When I was an operator, I regularly cursed competitors who stupidly bid high commission rates. Even though it has been over 20 years since I sold my vending operation, I'd be willing to bet that operators are still complaining about ridiculous bids made by their competition. However, over time I learned that the only thing worse than a bid that is overly aggressive, is one that is overly conservative. Obviously, the important word here is overly.
I understand there are operators who have made a careers out of giving away the store in the form of high commissions. But there are just as many that have stifled the growth of their companies by refusing to bid aggressively in competitive situations. Let's face it, the first thing the client looks at when you present him with a proposal is the commission rate. And if your bid is not competitive, you're not going to win your share of the business that is available.
Bidding aggressively does not mean bidding stupidly. Professionals understand that bidding aggressively means bidding as high as you possibly can in a competitive situation, while maintaining a realistic, budgeted return on investment.
To successfully implement a policy of aggressive bidding under this definition, operators must do a pro-forma, or ROI analysis, for every bid they submit. In my August 2004 VENDING TIMES article, I suggested a format for this kind of analysis. Very simply, it is an estimated P&L statement for the location, which calculates the profit before commission expenses. Then it allows you to deduct a predetermined rate of return on the capital investment you will have to make for determining how much, if any, is left to offer as a commission to the location. In short, it allows you to pay yourself first.
Assuming your analysis is correct, and you feel the need to bid aggressively, you may offer the entire amount that is available for commission as your bid. But if you are confident that you are the only bidder, you may choose to offer only a small fraction of the amount that is available. Notice we never offer any more than the amount available after we deduct the amount necessary for us to maintain our budgeted ROI.
Up to this point in the discussion, in order to be aggressive, the vending operator must first determine how competitive a particular bid is, and then figure out what is a reasonable ROI to budget.
With regard to the first question, it's safe to say that the larger the account, the more competitive the bidding. Also, if it's an advertised, publicly bid contract, such as a government contract, you can expect more serious competition. It's always a judgement call. You want to be as aggressive as you have to be, but no more than that. Obviously, bidding more than you have to bid is the same as giving your bottom line to the client. The second question is tougher to answer because it's a moving target.
During good times, when almost everyone is making money, it might be fair to target an ROI percentage of 20%-25%. At the other extreme, I can recall difficult times when I was grateful to be able to take home a week's pay, never mind earn a profit or ROI for the company. That said, it would appear that the appropriate ROI percentage is also a judgement call.
Over the years, I have suggested other proven strategies for bidding aggressively without giving away the store. Now that we are beginning to come out of the recession, this is probably a good time to review a couple of the better ones.
Business overhead or general and administrative (G&A) costs tend to remain fixed whether sales increase or decrease. They include such costs as rent, utilities and middle management or owner's salaries, along with, to a lesser degree, items like clerical and warehouse salaries. I say to a lesser degree because, as you continue to add new business, at some point in time you will need to increase warehouse and clerical labor. For that matter, if you continue to add new business, you will outgrow your facilities and need to move to larger, more expensive quarters. No expense is fixed forever.
Because G&A costs tend to remain fixed when you add business, you have some flexibility assigning a value to this cost when you construct your pro forma analysis. For example, if your existing G&A costs amount to 8% of your current sales, and you are bidding on a new account that is expected will produce $100,000 a year in new sales, what cost should you use for G&A costs for the new business? If you can convince yourself that none of these costs will increase if a new account is added, you could use "0" as a G&A cost estimate.
This approach would effectively add $8,000 a year, ($100,000 x 8%) to the amount available for commission on the pro forma, which would enable you to bid high, and hopefully land the account. However, as noted above, expenses don't remain fixed forever. Over time, they do in fact increase – so operators need to use this tool carefully. It can become a very slippery slope.
In attempting to come up with a reasonable percentage for G&A costs, I used an accounting concept called full absorption of G&A costs. It may sound complicated, but it's fairly simple. If we could correctly estimate how much business could be brought onboard, before adding additional G&A costs, we would have a reasonable basis for estimating the cost.
For example, if our current sales were $1,000,000 a year, and current G&A costs were 8%, or $80,000, and it's estimated that an additional $1,000,000 in new sales could be added before we had to significantly increase G&A costs, we would then have $2,000,000 in sales with $80,000 in G&A cost. At that point, we would be using all of our G&A costs most efficiently, and our cost percentage would be 4%, (80,000/2,000,000=4%). I suggest using the cost percentage developed from this estimate when doing a pro forma for new business, instead of using the historic cost. It will allow you to bid more aggressively, improve your winning-bid percentage and get to that more efficient level sooner.
USING A DIFFERENT CURRENCY
In my March 2009 article, I described how we quoted location commissions in two ways: We quoted normal commission rates if they insisted on real dollars, and higher rates if they would accept the commission in what we called Lemon Tree Dollars. Lemon Tree Dollars could only be spent on other products and services that we offered. These included function catering, OCS, filtered water, Christmas parties, summer barbecues or full New England-style clambakes. These products and services were priced at full retail value. However our real, out-of-pocket cost to deliver them was the actual product and labor cost.
When the article was published, I was pleased to receive a number of calls and emails from operators who thought it was fairly creative. However, a number of them said they couldn't do this effectively because they didn't operate manual foodservice and therefore lacked the resources to do such things as function catering. I was obliged to point out that most of the people that said this did offer OCS and filtered water services, and they were the first or second most popular products purchased with Lemon Tree Dollars.
By far, the most popular (and profitable) product we sold for Lemon Tree Dollars was our summer barbecue program. And I assure you, the average vending and OCS operator possesses the skills and resources to do them. You don't need a degree from a culinary institute to organize, plan and deliver a professional barbecue.
It does require a one-time capital investment in hotel capacity, barbecue equipment and utensils. This stuff is available from Sam's Club and Costco stores at reasonable costs. You can buy all of the food and disposable utensils necessary from them, too. Our bottler lent us a post-mix beverage dispenser, so we could keep the cost of beverages down to a minimum. My company became very professional at running barbecues at client locations very quickly. If you search for "barbecue operators" on the Internet, you should be able to find menus and prices for catered barbecues in your area. You may be amazed to see prices ranging up to $35 a person, depending upon the menu.
We pitched the program to clients' contacts, who in many cases were the companies' human resources officials, as an "employee appreciation day." HR people eat this stuff up. We became very efficient at setting them up so that the employees could be served during a normal lunch break, guaranteeing that no work time was lost. We provided chef's hats and aprons for the client's senior managers, who worked the serving lines; this also kept our labor costs down to a minimum. The salesman who originally booked the account would go to the location to supervise the event, because it was a great opportunity to bond with the client contact. Part-time, college students staffed our barbecue team. Most important, we were discharging commission obligations at 30¢ or 40¢ on the dollar.
THE ART OF WAR
The important thing to remember is that the process of doing a pro-forma analysis and bidding aggressively will give the vending operator a serious competitive edge. If you enjoy a purchasing cost advantage, or an operating cost advantage, aggressive bidding will allow you to leverage this advantage by quickly increasing your share of market. A pro-forma ROI analysis will show larger amounts available for client commissions on each bid, improving the winning bid percentage.
Also, it's important to remember that business is a zero-sum game. When you win a new piece of business, your competition loses a piece of business. So as you get stronger, he gets weaker.
Didn't Sun Tzu say that?
ALLAN Z. GILBERT founded New England Vending Corp. (Lowell, MA) in 1959, and led its expansion into a leading regional provider of full-line vending, coffee service and foodservice management. He founded Data Intelligence Systems Corp. (DISC), a computer software publisher and system integrator for vending, and Lemon Tree Systems Inc., which franchised a vending-and-cafeteria concept. He established Merrimac Financial Associates in 1984, and it made an initial public offering through the New York Stock Exchange in 1998. He became managing partner of The Merrimac Consulting Group in 1988.