bound to time and you're not even getting a profit on your time. So now again, say you're charging 2000 bucks a month and it costs 1827 and yes, those, a few of those expenses are onetime expenses, like the kickoff call, like the, you know, the welcome kit and like the, the acquisition, right? So it comes down, but maybe your hours go up and many of you I challenge, like if you don't know your, how many hours you're spending on each account per month, you should really start figuring that out.

Because when you figure that out, you're going to realize, wow, I'm actually not making as much as I thought I was. And the whole, I need one more client to grow, continues to be the story that you tell yourself because you think you're going to get another client, but really you're only gonna get another few hundred bucks. If, if, again, we go by the numbers that I just gave you, right? And so you're going to have another client that requires more bandwidth and still not that much money to pay herself and still not that much money to go hire help to do it. So if you don't understand your true cost of fulfillment, you're going to be in a really difficult spot when you try to grow your business and look, the reality is the more you can charge, obviously warranted that you're generating the result, the better experience you can give your clients because with more money, that means there's more money leftover for paying people to go above and beyond to do the work.

Right? This is why I see a lot of like the very low ticket, monthly recurring services, no Peter out, because they don't have the, the profit and the margin left over to actually go above and beyond the level of support that they've planned for, which is already very minimal. So when a client needs extra help and you go in to lean in for extra help, you instantaneously become not profitable. And that doesn't scale well. Right? And it's gonna always be like handcuffs on you when you try to grow your business. So the moral of the story is you need to calculate your cost of fulfillment. Now say you go more productized and even go into group consulting and things like that, group coaching, you can still calculate how the group costs, right? So say on average you have 10 clients active every month coming to your calls.

You can say, okay, well if the person who's conducting the call costs, you know, 20 bucks or 25 bucks an hour, or 50 bucks an hour and there's approximately 10 or so people on that call, you take that and it'll at least give you some sort of baseline. You could say, all right, well, we have one $50 an hour unit of time that is spread across 10 people, but in one concentrated leverage session. So on average, we're going to allocate this percentage of monthly fulfillment costs to these calls. So then you can add up the one off expenses, like the welcome kit, the individual kickoff calls, the hours that go into maybe implement implementation or hours that go into one-on-one touch points and blend that and add that to the the kind of average of the cost of your group elements. If you're doing multiple group calls and you have a a steady number, right?

Or a number that you want to aspire to, like, Hey, you want to have 25 people or 50 people on every call, you know, because your group, your program has grown big enough. Like what does that call cost you four 25 clients and start planning that as your cost of acquisition and add it to those one off things like welcome kits and kickoff calls and all of the things that bells and whistles that are to each new client and obviously don't forget your cost of acquisition and then look at, okay, well in month two, what does that look like in month three? Right? Because some of those things are hard costs that happen only once. And some of those costs are recurring costs, right? If you're meeting with your client every single month, those costs obviously are going to carry each and every month. And so again, flipping this back to kind of the people that focus on retainers, if you are doing the retainer just because it really benefits you and you have recurring revenue, I'd look to understand like where is, where is the tipping point where it actually becomes profitable because if it's month four, five and six and people are churning out at month three and four, then you're actually losing money because you're charging this low retainer to get them in thinking that you're having monthly recurring revenue, but you're actually losing the client and having to replace them with a new one.

Going back to the those front end hard costs and you've come to that position where like you're always hitting your head against a wall and you can't get the help you need because you don't have enough money to pay for the help. Thus you're always stuck doing the work. Thus you can't focus your time and energy and effort on growing your business because you're too busy in fulfillment, not in sales and marketing like you should be as the owner. And so you kind of end up in this little, you know, hamster wheel of like you're stuck in fulfillment cause you can't really give any clients more than you want, cause you're, you're tapped out. You can't take on any more clients because you don't have money to get the help and it all comes back onto your shoulders and you reached that ceiling very, very quickly.

So don't just arbitrarily pick the number that you're going to charge your clients. Do the numbers. And this is something that we are now rolling out to, um, our clients in our leverage program, really dialing in their cost of fulfillment so that they're effectively making sure that they're priced appropriately so they have enough margin to deliver an amazing experience and also have the profit to grow their business. Because that's why you're in business in the first place is to have a profit. Well not necessarily the reason, but your business should be producing a profit. So that you can live the life you want, have the you know, work life balance that you want while also growing and helping your clients. So hope you find this useful. Uh, if you haven't calculated your cost of fulfillment, your cost of delivery for whatever type of service you're doing, hopefully this is a starting point for you to figure out like how profitable am I per client?

And don't forget to add that one piece of how much time am I spending with each client? Because if there's no bandwidth left over, we all know that you can't get more hours in the day. And if there's not enough profit to hire somebody else and there's not enough hours in the day, you can't add more clients. And if you're already not making enough money and taking home enough money and you can't get more clients, what's going to change? You have to change your model and figure out your pricing so that you have a profit as a business owner so you can continue to reinvest in business and grow and, and survive. Really if you're not paying yourself enough. So hopefully you find this helpful. Love you guys and we'll chat soon. If I give you five to 10 new clients, would you or your agency break if so, your current agency model is broken? I struggle with this too, until I found a better way. By adding online programs, training, and coaching to our agency, we doubled profits without adding more hours. If you want to work directly with me and my team to transform your agency, visit myscalablebusiness.com to learn more.