It’s better to break even than to lose money
By Rich Lindblom, AVB Marketing
Earlier this year I was talking with the second owner of my former store (see Here Today, Gone Tomorrow); he was asking me a lot of advice about service rates and profitability.
In particular, he was talking about the service my company had always done and had continued to do after the sale with a large local home warranty company. At the time of the sale, this home warranty company had become my single largest source of revenue. We typically did five to 10 service calls per day for this company.
Now, they didn’t pay great, but what they paid was pretty much in line with any other warranty company we did work for. We got a flat rate for service, plus a 20% markup on our parts. They paid in weekly batches and we got a check (eventually an ACH deposit) every week for 15 years.
Icing on the Cake
But that wasn’t all. Here’s the best part — they had a $400 preauthorization limit and if a product wasn’t worth repairing, they gave the customer a $400 credit toward the purchase of a new appliance. And best of all, we had negotiated an exclusive deal with them so that if the customer bought the new appliance from us, we could take the $400 off the top for the customer and the warranty company would pay it to us directly, instead of the customer having to submit for reimbursement and then wait to get their money back.
Sure, it was a sweet deal for the customer, but it also drove a ton of sales to my store as well.
Well, as I mentioned in the opening, the second owner calls me to complain that this warranty company isn’t paying him enough money for his service calls compared to a C.O.D. customer, and that he was going to stop doing service for them unless they started paying more per call. Being a CPA he was very analytical about running the business and he explained to me that it cost him $X per hour to pay a service technician, including his wages, insurance, benefits and so forth, and that he was at best breaking even doing calls for that warranty company.
I told him in no uncertain terms that this company had been our cash cow for over 15 year and that it would be a horrible mistake to stop doing work for them. But he kept going back to his accountant logic, telling me it wasn’t profitable to continuing to do service for them and how he needed to do more C.O.D. service work. And worst of all, he would rather have his technicians work less hours per week than have them work for what he perceived as an unprofitable pay rate.
Plain and Simple
So, I tried to break it down for him in terms he could understand, telling him that it was not just about the costs specifically associated to the technician themselves. There were other fixed costs that had to be factored into the equation, including rent, utilities, vehicle costs, business insurance, vehicle insurance, accountant fees, software fees, website fees, subscription fees and a whole host of other things that you’re paying for.
Regardless of whether your store is open or not, how many employees you have or how many hours they work, those bills keep on coming. Here’s an example: let’s say your fixed costs of doing business are $10,000 per month. If we assume you have 10 employees, each working 40 hours per week, that’s 400 employee hours per week and roughly 1,733 employee hours per month. If you divide the $10,000 per month by 1,733 employee hours, your cost per employee hour worked is $5.77.
Now let’s look at his model: if he cut each employee back to 30 hours per week, that would result in 1,300 employee hours per month. If you divide that same $10,000 by 1,300 employee hours, your new cost per employee hour worked is $7.69.
Simply put, his cost for every hour an employee worked went up by 33%. I did my best to get him to understand that even if they were only breaking even on those extra hours they worked, they were still helping to cover the nut each month for those fixed expenses. But he just couldn’t understand the concept.
Go with the Flow
Having inexplicably lost that argument, I moved on to my next argument and that was cash flow. I’ve written more than once in the past about the importance of cash flow, that you need to continually bring in money to pay your bills. I’ve also said many times that it’s better to take a low-profit deal and increase your cash flow than to pass on that deal and have no cash flow.
I explained to him that if you cut your employee work hours by 25% — from 40 hours per week down to 30 —you’re also reducing your cash flow by that same 25% every week. Plus, you’re also at grave risk of losing valuable employees. Surely with his accounting background he could understand that concept.
Sadly, he still wouldn’t budge; he just couldn’t get past the fact that they weren’t paying him enough, it wasn’t fair in his mind.
I had one last trick up my sleeve. I asked him, “What about the sales you’ll lose?” He responded that those customers tended to purchase lower-price, lower-margin products anyways. <Sigh> Ultimately, I gave up trying to talk sense into him.
Hard Lesson
Instead, he concluded that he’d increase his pay per click advertising to attract more C.O.D. customers. Now mind you that pay per click in the Chicago metro area can easily cost $5 to $10 per click. But he had convinced himself that that made more sense than servicing the customers that were being handed to him for free.
If you read my article last week you already know the unfortunate result: my former company closed its doors for good this summer, less than four years after I sold it. In the end, his costs to generate service calls went up, his revenue per technician per day went down and as I had warned him, his new products sales took a hit as well.
The bottom line is that sometimes you must step back and look at the big picture to realize that there is quite often a whole lot more to profitability than meets the eye.
Rich Lindblom is a past principal of Advanced Maytag Home Appliance Center, a family business founded 64-years ago in Schaumburg, Ill. He now shares his 40-plus years of hard-won retail experience with fellow BrandSource members as a YSN columnist and creator of AVB’s SYNC point-of-sale system. You can reach Rich at rich.lindblom@avb.net.
