Profit Through Self Financing Your Clients

Opportunities can present themselves in the strangest places. Your most dissatisfied and vocal client could be your greatest insight to uncovering hidden value. Salespeople who work in large organizations will naturally provide reconnaissance in information around competitor offerings, client concerns, etc. They provide real time data in the market. A little known example of this is the invention of the Moon Pie. A traveling salesman for a bakery asked a group of coal miners “What would be a great snack?” — the group settled on the ingredients of what today is known as a Moon Pie. The companies that listen and adapt, further their companies to run more efficiently. Identifying and making a necessary change early on can relieve a potential tremendous pitfall.

Time, money, and leverage: three key words to maximize resources and ultimately secure profit to your organization. Not as easy as it sounds. If you read my blogs, I often include this concept into my writings. It’s been a foundation in my business values for years. TML requires a mental framework to identify the opportunities that lies within (hint hint: this is why a 3rd party consultancy agency can be extremely beneficial) A second pair of eyes can see things you don’t see.

In 2016, I became a franchisee of an auto repair chain based in San Francisco with locations all over Northern/Central California and Nevada. At the time, I owned a light construction company and this was a way to vertically integrate labor, resources, cross market, and generate cash forward revenue to front load the expenses in both operations. Not to mention reduce vehicle maintenance on our work trucks in the field due to the resources and skilled labor supplied by the auto repair shop. Fascinating business on both sides. I truly love service businesses. They are localized, carry great margins, and are typically in high demand. As our economy shifts, our labor participation throughout the trades has surfaced smaller labor pools in the service sector, there are less people doing service work mixed with high demand for services. A lot of opportunity exists in the service sector (wow…I just used the word “service”more consecutively than I ever have in my life)

Pricing is a very underestimated component that small business owners draw minimal attention to. Pricing can be such a strategic tool to usher in new clients, highlight perception of value, retain existing clients and so forth. Optimizing a key set of pricing strategies will forever change your operation. Not to mention, maximize profits and increase producer surplus opportunity (a fancy economic term for saying “leaving money on the table”). I have some great book recommendations on pricing. In this blog, I’m going to barely touch pricing. I am in fact going to talk about its cousin: Offer. Pricing and Offer go together like that treenut food and that fruit spread thing…oh yeah peanut butter and jelly! Some businesses focus entirely on price (where their offer is homogenous against their competitor’s offer and high volume with a operational cost reduction is the key). Not usually the greatest of business strategy however, none the less, this method can be profitable and many sectors thrive on this. The most desirable state is a focus on offer rather than price. Offer can give you the ability to set price and highlight offer. A harmony to be sought out. A way to extract value where value may not be seen. I make this last point to lead into the topic of self financing.

A frustrating thing that can happen to anyone is driving down the street when out of nowhere your car breaks down. If you're heading to an appointment, you have to reschedule. You need to call a tow and get it to a repair shop. Its a complete inconvenience and throws a wrench (ha!..subtle joke alert) into your entire day and possibly your week. You head to the auto repair shop and hit with a $1000 bill. This can be challenging for some people living paycheck to paycheck or struggling to get by. My heart would go out to those who couldn’t afford immediate necessary repairs, who also had no second vehicle, and now no way to get to work. Until you’ve lived this, it's a really scary place to be. After witnessing a few of these situations, I decided to design a program that would provide benefit to the client without compromising the business operation with unnecessary risk exposure.

I unveiled a financing program that met the clients in the middle. It worked for both parties. Typically in the auto repair business, auto parts will cost 20% of the total project. A $1000 repair job is typically 4–5 hours with 1 technician. In order to make this work, I need to understand the costs. A $1000 job will have $200 in parts and a labor burden of no greater than $140 including taxes and insurance. Leaving roughly 66% margin. I require the client to put 25% down to do the job with the remaining 75% due over the next 30 to 90 days. The terms were always flexible. The wager to the business in this case was 9% of every project. This meant I could operate a high default rate, while maintaining financial health. Keep in mind, this program added a decent uptick to our monthly revenue and was not offered to everyone. Only those that met a criteria for an emergency situation. So in essence, it created a whole new leg of revenue which would have otherwise not been recognized.

We had to map labor inputs accordingly depending on client urgency and otherwise offer efficient lead times to our regular clients. Meaning, if we took too long to complete a project, they might go somewhere else next time and lose any recurring business. Competitively, this was important. In the case of our self financing, the client knew we were providing them with a tremendous no-interest favor that they definitely could not get anywhere else. This allowed us a bargaining position on lead time. We made the client aware their job could take a bit longer than normal lead times. We prioritized jobs based on labor availability and job value. For instance, if I had a technician working on a self financing client’s project while I have a cash in hand customer willing to pay top dollar for a repair, I have to re allocate that technician to the other job due to opportunity cost if I chose otherwise. We would fit the self financing client into the slower portions of the day where at times, I was paying guys to stand around. In this case, I’m offsetting non revenue generating labor costs from performing mundane tasks and shifting it into revenue generating work. Thus, relativity speaking, the labor burden could be seen as a wash due to the fact that if the self financing jobs didn't exist, that labor expense would have been depleted without revenue.

This model worked. It increased our monthly gross revenue by 11% with operating at a 9% default rate. To quantify loss/gain scenario. The 11% increase translated into about $5000 in added gross receipts. Of this, we collected $1250 upfront with $1700 cost of revenue which was a revolving monthly booking. An upfront net loss of $450. The default rate calculates: $5000 minus $1250 times .09= $337.50 in loss each month. If we annualize this data we get the following:

$5,000 per month x 12 = $60,000 per annum

Cost of Revenue = $60,000 times .34= $20,400 plus Default Rate (.09% times $45,000= $4,050). The default rate is calculated based on the forward projected earnings with the initial amount collected not counted. Since we collected 25% of the project upfront (reducing risk in capital- $60,000 drops to $45,000) The default rate against forward revenue is calculated against $45,000. This brings our true Cost Of Revenue to $24,450 which represents a 59% gross margin. Our operating profit would be $35,550. Under this scenario, we could theoretically could operate with a 70% default rate before money would be lost, making this a favorable initiative to pursue.

This story was a great example about finding value where it lay dormant and unlocking its potential. It felt good to help those who were in despair. It created new money that would have otherwise never been realized to the operation. Marginal costs were reduced with marginal revenue due to fixed operating costs and supplanting down time with work time increasing the value marginal product of labor within the organization. Enterprise value increased. This initiative created tremendous goodwill and attracted new clients. Overall, it proved its success.