Every time a product is sold it carries trailing risk: Risk of return, risk of failure, risk of lawsuits, warranty cost, call center support and a host of other factors. All this risk turns into cost. Trailing costs impact your P&L after the fact, often in successive financial years. So in addition to not controlling these costs, failing to properly reserve margin at the time of sale sets you up to eventually pay for past mistakes with today's money, kind of like a mini-bailout.
Reserves are an accounting trick to take some revenue offline, hold it from taxable income until such time as it's either spent fixing problems, or taken back to the bottom line. What's the right amount? Planning is everything. Too big a reserve, planning too conservatively, robs you of profits you could be taking today. Too little held back and you run the risk of running out early. It's all product based, usually in the range of two to three percent of OEM price. Products with short lifespans are tolerant of reserve mistakes because warranty periods are short and the problem goes away faster. On the contrary, large systems and infrastructure can last for decades. Think about it: Under no circumstances do you want to be funding product support for a ten-year-old system with today's money. Better plan accordingly. . .
In principle, reserves taken at the time of sale should exactly match the cost a product is likely to incur over its lifetime. How do you know? Mature companies with extensive product history can usually guess right. Start-ups typically don't. If a product is new, but uses established technology, then experienced post-sale managers can make educated guesses based on history in the same sector. If the product is truly ground breaking, with no comparative history, then it falls to managers to meticulously track field failure rates, call-center activity and returns during prototype and roll-out phases, then QUICKLY adjust reserves to compensate. Obviously, extremes in product volume can be problematic on both sides of the equation: Too little volume = not enough history. Too large a volume = too late to fix mistakes.
When reserves aren't carefully managed, increasing sales volume often masks the problem: On the upswing, margin from increasing volume is easier to spread across last-year's trailing liabilities because not many units were shipped. However, on the downswing, just like financial derivatives, decreasing sales volume no longer covers trailing costs, which then explode all over the current margin, driving net profits severely negative. A worse problem occurs when margins are plundered from new, unrelated products to cover costs on things no longer sold. Good fiscal discipline means religiously isolating product P&Ls.
Continuous improvement systems, like all quality methods, are the key to controlling post-sale liabilities. Mechanisms as simple as holding specific departments financially liable for the top five call center issues can make a difference. Post-sale managers who constantly push visibility of customer problems back into the enterprise - and enlist executive sign-up - shifting everyone's thinking back into proactive space, taking care of stuff before it leaves, have a profound effect on the bottom line. Design For Serviceability (DFS) is a product feature often neglected in the rush to get new products out the door. Remember that the cost of fixing a problem in the field can be 100x higher than fixing it in the factory. Big money. . .
A big problem results when aggressive managers exploit a gap in financial oversight that lets them distort P&Ls by taking reserves to the bottom line too soon, in effect stealing from the bank of the future to paint a prettier picture today. Proper financial controls mean that NO manager should ever be permitted to tamper with reserves without sign-off from the reserve manager and CFO.
Strategically, the ideal situation is one in which a post-sale revenue stream is developed to offset trailing liabilities. Opportunities abound to sell extended warranty, upgrades, downloads, special offers, insurance and more. Infrastructure businesses are particularly adept at selling services, usually in the thirty percent range. Also, dollars from sold services are amplified by good product quality, and vice versa. A winning strategy builds even greater value by bundling services into complete care packages for whole businesses, not just one or two boxes.
Okay, so now your customers have signed up. What's next? In principle, at this point it's worthwhile to feed reserves and post-sale sold services into a new P&L devoted, not to a specific product, but to post-sale as a product itself, as a separate business. This is an especially good idea because it also insulates customer service from the tendency, as a cost center, to get chopped whenever money is short. When the whole customer experience is operated like a separate business, when it's isolated from specific products, its independent value becomes more visible too, adding to the total portfolio.
Non-device sales complement and amplify product sales. It is a misconception to assume that when customers are asked to pay for services, they perceive the product as less valuable. On the contrary, people value what they pay for. Offering a broader portfolio of post-sale products, particularly in a commodity market like cameras or MP3 players, can make you stand out from the crowd, maintain device margins longer. It isn't unusual to play into established markets where OEM device margins are under ten percent. Under such circumstances, failure to reserve for post-sale liabilities can kill your business once and for all. Reserve properly. Make a business out of the post-sale customer experience. Don't be a victim of your own failure to plan. - 15275
Reserves are an accounting trick to take some revenue offline, hold it from taxable income until such time as it's either spent fixing problems, or taken back to the bottom line. What's the right amount? Planning is everything. Too big a reserve, planning too conservatively, robs you of profits you could be taking today. Too little held back and you run the risk of running out early. It's all product based, usually in the range of two to three percent of OEM price. Products with short lifespans are tolerant of reserve mistakes because warranty periods are short and the problem goes away faster. On the contrary, large systems and infrastructure can last for decades. Think about it: Under no circumstances do you want to be funding product support for a ten-year-old system with today's money. Better plan accordingly. . .
In principle, reserves taken at the time of sale should exactly match the cost a product is likely to incur over its lifetime. How do you know? Mature companies with extensive product history can usually guess right. Start-ups typically don't. If a product is new, but uses established technology, then experienced post-sale managers can make educated guesses based on history in the same sector. If the product is truly ground breaking, with no comparative history, then it falls to managers to meticulously track field failure rates, call-center activity and returns during prototype and roll-out phases, then QUICKLY adjust reserves to compensate. Obviously, extremes in product volume can be problematic on both sides of the equation: Too little volume = not enough history. Too large a volume = too late to fix mistakes.
When reserves aren't carefully managed, increasing sales volume often masks the problem: On the upswing, margin from increasing volume is easier to spread across last-year's trailing liabilities because not many units were shipped. However, on the downswing, just like financial derivatives, decreasing sales volume no longer covers trailing costs, which then explode all over the current margin, driving net profits severely negative. A worse problem occurs when margins are plundered from new, unrelated products to cover costs on things no longer sold. Good fiscal discipline means religiously isolating product P&Ls.
Continuous improvement systems, like all quality methods, are the key to controlling post-sale liabilities. Mechanisms as simple as holding specific departments financially liable for the top five call center issues can make a difference. Post-sale managers who constantly push visibility of customer problems back into the enterprise - and enlist executive sign-up - shifting everyone's thinking back into proactive space, taking care of stuff before it leaves, have a profound effect on the bottom line. Design For Serviceability (DFS) is a product feature often neglected in the rush to get new products out the door. Remember that the cost of fixing a problem in the field can be 100x higher than fixing it in the factory. Big money. . .
A big problem results when aggressive managers exploit a gap in financial oversight that lets them distort P&Ls by taking reserves to the bottom line too soon, in effect stealing from the bank of the future to paint a prettier picture today. Proper financial controls mean that NO manager should ever be permitted to tamper with reserves without sign-off from the reserve manager and CFO.
Strategically, the ideal situation is one in which a post-sale revenue stream is developed to offset trailing liabilities. Opportunities abound to sell extended warranty, upgrades, downloads, special offers, insurance and more. Infrastructure businesses are particularly adept at selling services, usually in the thirty percent range. Also, dollars from sold services are amplified by good product quality, and vice versa. A winning strategy builds even greater value by bundling services into complete care packages for whole businesses, not just one or two boxes.
Okay, so now your customers have signed up. What's next? In principle, at this point it's worthwhile to feed reserves and post-sale sold services into a new P&L devoted, not to a specific product, but to post-sale as a product itself, as a separate business. This is an especially good idea because it also insulates customer service from the tendency, as a cost center, to get chopped whenever money is short. When the whole customer experience is operated like a separate business, when it's isolated from specific products, its independent value becomes more visible too, adding to the total portfolio.
Non-device sales complement and amplify product sales. It is a misconception to assume that when customers are asked to pay for services, they perceive the product as less valuable. On the contrary, people value what they pay for. Offering a broader portfolio of post-sale products, particularly in a commodity market like cameras or MP3 players, can make you stand out from the crowd, maintain device margins longer. It isn't unusual to play into established markets where OEM device margins are under ten percent. Under such circumstances, failure to reserve for post-sale liabilities can kill your business once and for all. Reserve properly. Make a business out of the post-sale customer experience. Don't be a victim of your own failure to plan. - 15275
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