Should You Knock Doors? The Economics of Pest Control Door-to-Door Sales

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Illustration Credit: PCT Magazine, Feb 2016

Since PCT Magazine printed its February 2016 cover story, “Who’s Knocking at Your Door?” [Download it here: PCT Whos Knocking at Your Door], I’ve received a litany of questions on door-to-door sales. This article was printed on the heels of the ServiceMaster acquisition of Alterra, which, at the time, was the largest door-to-door (“D2D”) pest control company on the globe, having gone from $0 to $75 million in the three years prior to the acquisition.

In 2017, we estimate that approximately $150 million in pest control revenue was sold on the doors in North America.

I find that most of you fall into two broad camps when it comes to door-to-door sales:

  • A. “These Mormon companies are bad for business. They are just marketing companies and they have no idea how to perform the service. They piss customers off and make the rest of us — who know what we’re doing — look bad.”
  • B. “$150 million per year, that’s a lot of cabbage. My company is a million times better than any of these door-to-door knuckleheads and I want to get me a piece of that sweet action.”

Unfortunately, in many cases, I tend to agree with statement A above. However, the majority of pest control companies out there are bad for business in general (e.g, crap employees, bad management, high turnover, treating your company like a piggy bank, etc.), so let’s not blame all our ills on the Mormon door knockers.

If you are in the statement B above camp, and find yourself green with envy that young 20-somethings are cashing out to the tune of millions of dollars per year while you’re toiling in the vineyards, this article is for you.

Over the last seven years, Potomac has executed over $250 million D2D transactions as well as advised Scotts LawnService (“SLS”) from 2011 through 2015, which, on average was selling 135,000 new accounts per year on the doors — making D2D the number one source of new sales for SLS. For better or worse, it’s safe to say I’ve seen more D2D transactions that anyone else in the industry and I’ve learned quite a bit from it.

In the D2D world, you’ll see some of the big players attempting to to do it themselves (with the assistance of outsourced service providers), and then you’ll find hundreds of LDS (aka Mormon) run businesses out there building these businesses from scratch in hopes of hitting the jackpot at some point in the future with a sale to a strategic acquirer.

Well, Just How are the Kool Kids Doing It Then?

For years now, Terminix, TruGreen and Scotts LawnServices have been knocking on doors (and annoying neighbors). Terminix has used an outsourced partner and SLS, now part of TruGreen, has tried to home grow their own door knocking capabilities. Massey has down a few tests with the same outsourced service provider that Terminix uses and Orkin has stayed away from it since the days of their Eclipse Marketing partnership in the ’90s.

When a company hires an outsourced provider, they are typically paying anywhere from 60% to 100% (with the median around 85%) of the contract value (not to mention an upfront fee, etc). The outsourced provider handles all of the things that you don’t want to handle. For example: hiring, training and putting the sales guys up for the summer (yep, they typically fly in from other states and need to be put up for the summer). The sales guys tend to be in their early 20s and they don’t work for you, they work for the outsourced service provider, although the customer thinks they work for you. That means, if they take a dump on the front lawn, your company did.

If you hire an outsourced provider, you might end up with a few dozen kids out on the streets banging on doors on behalf of your company. They’ll wear a polo shirt with your logo on it and knock daily until the street lights come on.

From an economic perspective, a typical payment schedule might be 85% (and I’ve seen it much higher than this) of the first-year contract value with some sort of retention clause. For example, you might not have to pay if the customer doesn’t accept and pay for at least the first two services. So, if one of your sales guys sells a $425 residential pest control contract, you’ll pay, on average, $361.

The big companies, like Terminix and perhaps Massey Services, are likely getting a much better deal than you’ll be able to negotiate.

Save for TruGreen, I don’t know any of the large pest control companies that are actually running their own sales crews internally. They’ve realized that it’s very difficult to do and instead they use outsourced providers.

I can safely say that for the privately held pest control business, bringing on a third party to knock doors for you is not economically feasible. Unless you feel good about the rates that I just quoted you above. And if you do, you won’t be in business for very much longer.

It’ll be Cheaper to Just do It Myself

“$361 for a residential pest control customer? You gotz to be crazy!” is what you are thinking right about now… and I am not going to disagree. I would never do it myself.

So why not just hire your own sales crew to knock doors? These guys are often young kids, how hard can it be?

I just had dinner in Europe last week with the head of a PCT Top 25 company here on vacation. He said, “Paul, we’ve really been seeing a lot of door-to-door companies in our service area and I am thinking about building out these capabilities internally. If these guys can do it, I don’t see why we can’t.”

The issue often isn’t whether you can or can’t do something, it’s whether you should do something. Period.

Your residential pest control customers typically, at one time or another, need a new roof, a new heater, weeds pulled, car washed, pool cleaned, etc… the list goes on and on. Can you provide some or all of these services? Perhaps you can, but you shouldn’t. By doing those things, you will be building a barely profitable, Frankenstein of a business that is very hard to manage and even harder to sell if you make it that far.

The Proof is in the Retention Rate

Door-to-door sales is just one way to sell pest control to the residential market. There are a variety of other sales and marketing tools in your toolbox, such as: direct mail, internet marketing, radio, billboard, TV, etc.

The big difference between door-to-door sales and other forms of direct marketing is that with traditional direct marketing, the customer raises his hand and says, “I have a problem, come fix it.” As you know, if you take care of that customer, and he sees the value in your service, he will stick around for years.

If you’ve been in this business long enough, you know that it’s not uncommon for one of your technicians to be out at a home and the neighbor, after having seen your company in the neighborhood, walks over and says, “Hey, I’ve got carpenter bee problems, can you come over and take a look at it when you’re done here at Jim’s house.”

When a customer sees you working, or sees one of your trucks or ads and calls you, they are self-selecting as someone who (1) has a problem and (2) is seeking a solution.

In contrast, with D2D sales, a salesman is showing up at the front door and “selling” the customer. The customer might not have a problem, or realize he has problem, but the difference here is that he hasn’t come looking for a solution. He’s been approached by a salesman. And when there are sales folks on the streets who are highly incentivized to do anything that they can to get that sale, some high pressure tactics become the flavor of the day… resulting in some pretty pissed off customers.

Just take a look at the Yelp reviews of companies that you know that currently employ D2D sales teams, inevitably, half of them will be one-star reviews complaining about the “contract” and the “cancellation fees” that they “weren’t aware of when they signed up.” And of course, many, if not most D2D companies are great at getting sales. What they are not so great at is serving the customer or keeping them happy, so many of the online reviews focus on the schlocky service.

I know what you’re thinking.

Man, if I could just add on a few thousand additional accounts a summer, I’d be cooking with gas. If I could just increase my sales, unlike the D2D companies, we are great at serving the customers and keeping them happy, so we wouldn’t have the same issues as a D2D company.

Unfortunately, technical prowess and customer service is only half the battle. When someone makes a mistake to buy a service that they didn’t want in the first place (because they were pressured at the door), they aren’t sticking around, whether there is a service contract or not.

In the D2D realm, it’s not entirely uncommon to see 50% of D2D customers disappear in the first year. Retention rates can be abysmal.

Here are some of the problems that I see when traditional pest control companies try to run their own D2D programs internally:

  • Retention rates are dramatically lower than what they expect, which causes internal problems in the business — e.g., their technicians aren’t used to losing so many customers so quickly.
  • Non-LDS kids hired from local colleges do not perform nearly as well as the Mormon missionaries that have had doors slammed in their faces for years. Not for nothing, I’ve seen a measured decrease in the performance of the LDS kids themselves. So, I know I probably sound like my father now, but young people are lazy, stupid and entitled, irrespective of religion and socioeconomic background.
  • It takes a lot of time and effort to train and manage kids on the doors.

The list goes on and on.

This is the reason that firms like Orkin and Massey tend to buy D2D firms that have been around for a while rather than do it themselves. They would rather 70% of the customer base whither and fall off over time in the hands of the D2D owner and instead buy seasoned customers at a greatly reduced price versus what they would have to pay for them organically or if they were buying a traditional company.

Here’s What I Would Do Instead

The interest in D2D from traditional players (at least the ones that discuss it with me) tends to come from the traditional owners seeing these D2D companies grow so quickly.

With valuations being up across the board and deals happening on a daily basis, I get it. You’ve worked your whole life and your business does $3 million in revenue and here comes some sales guy out of nowhere, builds his business to $10 million in three years and sells it for a multiple of that. It’s frustrating. Especially, when you look around town and see these guys knocking doors and you know in your heart of hearts that they are doing shitty work, lying to customers, and ruining the reputation of the industry.

Here’s what I have to say about that.

First, it’s true that some people are making a ton of money selling pest control door-to-door. However, more people are making more money doing it the traditional way, the way you’re doing it. So don’t get distracted, because door-to-door sales is not the answer for most companies… and in fact, it’s likely to hold you back.

Remember, what you hear about out there are the successes, not the failures. When Potomac, or Orkin or Rentokil puts out a press release, it’s about some great deal that made everyone rich. We don’t put out press releases that say, “the owner was idiot, the company wasn’t profitable, and the acquirers basically told us to piss off… then the owner lost his mind and is now on the verge of suicide.” Just because we don’t say that kind of stuff, doesn’t mean it doesn’t happen all too often. Most of the door-to-door companies out there are struggling to survive and starved of investment capital.

Instead of worrying about door-to-door sales, focus on building internal capabilities. Focus on getting better at direct marketing, and you won’t need door-to-door.

Second, life’s too short to bamboozle customers into buying what you’re peddling. If you really can’t be proud of what you and your company do every day, then what’s the point. In the last five years, we’ve done about $250 million in D2D pest control transactions. We’ve advised the two largest D2D companies in the industry and dozens of others. Of all of the D2D companies that I’ve met over the years, I’m extremely impressed by 20% of them and disturbed by 80% of them, and I do believe that they are bad for business. Some of these D2D companies, however, really do run very ethical and impressive programs, and I consider the owners to be close personal friends. However, it’s hard to do D2D the right way.

Finally, if you really want to get into D2D, you might be better off in contacting the D2D pest control firms in your area and working out a deal with them. 95% of the owners of these companies are not interested in running a pest control company long-term, they are interested in building and selling them.

Let me give you an example. Last year, a friend of mine in the industry came to me and said, “Paul, I’m pissed at this D2D company, they keep trying to pick off my customers, and now they are lying to them. I am going to hire my own D2D sales force that’s twice the size.”

My suggestion was to forget about selling pest control door-to-door and instead take the owner to lunch. Let him know that you understand that he’s building a business to sell, and you’re willing to buy his business as soon as 75% of the customer base has been seasoned for 18 months or more (at 18 months, D2D customer tend to proximate traditional customers). I suggested that he offer to assist the know-nothing, 25-year D2D owner, if he is willing to walk away from any customers of his firm.

Bottom line was, instead of going to war, there was a great opportunity for the two firms to work together. And that’s exactly what they are doing right now. In fact, my buddy will be buying the D2D accounts in his service area after they’ve been seasoned and the D2D company will be using that cash to fund growth in adjacent markets, which my friend intends to buy in the future.

What About the Pot of Gold at the End of the Rainbow?

Alterra didn’t sell for the same multiple as Steritech did. None of these door-to-door companies, for the most part, get the same valuation multiple as their traditional brethren. Why? Oh let me count the ways.

First, customer retention tends to be significantly lower.

Second, technicians tend to be younger and less experienced.

Third, management tends to be younger and less experienced.

Fourth, when the D2D company turns off D2D sales, there is nothing else in place to drive leads and new sales.

I could go on and on.

Buying a company’s accounts is a lot different than buying a bundle of unique resources and capabilities.

In this market, D2D and low quality traditional businesses have been rewarded by acquirers as the rising tide has lifted all boats. But we’ve hit an inflection point and that is beginning to change.

 

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About Paul Giannamore

Managing Director at The Potomac Company where I head the firm's strategy consulting and investment banking practice focused on the structural pest control and integrated facilities services industries. I write the Pest Control M&A Weekly Commentary and The Potomac Pest Control Executive, newsletters read by thousands pest control professionals in scores of countries (you can subscribe to it below). In a nutshell, I do two things: (1) advise shareholders and senior management of pest management firms on creating value in their businesses, (2) advise sellers on the sale of their businesses. Based in Geneva, Switzerland, I'm a graduate of Cornell University, and I speak Italian, Spanish, Arabic and broken French. Join me on LinkedIn