A Sound Business Plan
Emmett Culligan, who many recognize as the father of the water treatment industry, stressed the importance of rentals and developed a business model that was primarily focused on the value of building recurring revenue. He began by initially selling water treatment systems to his customers, and during the Great Depression he conceived the idea of marketing soft water on a service basis. Using $50 to establish credit, he began his venture into the residential rental business and the rest is history.
In trying to develop a business model that will carry our industry not only through the current unsettling times but enable us to emerge stronger, we might do well to turn back the clock and consider altering our business model to place a stronger emphasis on residential rentals.
A water dealer today with a strong rental base is not experiencing as much financial pressure as the dealer whose business model is primarily built on the results of yesterday’s sales efforts. Many rental-focused dealers have enough monthly recurring revenue to know that they have achieved profitability for the month even if they do not sell a single unit.
The current state of the economy, combined with lenders tightening their lending criteria, has made it difficult for many marketing-driven companies to operate profitably. Economists believe it will take years for the economy to recover, and nearly every financial expert will agree that the days of lending money to high-risk customers will never be repeated. Are you going to keep your same business model and hope for the good old days to return, or is it time to take a fresh approach and modify your business strategy?
Grooming Your Successor
Almost every entrepreneur wants to retire one day, but there are only two paths you can take to achieve this goal: develop a replacement for yourself or sell your business.
If your business model is primarily based on acquiring new sales contracts, ask yourself who within your organization can replace you in the leadership role and continue to manage your business at the same level of success?
Do your children possess strength and charisma to effectively manage a dynamic sales organization? One advantage of a business model with a strong rental program is that the business itself is easier to sustain with a substantial recurring revenue base in place.
Selling Your Business
In order to sell your business, you have to have a buyer. Do you think it might be difficult to obtain a fair market value for a company that is literally day-to-day in business in a down economy and with the guiding hand behind the success of the past going into retirement? Or would it be easier to receive a fair price for a company that is built around collecting revenue from existing accounts?
The industry is changing and we must be willing to change with it. Certainly you should continue with a strong marketing approach with the goal of selling as many water treatment systems as possible; however, you may want to consider developing a rental program as well.
The key question dealers and salespeople ask is: Why don’t more people buy? While there could be a lengthy list of answers, the main reasons are:
- They are risk avoiders and will not enter into a long-term financial obligation without knowing that they will be happy with their decision.
- They got stickershock when they saw the cost of the product because they were expecting a big-box store price.
- Even though you spent a considerable amount of time showing your potential customer that installing a water treatment system can literally pay for itself, the prospect is still looking at it as creating another monthly bill, trying to fit it into their budget.
- They have never heard of the soap products you are using to try to close the sale and are not convinced that they will be satisfied with their performance.
If you cannot close the sale on your initial visit, offering your prospects a rental option can overcome all of the obstacles listed above. For instance:
- After asking for an order with an 84-month contract, a 36-month rental term will seem short.
- With a rental option, there is no stickershock and you can offer the prospect a purchase option at a future date with some rental payments applied as a down payment.
- Rental payments are usually half of the monthly cost of a financed sales contract.
Why should you incorporate a residential rental program into your business model?
- It makes your business more sustainable if you want to hand it down to future generations;
- It increases the value of your business and makes it easier to sell; and
- What do you receive from your investment of placing a sales rep in the home if they do not sell? A residential rental will allow you to gain an asset for the money you have already spent.
What is the biggest barrier to entering the rental segment of the market? The negative impact it will have on your cash flow. Depending on your installation cost, your total out-of-pocket expense for placing a rental water softener is $700 to $1,000. If you placed 10 rentals per month, your cash flow would be negatively impacted to the tune of $7,000 to $10,000.
With sales down, how can you afford to pull this amount of capital from your operating budget and still remain in business? Some branded dealer programs offer assistance with financing rentals for their dealers, but what is the independent dealer to do?
There are companies that have developed financing programs that are available to the entire industry regardless of affiliation. The company can generally fund a dealer enough money to cash flow a rental placement without using any of their own capital.