Customer value and opportunity cost

Lets say you were about to sign a 1million dollar contract, as a small business this is amazing, this could cover your costs for at least a good few months. 

But, theres a catch. Payment terms are 3 months from invoice date, then there’s the amount of time you’ve got to spend pitching in order to close this deal (which lets face it, could be 3 – 6 months)

Suddenly this wonderful 1million is looking tough. But you’re a startup right? Revenue is revenue and this is a massive client. I can already hear you trying to justify the commitment to this 1mil contact with arguments about brand and ability to leverage this for future clients. 

And its true, theres some real upsides to taking this 1mil contract. But the considerations aren’t that simple.

To get this contract, you need to be in a position to survive for possibly a year before you’ll see the cash in the bank. And most startups don’t have that kind of survival.

Now I get this is over simplified and not the best example, but I hope the point I’m trying to get through can be clarified.

  • When you’re looking to sign big contracts there is a cost to negotiating these contracts that sucks up resources and means you can’t close other contracts 
  • When you sign these big contract there are often long payment terms, this creates cashflow and growth issues for your business
  • When you sign these big contract, they often come with expectations of service and VIP treatment, not only is it a distraction, but it’s also a resource drain
  • Smaller ticket contracts are easier to manage and quicker to close, they pay better, which means cash to invest in growing your business in the form of a fly wheel effect.

We can only make a decision on a big contract if we understand the cost and cashflow impacts of those big contracts on our business, in some cases, it may not be worthwhile due to how much burden on resource and cashflow the big contract may have.

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