Has your company been approached by a marketing firm that promises to increase your residential subscription customer base and profitability? Their starting point is that they will be able to increase your customer count, improve your density (while lowering your expense for each new customer) and of course, generate more profits for your company. Some might entice you with their sophisticated analytics on their understanding the marketing dynamics within your market area footprint. Once again, beware.
There are a number of companies that propose to bring these benefits to independent haulers. Many will be able to add to your customer base; however, their other promises could be questionable. Their projection of new customers and revenue is enticing; however, their results might be less than what is expected by an independent hauler. Let me share an experience that one of my clients had with one such marketing company. The company approached my client with a plan to analyze the targeted area and determine how many potential customers were available, who their current service providers are, the potential additional profitability and their anticipated close/success rate. My client had determined the target monthly rate that he needed to make this process profitable. All good up to this point. The marketing team had a sliding scale on their fees: $50-$75 for each new customer, depending on several variables. After a week the project manager came in and told my client that the target rate of $22.00 was too high for the market area (the then current average rate was slightly higher) and he and his team would not be able to sell any accounts at this rate, but proposed a “suggested” rate at $15.00. Reluctantly, the client agreed and after the marketing team had success at the $15.00 rate, after we analyzed the financial impact, my client realized that his $15.00 rate was actually costing him $5.00+/- per month. My client immediately thanked them for their efforts, paid and dismissed them. (Recently, my client’s controller told me that the last of these customers’ agreements had expired and that the client’s new rate had been passed on to all without any defections.)
I saw where a marketing firm went into a stable market and persuaded a hauler to drop its rate from the $30.00 range to below $20.00 per month with much success. You can imagine the financial impact to the hauler. Probably that hauler’s posse is out looking for these marketers, but they have deposited their check and moved on to the next starry-eyed hauler.
Let’s examine the marketer’s value proposition. I will generate 500-5,000 new customers if you will lower your rate by $5.00-$10.00 per month per residential subscription customer. You will recognize a lower cost per unit because of the density increase and you will become more profitable and I will only charge you $50-$75 for each new customer.
First, if you determine that your offered rate needs to be $25.00 per unit and, after analysis you find that you can increase your profitability by lowering your rate by $2.00 on the promised 1,000 new customers (hypothetically), then it is probably a good deal for you. However, if you find that by reducing your rate to $20.00 per month or lower (and factor the density increase and expense reduction) to the marketer’s sale price target will make you less profitable, then it is not a good deal for you.
Remember there are 2 concepts of profit: accounting profit and free cash flow. Accounting profit is what you see each month on your income statement (P&L). This is not a true indication of your cash position since it should contain non-cash items like depreciation, amortization and bank note payments. Free cash flow should tell the owner how much cash is left over each month when all expenses are paid and the debt notes are paid. Think of it this way: all of the revenue comes in, and all of the expenses should flow through the company’s checking account and the free cash flow can go into the company’s savings account.
Adequate free cash flow for a residential account should generally range from $2.00-$3.00 per month per unit, depending on the rate. If the marketers are proposing a fee of $50.00-$75.00 for their service, the payback, from a free cash flow basis, could be 2-3 years at your current rates. However, if you drop your rate $5.00 on the marketer’s recommendation so that he can be successful and generate his commission, then there will never be a payback for the owner – just substantial losses on the marketer’s newly generated business: real money going out of the company to subsidize the new business. This would not be a good business decision.
What should the hauler do? First, and foremost, the hauler needs to understand their cost structure. Once the revenue, expenses and profitability can be determined on a per-unit basis, then the hauler can determine what impact 500 or 5,000 new customers would have on their business and what the lower rate needs to be and not what the marketers can sell to the customer. Also, this approach will allow an independent hauler to determine a fair commission to pay for each new customer.
This is not an indictment of all subscription marketers – just some that you need to be aware of in your efforts to improve your business.
I hope this is helpful to you. If you would like to explore truly understanding your cost structure and the cost effectiveness of subscription residential marketers, please give us a call. We would enjoy helping you and your company.