The lifeblood of your OCS operation is the continual acquisition of profitable new customers. Those of you who have one or more salespeople know that keeping gross profits in the range of profitability is among the most pressing issues under continual discussion between management and your representatives.
Our industry is unique, in that we make an investment in equipment and service that encompasses brewers, bowls, airpots, thermal servers and cabinetry, as well as their installation cost, without charging our clients. The costs of these items should be recovered within six months to a year.
The second-biggest investment is the salesperson who we pay, including benefits and taxes, training and travel costs, among other expenses. This investment, if we are lucky, will also be recouped in about six months to a year. But the return-on-investment timeframe here depends, overall, on whether that rep stays with the company and produces. Most of you know that finding a quality sales representative is not an easy chore. Giving the rep an overall understanding of the business can improve your chances of retaining him or her.
Realistically, gross profit in the refreshment industry ranges from 45% to 52%. There are exceptions to this rule, based on several factors (they will not be covered in this article).
If you've ever heard a salesperson state, "You already got paid for the brewer several times over, since it is used equipment," that rep needs to understand that the equipment cost and salary are not your only outlays when adding an account. So let's take a look at the points that you should be covering with your salespeople, so that they will understand what it takes to run a profitable company and endeavor to keep gross profits on the upside.
Expenses of acquiring a new customer include the salesperson's salary, benefits package, travel, phone, training (during which time no sales are made) and taxes (FICA, social security, etc.).
Other direct costs are equipment and the expense of installation by your service department, including the installers' salary and vehicle costs (gas, insurance, tolls, parking tickets, etc.) and installation hardware (piping, valves, filters, etc.).
The indirect expenses include your facility: office and warehouse (rent or mortgage), utilities, insurance, maintenance, janitorial services and exterminating, among several others.
You must include delivery costs for drivers, trucks, gas, tolls and maintenance; warehousing (packers and shipping supplies, for instance); and the service department, beyond its role of installing new accounts, which includes technicians, parts and cleaning supplies.
To be sure, the profitability of any account is affected by your total costs, which include all the employees and management in all the departments that don't take part directly in its acquisition and setup. And it is essential to include profits for the company and owners (yes, they get paid, too).
Now, let's take a look at some typical new clients that our salespeople have sold.
Client No.1 has 15 employees and is using a three-warmer pourover. It is doing fine, and gross profits are in the low 50% range. The account orders monthly and pays on time. Order volume is rising, and the ROI on equipment is within the six-month period.
Client No. 2 has 75 employees, and its GP is in the mid-40s. ROI is eight months, due to the higher cost of two single-cup brewers and one three-warmer automatic. The GP has been brought down by the lower pricing of single-serve packets. This account orders weekly, but does not purchase many additional allied products. It pays its bills in about 45 days.
Client No. 3 has 20 employees, and demanded two automatic thermal brewers and two cabinets for its breakroom. It is also leasing two filtration water coolers and one icemaker. It claims to be growing rapidly, and expects to have 65 employees within a few months. Its GP is in the high 40% range, and it always pays late -- it claims its rapid growth has stunted cash flow, but that once it levels off, it will be paying on time. ROI looks like it will be 12 months; and after six months, it still has only 40 employees.
Client No. 4 has 120 employees with three single-cup brewers, along with water filters. It is leasing a microwave oven and three filtration coolers. It also is being provided two vending machines that dispense snacks and cold beverages. GP is 50% on coffee service products and 65% on vending products, with no commission to pay. It pays within 30 days, and ROI is seven months on the OCS equipment -- it's too early to know the ROI for the vending units.
Several months later, let's take a look at how each account is progressing.
Client No. 1 is doing nicely, and adding allied products. It still pays on time.
Client No. 2 is still paying within 45 days and it added two bottled coolers, which have increased the GP to just under 50%, due to the high markup on 5-gal. bottles.
Client No. 4 has added 20 more employees and started to extend its payment to 40 days.
No, I did not skip Client No. 3. They are gone! Doors locked by IRS for a tax lien. All the equipment has disappeared, after the company had started to pay later and later. Equipment loss is $2,200 and the receivables loss is $725. As owners, we are very upset by this loss, but most of our sales reps do not lose any sleep over it. Their attitude is, "Oh, you can write off your losses."
When hiring, show them this article, so that they will better understand the cost of doing business. Ask them to make believe they are the owners of the company and then decide, as an owner, whether they would make an equipment investment into a particular account that sold with a low GP.
Let me know how you train your salespeople to understand the cost of doing business. I can be reached at (516) 241-4883 or firstname.lastname@example.org.
LEN RASHKIN is a pioneer in office coffee service. He founded Coffee Sip in 1968 and later merged it with Dell Coffee, of which he became president in 1991. Sales at Dell topped $7 million. He also founded the Eastern Coffee Service Association and National Beverage & Products Association. He is a speaker at national and local trade conferences, consults on OCS sales and marketing, and is the author of two OCS training programs.