Paul Giannamore: How you can start to Moneyball pest control is to say, “How many calls do we get in the office? How many did we sell over the phone? How many did the technician sell on the door? What number of calls were for a one-time service and how many do we convert into a recurring service?”
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Paul Giannamore: Mr. Fat Pat.
Patrick Baldwin: It's Fatter Patter today.
Paul Giannamore: PB, I’m going to the UK. While I'm over there for a few meetings, we're going to crank up the old POTOMAC TV machine doing a handful of what I think will be interesting discussions.
Patrick Baldwin: I hope you all make it through customs because Dylan carries a lot of Pelican cases whenever you travel.
Paul Giannamore: That’s why I specifically do not travel with Dylan. I travel separately.
Patrick Baldwin: That's clever, Paul.
Paul Giannamore: My flight is strategically booked at a different hour, he gets in before I do.
Patrick Baldwin: That's more exciting than me going to Melbourne, Florida. Nothing against Melbourne, Florida but the UK sounds mighty nice.
Paul Giannamore: What’s in Melbourne, Florida?
Patrick Baldwin: Seth Garber and I are speaking at WolfPack Summit, home inspectors getting in pest control and vice versa. I'm going to be talking about key performance indicators, Paul.
Paul Giannamore: The home inspection business is interesting. We've seen other resi services businesses tie into home inspection as a great lead source, you get termite and general pest. We had the Lunsfords on here over two years ago talking about how they had their inspect all services, the inspection business, and then their pest control business. Quite frankly, that's how they grew that pest control business. Millions of dollars in revenue came from the inspection business. There's somewhat of a home inspection mastermind group that had a session. They came down to Puerto Rico and tracked me down and I spent some time with them. This was a couple of years ago.
Patrick Baldwin: I wonder if this is the same group. I guess we'll see.
Paul Giannamore: You're talking about KPIs.
Patrick Baldwin: I'm going to talk about KPIs. You and I spoke, I don't know if my KPIs or your KPIs.
Paul Giannamore: It’s probably very different. A good thing to talk about in general is key performance indicators but also being a diagnostician in your own business. It’s the winter months now, this is when everyone is working on a strategy for the upcoming season, preparing to begin the season. Patrick, I can't help myself from giggling many times when I talk to folks and they've prepared a strategy for the upcoming season. Oftentimes, it's a bullet-pointed list of buzzwords, hopes, and a variety of different goals, and it's short on actual strategy.
Patrick Baldwin: I don't know if I've ever seen you giggle.
Paul Giannamore: I do giggle when I see some of this stuff. A lot of the time, guys will say, “We're going to increase revenue by 10% this year.” It's a list of wants and desires but there's no strategy behind it. When I think about trying to formulate a strategy, it all starts with the diagnosis. You and I have had a lot of discussions about KPIs, which I don't necessarily believe in run-of-the-mill industry average KPIs because it all starts with diagnosing what is the particular problem in your business.
When we did the conversation with Seth and I was talking about looking at cause and effects, looking at a P&L, for example, seeing a result, which is the effect, and then trying to understand the drivers and the cause behind it, which ties in with this discussion. To take a step back for our audience, during the winter, once we get through the end of the year here typically at Potomac, there's a rush to get everything done by the end of the year.
In January, February, and March is when a lot of guys will ask to get their valuations updated, “Where do I stand right now? What do we need to be focused on?” Years ago, we would do a lot of analysis in-house but I've moved substantially away from that and focused more on talking people through how to be a diagnostician in their own business as opposed to having somebody do it for you.
Quite frankly, anyone out there running a pest control business can do this and it all comes down to, first off, determining where you are today. Where are we right now? Ultimately, where do we want to be? What do we want to do this year? Goals are helpful there but, effectively, when you compare today versus the state of affairs that you want in the future, you've identified a gap. The reality is, have you, in effect, diagnosed the real problem?
I used this example with you in the last episode. When you've got a fever and a cough, you go to the doctor. The doctor, in order to help you solve the problem, has to diagnose what is causing it. Do you have covid? Do you have a cold? Do you have cancer? What do you have? First is the diagnosis. Secondly, the doctor has to come up with some guiding policy for dealing with the issue.
Number one is to diagnose what the actual problem is, not the symptoms, diagnose the problems, and come up with a guiding policy and therefore come up with an appropriate therapeutic solution to your problem. I find that diagnosing the problem is often the most difficult aspect of this. Another example of this, Patrick, is my clothes are a little snug, and things are a little bit tighter around the old belt.
Patrick Baldwin: My clothes? Fat Pat?
Paul Giannamore: We can say one's clothes are getting tight. My clothes are tight and now I step on the scale and the scale measures my weight. I can look at the scale and say, “Definitively, I have gotten five pounds heavier.” There might be a KPI, your weight. The symptom is your clothes aren't fitting so well, you get on the scale, and now you've got a definitive number so you've measured that, and now you could say that instead of 180, you're 185.
Measuring your weight doesn't tell you the cause and effects behind that. Now, if you continue to unbundle or unpack the weight, you've got diet and exercise. Now you can start to think through, “Am I exercising? If so, how much? Am I measuring my calories?” The weight in and of itself is the result. The drivers behind that, the cause and effect, are the calories, the exercise, and so on and so forth. If you take a pest control company that says, “I want to grow 10% this year,” everyone typically comes up with tactical solutions to this, sales guys, social media, and advertising spend.
The real solution to effectively diagnosing this would look at the cause and effects behind your growth levels today versus where you want to be in the future. What I mean by that is in recurring revenue businesses, clearly, customer retention is a big key. Are we effectively managing and measuring our customer retention? Of course, customer retention, we could call that a KPI, but then there are drivers behind that.
What are the actual drivers behind customer retention and thinking through those? There are companies that go out and survey their customer base. There are companies that put together cancellation-saving type programs, somebody calls up, and they want to cancel. You get to the bottom of it. You might send somebody out to have a conversation with the customer. When you start to look at retention rates, you can always benchmark against the industry. That data is relatively opaque.
I've said this probably since episode one, one of the best things to do is effectively benchmark against yourself. Instead of worrying about what everyone else is doing, if you begin to measure various aspects of your business and you start to benchmark against your own historical numbers, that's the way to get improvement. I'm not benchmarking my weight against yours. I'm benchmarking my weight against my historical weight and my desired weight and body composition.
Most of the discussions I have over here, Patrick, is, “Paul, do you know this company? What's their retention rate?” They're always trying to think about their competitors, “What's their retention rate?” I don't know how valuable that is because if you're in it for the long term and you're trying to build a business, there's a lot of value in effectively benchmarking against yourself. Constant improvement, month over month, quarter over quarter, and year over year.
Patrick Baldwin: I think about these growth rates or how much I weigh on the scale. By the way, I don't know if I told you my pronouns are Fat and Pat.
Paul Giannamore: I know that. That's why I brought the weight up, I thought it would be good for this episode.
Patrick Baldwin: Those are results, at the end of the day. Should they be measured? Yes. Those are important numbers. What you're saying is, almost Chief Strategy Officer, you've got to reverse engineer from those final results. If we want to hit 10% growth, that's great, that's probably pie in the sky. Where did you pull that number out? Maybe that's what makes you giggle. They're almost abstract numbers and what are you going to measure to get those leading indicators or those activities or those levers or whatever you call it? You've got to go all the way back to how many calls are coming in, what's your close rate, and what's your customer acquisition cost.
Paul Giannamore: That's 100% correct. Much time is spent addressing results without a whole lot of thought being put into the drivers behind those results, the causes behind the effects. Measuring the results. As we talked about a few episodes ago, the P&L is a great amalgamation of results but the key here is to sit down and think. Sometimes business owners and managers don't spend the requisite time looking at the results and then asking a million questions as to why these results are what they are.
It's not highfalutin data analytics that you have to do but you have to start looking at numbers. When you start thinking about sales, conversion rates, customer acquisition costs, and all those sorts of things, it's not math intensive, anyone can do it, and you pull up an Excel spreadsheet and start writing numbers on how you can use a napkin. You need to force yourself to think about all the causes that go into this and the results are helpful because they give you a snapshot of where you are today. It's hard to fix things unless you think through the drivers and there are a million different drivers.
Patrick Baldwin: The big thing that stuck out when we were talking about this last episode was there are a lot of comparisons in the industry, the financials, the efficiencies of the business for growth rates, and everything. At the end of the day, in the M&A world, the buyers are looking at top-line growth, bottom-line growth, and market penetration. There are a bunch of result-oriented factors. When you and I were speaking about this, my obstacles and hurdles were, “My KPIs are different than the next guys.” If I reverse engineer that all the way back, it might be that those activities need to be looked at differently in my business versus the next person.
Paul Giannamore: That's a great point you make. You can have broad-based business model-type KPIs. If we take a step back and look at this from a 50,000-foot view, pest control business is a recurring revenue business. Having what we call a portfolio, recurring revenue is extremely important. We love to see recurring revenue. I love to see it in the 80% or above range.
You can use recurring revenue as a percentage of total revenue as a KPI. You can say, “I need to make sure that I'm at 80%-plus.” The reality is you can't say, “I need 80%-plus and so be it.” You have to say, “We're at 65% recurring revenue today. What decisions have we made in this business that are putting us at 65% versus 80% or 85%?” One thing that might come to mind and is worth taking a look at is, “How are we incentivizing our people? Are we incentivizing them to sell recurring revenue services?”
One example that we see often in pest control companies is somebody might say, “We provide a commission for new sales and it's a 10% commission.” I'm going to make this up. If you're a technician and you sell a new account, 10% goes into your pocket, it might be 5%, or 25%, who knows? If the incentive structure is the same for recurring revenue versus a one-time wash job, the actual guy out on the street is not going to make a distinction between, “I'll sell that $250 wash job and not the $600 pest control job. I can get it done. Money in my pocket.” You think about incentive structures.
Patrick Baldwin: We did that, by the way, at Bugs.
Paul Giannamore: What's that?
Patrick Baldwin: We paid a 15% annualized sales commission if it was a recurring job and 10% if it was one time. It worked and it helped.
Paul Giannamore: It does work. I've seen companies move to not even paying any commission or bonuses on one-time work, only paying it on recurring. You've got the incentive structures, what is it that you're doing as a business, and what is the ultimate business philosophy and if you communicated that to your people? Your average technician probably doesn't care whether it's recurring or one-time. I'm not making any suggestions, I'm walking through the thought process here of things that need to be thought about.
You have to think about the incentives and you have to think about how you're communicating with your people about what's the most important aspect of your business. From a management perspective, you have to not get lazy because everyone tries to get cash in the door and they want to do jobs. It's easy over time to end up doing a lot of one-time work. You only have so many resources so you're effectively allocating the resources of your firm to one-time work versus recurring work.
You can use recurring revenue as a percentage of total revenue to give you a KPI, if you will, as to your portfolio but then you have to think about all of the actions and policies behind why it's there where it is. You can't just wish, “I had more recurring revenue.” If you take a look at that percentage portfolio and then start to think about what is it that you are doing or not doing to otherwise incentivize one-time work and you being at 65% versus 80%.
Patrick Baldwin: Incentive structure. Compensation structure is one. It's almost the brainstorming exercise thinking through, “What all changes can I make or measure or monitor to effect going from 65% to 80% recurring?”
Paul Giannamore: There's a myriad of things. It could be something as simple as you haven't effectively communicated and trained your customer service reps and your sales folks to sell recurring where they're taking the path of least resistance. I call up, “I got a wasp job.” “We'll send somebody out. It's $250, we'll take care of your wasps.” The guy goes out, does the wasp job, doesn't attempt to sell a recurring program, and that's it. “Call us if you need us. We will be around.”
There were some missed opportunities on the phone. You could have said, “You'll never have wasp problems at all this summer. If you got a problem now, we'll take care of it. If you got a problem in July, we'll take care of it as well. By the way, we'll take care of 63 other bugs. I can bundle a mosquito. We'll take care of your mosquito. You have barbecues this summer, take care of that. By the way, you live in XYZ, 27% of homes in this area have termite issues. We can also do a free termite inspection while we're out there. if you've got a termite issue or don't, we can set up a preventative termite plan.” Now you've got this big bundled package.
Of course, the technician is incentivized when he goes out there, he's trained and incentivized to sell a recurring program. Something as mundane as a wasp job, you're not going to always be able to sell it. People usually panic, “There's a wasp that needs to be taken care of.” They don't expect to have wasp issues in the future and it’s one and done. If it's effectively established and communicated to the people and then the incentive structures behind it are set up right, you should see an increasing percentage of recurring revenue as total.
This applies to every different aspect of your business and not just recurring. Go back to 2022 and say, “How many one-time jobs did we do?” If you are collecting data and thinking through this, how you can start to Moneyball pest control is to say, “How many calls do we get in the office? How many do we sell over the phone? How many did the technician sell on the door? What number of calls were for a one-time service? How many do we convert into a recurring service?” You can slice and dice this data.
People are on PestRoutes, PestPac, ServSuite, and all these different software. I've seen folks set up an Excel spread every single day where the CSR is on the phone and a call comes in. There's a dropdown menu on Excel as to why they called what they said. If you do a little bit day by day, now you've got a lot of data that you can pull together and you can figure out, “How many people called? Why did they call us?” The why they called us is always a difficult one because, “I saw your truck,” or, “I saw a billboard.”
Did they see that or did they type it into Google and then see your name and remember seeing the truck? It's always hard to get definitive answers as to the source. For example, online marketing. You can track that stuff but you also don't know if they're driving down the road and saw your truck and typed it into Google and then clicked on your ad. It's not perfect. If you start to assemble that raw data that you can synthesize and analyze, it'll help you make better business decisions.
The problem that you have is usually when you look at the industry, you tend to have two ends of the spectrum, you tend to have guys that collect no data and analyze nothing, which is the majority. You also have the guys that get way too granular and you've got a ton of different data. It slows down your people because we're always collecting data and it's hard to determine what we're ultimately going to do with it. It’s thinking through what data you're going to collect.
That goes to my next point. We talked about recurring revenue as a general KPI in the pest control industry. You mentioned all firms are different, they're unique, and that's right. One of the things you and I talked about last episode is, at the end of the day, setting strategy comes down to diagnosing an obstacle and then setting a coherent action plan to overcome that obstacle.
Every company will have different obstacles and they're going to have different strategies to overcome those obstacles, which is going to require different data. If you are thinking about what your strategy is versus that of your competitors, your set of KPIs will be slightly unique because it'll be based upon a specific obstacle. You might have done a little bit of analysis there in your office and said, “I'm paying X for a new customer.”
Most guys are not focused on retention, they're focused on customer acquisition. That's where a lot of people spend most of their time on, like, “How do we get new customers?” If you start to get granular about how much you're paying for a new customer and when we think about customer acquisition costs, it's sales, advertising, and marketing. If you start to calculate that and then you look at your retention rates, you might say, “There's potentially more bang for my buck if I think about customer retention.”
With that, if you're collecting data, you can determine why customers are canceling. We're going to have natural attrition, people die, they move, and so on and so forth. We see wild swings in companies based on service. If you can start to zero in on, “I've determined that I'm losing customers due to scheduling snafus.” That's an obstacle. We've determined that we've got a scheduling issue here. Is it the back office? Is it the technicians? What is it? You do more investigation.
Once you determine and diagnose the specific problem, your KPIs for the next 3, 6, and 12 months, whatever the case may be, might be solely focused on the causes behind the result and the result was high attrition. What are the causes of that? Now, you've set up custom KPIs for your business because you've diagnosed a problem, there's an obstacle, you've determined the root causes of that, and you set up specific KPIs to attack that.
When I look across the industry, you've got some companies that are phenomenal at getting new customers. They've got great sales marketing and they might have great branding. They have a problem getting new customers and they might have a problem getting production done. They might have a problem with retention.
You've got other companies that can't get new customers to save their life but it's A-plus first-class service all the way through and they barely ever lose customers unless somebody gets hit by a bus. You have to start to think through where are the obstacles in your business. There is a tremendous amount of low-hanging fruit if you, as a manager, start to think of the various different aspects of your business, start to do some very basic measurement, and benchmark it against yourself.
Patrick Baldwin: Uncle Paul.
Paul Giannamore: Yes, sir.
Patrick Baldwin: Fat Pat here, a $5 million business. Typically, I grow 10% a year. This year, I'm shooting for 20%. That's a big difference going from historical going to 5.5 to now, all of a sudden, we're going to jump to 6. You're not in the consultant seat but having a strategy conversation, where would you start? Would you break that down and say, “How are you going to do that? Why are you going to do that?” Maybe this is a friend-to-friend and not Potomac, Paul.
Paul Giannamore: Fat Pat is a $5 million company and you're growing at 10% in 2022. You've added roughly $500,000 to the top line. Do you want to add $1 million to the top line this 2023, roughly?
Patrick Baldwin: Yeah. I feel like it's a good year.
Paul Giannamore: Your gap is, effectively, $1 million in revenue that you want to add this 2023. You've got a whole host of things you have to look at. You've got retention, which we talked about, is one. You've got two ends of that bucket, you've got the top and the bottom. It would behoove you to understand your retention rates to see if you can move the needle on that. You always have to remember that a business is a system. At the end of the day, you take the Ferrari engine and put it into the Ford Taurus. By doing a tremendous amount of sales and marketing, it doesn't run right. We've identified a gap, that's the problem. The problem is I need to double my revenue growth this 2023.
Patrick Baldwin: It's a feeling, right? That's where it all starts, a hope, a feeling, a wish, and a prayer.
Paul Giannamore: That's right. I want to do $1 million in additional revenue this year. The normal thing that everyone does is say, “How do I do that?” I need to spend more money on online marketing. I need to hire some sales guys. These are all tactical solutions. If you identify that and say it's a gap, “This is a problem and this is an obstacle. This is where we should be but that's not where we are.”
You then start thinking about the entire business and you might say something like, “Before I think about spending additional capital on bringing in new customers, let's shore up first. Let's fix our problems.” How many calls do we have coming into the office per day? At what point in time do they come in the day?” In different areas of the country and different areas of the world, particularly in the busy season, you'll get a lot of calls in at 6:00, 7:00, 8:00 9:00, or 10:00 at night.
Oftentimes, companies aren't taking those calls. You might have an after-hour service, which is not particularly effective. The people that call at 8:00 at night, if you don't answer the phone, they're instantly going to go to the next one. They're going to try to get somebody, they got a problem, and they want somebody out there. You might think, “Can I hire somebody to answer the phone from 5:00 PM to 10:00 PM? Is there additional work that they can do?”
We've talked about this in a prior episode. I've seen companies say, “We're boning up our commercial sales program. I'll make up a name, “Jill, in the evenings, you were taking care of your kids all day, you wanted a flexible job, and now you're working in the evening. Your husband is home with the kids and everything is great. From 5:00 to 11:00, you're going to be taking every call that comes through. In addition to that, you're going to be amalgamating contact information for businesses in our area for our commercial sales program.”
Now, it's not sitting around doing anything if the phone doesn't ring every fifteen minutes. Now you've got somebody helping you build the business and ultimately taking calls. Now, none of those calls are being missed. You can start to think about things from a production perspective. A lot of times, companies won't operate on Saturday and Sunday. In the busy season, Saturday and Sunday, people are home.
Over time, I've seen more and more companies put people on the weekends. It's about getting the data first. How many calls are we getting on the weekend? How many potential jobs could we have scheduled on the weekend that we're not doing? Does it make sense to do this? The hardest part of the strategy is the thinking part, diagnosing what is the problem. There's not just one problem, there are going to be multiple problems, “I'm getting a lot of calls in the evening. We're not even getting to them. We're not scheduling anything on the weekend.”
You need to first be a diagnostician and you have to use your imagination to say, “In what way can we break down this business mathematically and get some statistics and then determine what those statistics should look like if we're doing what we're supposed to be doing?” If you and I were having a buddy-to-buddy chat, I would recommend before you go out and dump a lot of money into the latest and greatest marketing fads is thinking about where all the leaky buckets or holes are in your own business. Where are things not moving as they should be?
Patrick Baldwin: Getting my own house in order before I accelerate all the problems. It's going to make for bigger problems.
Paul Giannamore: With rapid growth businesses, you get into that whole vicious cycle and a lot of the door-to-door companies face it where if you put on too much new revenue too quickly, the service suffers. Customers can't get your CSRs on the phone, it's too busy. They're scheduling snafus and you've got all sorts of problems. You're hiring a lot of people quickly and they haven't been trained right. One of the worst things that you can do is build a $5 million business on a $2 million business infrastructure and vice versa. It costs capital but you need to build the infrastructure first.
When you're small and nimble and willing to work crazy hours, you can get away with redlining. At some point, you have to focus on building the infrastructure first and effectively growing into that. Otherwise, you end up with a whole host of reputational problems. I've seen that and I'm speaking from anecdotal experience and having seen what that looks like.
Patrick Baldwin: Thinking through how granular can you get with this data measuring almost every iota.
Paul Giannamore: With measurement, in general, you have to be careful. If you're new to this, let's say you've been running your business for a while, your accountant is putting together annual financial statements and you're like, “I made money, I need to make more.” Overall things are good but you want to start to think about your business differently. You want to diagnose problems, you want to fix them, you want to move on, and you want to grow.
As the owner who's the CEO of the business, you can start to measure various different things. It's important though that you think about what measurements are being communicated to your staff. You want to put a lot of thought into that because there can be some adverse consequences. What's that old adage? It's not measured, it's not managed, or something to that effect.
At the end of the day, when you start measuring things, systems get gamed, and people start understanding, “This is a KPI for me and it impacts my job.” You get distortions. The best course of action is if you take a step back and say, “What is it that I am attempting to do here? I'm in this for the long term. I want to have a good life for myself and my family but I also want to build substantial value in this business.”
We know that pest control businesses, like any other businesses, are valued based on the stream of cashflow that the business produces. The less risky that stream of cashflow, the greater the value of the business. Great shorthand in pest control as well as lawn and care and other industries is that recurring revenue is naturally less risky than one-time. We know that revenue growth is important because it translates into a growth rate and free cashflow.
We know that recurring revenue is important because it effectively de-risks the business. That stream of cashflow is less risky, therefore more valuable. We know that the greater the percentage of cashflow, if we think about the cashflow margin, we know that that's also helping us build value in the business. Everything else can effectively stem from that.
This is a conversation that is difficult for guys that own a $1 million business out there because the system is not big enough to get extremely creative. You start running at $2 million, $3 million, $5 million, and now you're at $10 million. There are a lot of things that can and do go awry in your business and it gives you a lot of opportunities to start to look at different data sets.
When I think about strategy, it's all about saying, “We can't do everything. There are trade-offs in life. Where are we going to compete and effectively differentiate ourselves in this market? Are we a pure-play commercial business? Are we a pure-play residential business? Are we an amalgamation of the two? Are our technicians going to be universal techs? Are they doing everything or are we splitting them off into different divisions? Are we a me-too company? What additional value are we going to be providing to our customers? How are we bundling our services?”
You have to think about how you're going to compete and create value for the customer. You have to think that value is one thing and price is a different thing. Value is subjective. Effectively, what the price does is the price splits the value pie between buyer and seller. How much of the value created by any individual transaction will you be able to extract from the transaction? Higher prices mean more goes to the seller and lower prices mean more goes to the buyer.
You do have to spend some time thinking about, “What business are we? Are we a low-cost producer and the market only has room for one low-cost producer and the rest of them get creamed?” That's probably not you. The best thing that you can do as an owner is focus on being at the median of the market, as we've always talked about, or greater. You want to be a higher-cost provider and you want to provide greater service. A business is a system and systems over time break down. Entropy is stability and ultimately evolving into chaos.
As businesses grow bigger, you’re the CEO attempting to impose a design on the organization but it naturally gets somewhat unwieldy. By the time you get to $5 million or $10 million, there's a variety of indicia of entropy in your organization and you can focus on that. One of the things that I will say is important is you shouldn't attempt to do everything at once. If you've got a $5 million business out there and you say, “I've got my P&L and I am happy with my growth rate. I'm not happy with my recurring revenue percentage. I'm not happy with my margins.”
As we talked about a few episodes ago, now you can use those metrics on your P&L to say, “What is the cause or what are the drivers of this particular result I'm seeing?” That takes a lot of thought and it takes a lot of imagination. It's not just 1 or 2 things, there are oftentimes 20 or 30 different things that span culture, incentives, and communication with your staff. Things haven't been managed effectively so you can start with your P&L and you can determine, “What are areas that I need to focus on?”
From there, you can use real common sense and say, “What are the drivers of this and which one of those drivers can I begin to put in number two? How do I quantify this?” As you start to quantify those drivers, you can start to find deficiencies in your business. From a strategic perspective, a strategy doesn't have to be this massive thing, it could be simply as finding problems appropriately diagnosing them, and trying to determine the cause and effect.
Put numbers behind the cause and effect and begin to manage that, begin to measure that, and begin to think about how you can change or augment the business in order to get rid of that. It's important to not attempt to do everything at once. You can get your whole team fired up about one particular issue for 90 days. You can make customer retention something that everyone in the organization is going to focus on.
You, as the owner, will have to do the hard thinking about the drivers of that, trying to quantify that, and then communicating with your staff and saying, “This is a potential issue. That is a potential issue. As a team, we're going to focus on this, and here's what we're going to do.” You can't get the whole team focused on, like, “We've got a retention issue. We've got this issue. We've got that issue. Plus, we're going to add $1 million in sales on the top line.”
If you can do these short 90-day sprints, that's a much better way to get everyone's engagement and tackle these problems. There are companies out there that have been effective and, on a quarter-by-quarter basis, identifying or diagnosing an obstacle, determining a guiding policy, and putting together a set of coherent action plans that are communicated to the entire staff to deal with that particular issue. Once that's dealt with, assign some numbers. You might have a unique KPI for the obstacle that you've determined and then you're measuring that going forward. Is it improving? Is it staying the same? Is it getting worse? Where do we stand?
Patrick Baldwin: As a $5 million company, roughly 50 employees, give or take. Based on all you've seen, read, and experienced, on a 90-day sprint if you will, how many initiatives can a company and all employees get on the same page and say, “These 90 days, we're going to focus on customer retention.”
Paul Giannamore: I would say one. I would say you need to diagnose the problem. A strategy is about applying leverage, it's the use of force. At what pivot point can you get the most leverage? You don't want the entire team focused on something mundane that won't move the needle. If you identify some of the biggest obstacles that'll provide the most leverage in your business, you focus on one.
Everyone is still doing their normal day job but you rally the troops behind one particular issue. As you think about this, as a CEO, when you're thinking about strategy, you say, “Where is it?” It’s like Archimedes with the lever? Moving the world, “Give me a lever long enough and I'll move the world.” You need to think about areas where you can apply the most force to a pivot point utilizing leverage to make a significant change in your business.
Oftentimes, it's about viewpoint. There's an important aspect of taking a step back and thinking about your business. This is oftentimes what owners don't do enough, everyone's always on the move, and you're always putting out fires. There is a huge benefit of a shift in the framework in which you look at your business. I'll give you an example. Patrick, you're Southern Baptist, and you like Bible stories. Remember the story of David and Goliath?
Patrick Baldwin: I thought you were going to talk about Jesus Chicken being a Southern Baptist.
Paul Giannamore: Talk about David Goliath.
Patrick Baldwin: Put me on the spot, Paul.
Paul Giannamore: Remember it was the Philistines, back in the day. I'm trying to recall what book it was from, Patrick. If I had to guess, I'm going to say it might be in 1 of the first 5. Does that sound right? It all would've been in judges, who knows? It could have been 1st or 2nd for all we know. We know that the Israelites were having problems with the “Philistines” of the time and they had some giants, one of which was Goliath, the guy was massive. King David, who I don't think was the king at the time.
Patrick Baldwin: It was for Samuel.
Paul Giannamore: He wanted to go out and fight Goliath. He was a skinny, nerdy, little dude, and he wanted to go out and battle this guy. The king said, “No way, Jose, you're too small. This guy is going to cream you.” He ultimately went out into the battle. If you recall, they gave him all sorts of armor. Remember that? They gave him a ton of different armor. Before going out to battle Goliath, he took the armor off and threw it on the ground. He went out there entirely unprotected with his sling.
He effectively sized up the situation and said, “My only competitive advantage out here is my size and my speed. If I wear all of this heavy armor, it's going to slow me down and Goliath is going to crush my skull and my brains will go everywhere.” There was a shift in his viewpoint and he said, “If I take this heavy armor off, I can move much quicker than Goliath and I can get close enough to land a rock for my sling right on his noggin,” which he ultimately did.
Had he worn the armor, he would've gone down. Everyone was shocked and astounded and said that he needs to wear the armor, otherwise he will die. That's an example of capitalizing on an advantage that you have and shifting viewpoint and thinking, “It's not the armor that's going to protect him. The absence of the armor is going to protect him because he's going to be able to utilize the one thing that he has, size and speed vis-à-vis. Do you like your Bible lessons, Patrick?
Patrick Baldwin: I love the Bible lessons. I should have known it was First Samuel and this concludes our Bible lesson with Paul.
Paul Giannamore: It's going to shame you, Patrick. I do think that if business owners look at their business in a different light and try to capitalize on the advantages that they have and not necessarily always follow conventional wisdom. That's why I tend to shy away from a lot of this, “XYZ pest control company is doing this so we should do it too.” Your competitors are not that smart and they might be David going out with a bunch of armor on where there's a better way to do this and it's more efficient.
Patrick Baldwin: Breaking it down to the smallest even activity or answering the phone. How many calls are we missing? It’s being able to measure and grab as much data. It’s possible or at least it's relevant based on strategies and then making decisions from those. Managing those to make sure that those then affect your overall outcome.
Paul Giannamore: That is correct. My overarching message for this episode is, in a nutshell, this whole strategy-setting time of year, these strategic plans that I see tend to be nothing more than bullet points of hopes and dreams. Strategy is hard work, it hurts the brain, and it requires a lot of thinking. If you can begin to identify obstacles in your business, if you could diagnose the problem, “I'm not doing enough. I'm not making enough. Revenue is not growing rapidly enough.”
What is the root cause of that problem and not just saying, “I got to throw more money at marketing,” or, “I got to throw more money on sales.” It’s thinking about it and saying, “In order to come up with a prescription like a doctor, I have to accurately diagnose the problem.” Don't just go with the first 1 or 2 things that come to your mind. Sit back and think about it. Take out a piece of paper, write a lot of thoughts down there, and diagnose the problem.
Once you diagnose the problem, like a doctor, you come up with a guiding policy or prescription. Once you have that guiding policy, which is, “I've determined that in order to grow revenue more, I've got to focus on X, Y, or Z, or retention, and so on and so forth.” Only then do you determine a coherent action plan to address that. As part of doing that, you've gone away from the P&L. You're looking at cause and effect.
I challenge everyone out there to be a diagnostician in your own business. Think about it as a system, think about all the different aspects of the business, and think about unique ways to quantify potential drivers or causes in your business. Don't talk to Jim down the street that owns ABC Pest. I will say this, there's a balance with everything in life. Trial and error is a stupid way to do anything.
If I've got to make a doctor's appointment, I could say, “I got to call Dr. Sanchez. I can attempt to reach him through trial and error. I can dial a bunch of numbers and maybe get ahold of him 60 years from now.” There are better ways to do that like getting on Google. I'm not saying that you should not pay attention and learn from people, you absolutely should. There's a better way than you feeling around out in the dark. On the flip side of that, don't get distracted because there are a handful of industry norms, and there are industry KPIs.
If you're trying to solve a problem that's unique to your business, which is a unique bundle of resources and capabilities, you might need your own KPIs that are tied to specific drivers. You should not be concerned with what anyone else says. I challenge every one of you reading this to have some fun with it because that's how strategy is formed and that's how people make big breakthroughs in their businesses, it's identifying problems and obstacles and sorting out a solution to them.
Patrick Baldwin: I'm sitting here visualizing through the setting in which I would sit down and figure out KPIs, which levers, what to measure, and what to manage. Oftentimes, it's easy to go, “I love being in a group setting. I love people. I’m energized.” From a peer group perspective, I would ask them these questions. Naturally, that's where I would've gone before this. It’s like, “What do you do for measuring and managing? What numbers are you measuring? How do you do it?” Outside of a peer group, what if I even went to my executive team and asked them, “What should we measure? What should we manage?” I'm not hearing that. I'm thinking this is me in the library with headphones.
Paul Giannamore: Granted, you should do it with your team. This is hard work and I would challenge you, Patrick, to do it on your own. With the recurring revenue, one stick in my mind because I had these discussions, and here's what happened, “Paul, where should our recurring revenue be?” “A lot higher than what it is now.” “Where should it be?” I'm like, “Obviously, the higher the better.” Most companies aren't going to have 100% recurring revenue but 80%, 85%, or 90%, that's a beautiful number. You're still going to have one time.
If it's low, why is it so low? You got to figure that out. This wasn't driven by me so the thought process was the owner sat back and said, “We're selling a lot of one-time jobs. We do some wildlife but we're doing a lot of one-time pests. Why aren't we selling?” He had all sorts of gut feelings, like, “We should be selling more.” I'm like, “Business owners are the worst because every one of them does stuff on feelings.” I always say, “We don't do feelings, we do math.” This is something you can quantify.
This company was one of the companies that went and said, “We're going to start doing a call log and we're going to understand what people are calling for.” This does happen and it happens more and more now but usually, they don't call up and say, “I'd like to get your total protection plan and pay you monthly. Can you start me today?” That's usually not what they do. They call up and say, “My wife wants to murder me. Can I send you a picture of these ants? What's going on here? I sprayed some raid and they keep coming back.” They got all sorts of problems.
They call up and you're the solution provider, you're the expert, and you got to tell them how you're going to deal with it. If you're quick to do a one-time service versus a recurring plan, that's your fault. Let's start basic, how many calls are coming into the office? We get 100 calls per day. How many of those calls are total BS? Somebody's trying to find the owner, selling you a life insurance plan, or whatever.
We can bifurcate that and we can say, “30 of the 100 calls that came in, somebody called us up, they found us online, and they saw our truck, it doesn't matter. They called us up with a problem.” What did we do? Now you've got your CSRs. Everyone answering the phone got a basic call log and it can be a cell spreadsheet. If you want to start with a piece of notebook paper, it doesn't matter to me. Office, your job, “We might do this in perpetuity or we might not. We might just do it for a month. Here's what I need to know, I need to know everyone that calls in here, and what's the purpose of their call? What was the problem that they have and then how do we deal with that?”
You can listen to some calls, you can listen to how your CSRs deal with them. You can start to identify, “We got 30 calls that came in and almost every one of them had a “one-time problem.” Where did we go from there?” Did our folks on the phone attempt to even sell them our home protection plan? Once our technician went out, did he attempt to do that? Where did we go with it?
It's probably good before you make any dramatic changes in communication to your staff incentive structures to get some actual data so that you're talking about fact and not fiction. “I feel like we're not selling enough recurring.” No.”We had 30 calls today. We had 30 calls tomorrow. Here are the results.” What can we do about that? You do this on your own, you need to ask your staff, and you say, “We're going to start managing this. We're going to start collecting this data and this data will help inform us. It'll help uncover what the problem might be.”
We don't know what the problem is, we don't know, but you get that data and then you start to look at it and you're like, “I got 30 calls on Tuesday and we did 30 one-time jobs. That doesn't sound right to me.” You then can explore further and now you're starting to build up your data and statistics. Once you've diagnosed that this is a problem, then you can start to think about what it is you'll do with it. That can be applied to any aspect of your business. Owners need to get in the habit of thinking about key business problems. Get a cup of coffee and lock yourself in a room and say, “Don't bother me for two hours. I'm going to start jotting things down. I'm going to start thinking through stuff.”
Patrick Baldwin: You just want some time alone, Paul.
Paul Giannamore: Yeah, I do. That is valuable and high-octane time for a CEO who's charged with setting strategies and organizing the capabilities of the firm. Instead of putting out fires, make sure you schedule some time to do that analysis. Over time, you can put together a crack team that's going to help you with that, for sure. No one is born a professional manager of a business, they're not. There are no naturals out there.
At the end of the day, you have to educate yourself, you have to read, maybe take some courses, and listen to some podcasts. You have to see what other professional managers have learned and done throughout their life and then you have to apply those skills. You can read a manual on riding a bike, the old saying, but it's not going to make you ride the bike, you got to get out there and apply that. There's a lot of value in dramatically upgrading your skills as a businessman and a manager and a leader.
Most business owners stumble into this. They're a second generation or they were a technician, they started a company, and next thing you know, you've got 10, 20, or 50 employees and you're not a natural at this, and that's okay. You should recognize, “The first thing is no one was born doing this but I can learn and I can dramatically upgrade my business skills.” As I've said on The Buzz multiple times, bar none the biggest constraint in the growth of a pest control business is the caliber of leadership.
Small pest control companies that are operated inefficiently stay small, not because the employees suck and not because there's no demand in the market. It's that the business owner has quit growing as a manager. He or she has not educated themselves and is focused on acquiring the necessary skills in order to be able to handle that. Learning is key and I stand by that. I look across the board and one of the biggest inhibitions to growth in these companies is the calibrator of the leadership, bar none.
Patrick Baldwin: Paul, you practice what you preach because I've been in the office. In the morning, you've got the headphones on, you've got the journal out, and you're writing. It's not just to-do items, it's thinking through strategy. There it is, you're thinking through strategy on a daily or maybe constant basis. How do you make sure that you're not giving new course direction to your staff every day? You've finished riding and you run out there, “We got to do this today.” What's the balance there taking those initiatives and balancing that with the team and making sure you're not giving them too much to do?
Paul Giannamore: I will say that I am a horrible manager. I'm not particularly great with strategy in my own opinion. The reason why you see me doing the things that I do is that it's a constant struggle to learn and stay ahead. If we talk about Potomac, our business over here, for example, it has been an extremely busy five years with the M&A market globally. It's been ridiculous.
In 2023, I said to myself, “This year, I am going to dramatically improve my skills in certain areas.” One of those areas is setting strategy for the firm. Another one of those areas is thinking through the difference between delegating and abdicating. Am I abdicating my duties or am I effectively delegating them and thinking about accountability within the organization? One of the things that I've been working on is we're an extremely flat organization.
We realistically don't have titles over here. A lot of investment banks are somewhat set up like that, they're pretty flat organizations. One of the things I've been working on, Patrick, is you've got an org chart but you also have a chart of accountability. What individual owns a specific aspect of the business? You can break that down into a pest control company. What employee or team member at your firm owns a specific line on the P&L? That line that says insurance, who owns that? Is that you, the owner? Is there somebody at your firm that needs to get super smart on insurance?
Whether various insurance policies out there, are we properly insured? Are we paying too much? Insurance companies are notorious to continue to jack up the price. Unless you do something about it, you're stuck writing all sorts of checks and there are no checks and balances on it. One thing that business owners can do is think through every single line of the P&L and make somebody own it. You own this line, you own the drivers behind it, you own the cost behind it, and you own the results.
Let's talk about what that means. In a typical pest control company, what ends up happening is with most owners, at the end of the day, the accountability falls on them. They've never made any other individual within the organization accountable for a specific line on the P&L and then everything gets done half-assed. I'm no different, by the way. Because you don't have enough time in the day to focus on all those sorts of things.
As far as I come up with an idea and how about everyone doesn't run out and do it? I'm different than the Mexican, for example, he comes up with an idea, “Let's shift course. Let's do this.” I'm the exact opposite. I like to think about it. As per Thinking, Fast and slow, I've been trying to do the pre-mortems as much as I can where I think about the cost-benefit analysis, what's the absolute worst thing that could happen if we invest in X, Y, or Z? That's a difficult process.
As we're starting to plan for the following year and somebody says, “I'm eighteen months out from a sale, or 24 months, or what have you. One of the discussions that I often have is cashflow is extremely important. If an acquirer is paying 10, 15, or 20 times cashflow, every single dollar in your P7L is worth $20. Every dollar of cost lightens on fire, $15 or $20. If I think through some of the things that we start to do years in advance of the sale, if you think about all the overhead associated to support revenue, if you don't want to spend one single dollar above and beyond what you need to support your revenue base.
You can have a conversation with your team and say, “We want to focus on spending money on the right things, the right things for you guys, and the right things for me. We don't want to spend a lot of money for stupid crap. Let's all collectively as a team put together a list of where we're wasting money.” You might be better understanding where we're wasting money in your own domain but you can look across the office and you can look out at the vehicles.
Wherever you come up with ideas, what services are we paying for that are worthless and no one wants to use? What stuff do we have laying around here? What benefits that we have that are a total waste of money? Consistently, across the board, I've heard from owners when they have those discussions with their team, they love coming up with ideas, “we're wasting money. This is stupid, what we're doing here.”
Your question on the tracking calls, I don't think you have to say, “CSR, I know you're busy, I'm going to pay you extra for tracking calls.” You need to sit down and say, “We're trying to grow this business. We're trying to turn it into an employer of choice. I'm trying to give you as many opportunities as possible. Let's sit down and one of the issues that we have is when we sell a one-time service, it's far less profitable to us in the long term than doing a recurring service.” You make sure you define the two and everyone understands.
All I'm trying to figure out right now is what calls we're getting in the door, what folks are saying to us, and how we're attempting to sell a one-time versus recurring. Right now, we're trying to get some data so we can understand if we need to make any changes to how we're effectively dealing with our sales program. No one has ever come back to me and said, “Paul, I told my staff that and they told me to get lost.”
In the busy season, you might get some pushback, like, “I can barely answer the phone and now I got to write all this stuff down.” Yes, you might hear that sort of stuff. Your information sources may or may not be perfect but all you want to do is try to get each and every one of them to do the best that they can. You might say, “July and August are not the time to do this. Maybe we do this in May and June. In April, May, and June, the phones are starting to ring. Let's get a sense of it before it gets crazy.”
Patrick Baldwin: If you’re like Mike Rogers and you would do it in the craziest season.
Paul Giannamore: It could be like Mike. What's the threshold of statistically significant? You don't need 65 months of data. You can do March, April, May, and June. You can get 4 months of data or 3 months of data. A week of data will help you understand if you're thinking about this whole recurring versus one time and who's calling and how's that all working. It's not perfect but if you're not doing it, it's better than pulling something out of your ass and saying, “This is why it's the case,” without measuring things.
Patrick Baldwin: I love the idea of getting away from standardized KPIs in terms of the levers or the leading indicators or the activities in which mine don't need to be like yours and it doesn't need to be like the next guys. I need to understand my business and what makes my business successful.
Paul Giannamore: PB, we've got a little bit of housekeeping on the old Boardroom Buzz to talk about. I've got some travel as do you. We're going to push off some actual interviews that we have until we return. If you've not subscribed to POTOMAC.TV, head on over there and subscribe. I will be traveling about having all interesting conversations in the UK and Ireland and we'll be coming out with some cool stuff that you will not want to miss.
Patrick Baldwin: Are you looking forward to it?
Paul Giannamore: I am, as a matter of fact.
Patrick Baldwin: I'm looking forward to it. Make sure you get a picture of Dylan carrying all of your bags.
Paul Giannamore: I’ll see what I can do on that topic.
Patrick Baldwin: Safe travels. I'll see you when you get back.
Paul Giannamore: Sounds good, brother. See you soon.
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Dylan Seals: Thank you so much as always for supporting us at The Boardroom Buzz. We know your time is valuable and the fact that you spend 45 minutes or an hour with us means the world. All the media that we put out from Potomac is meant to honor and celebrate you, the service industry owner. As Paul would say, “Yee who toil in the pest control vineyards.”
As part of giving back, we have this podcast, but more than that, Paul and I have been working our tails off over at POTOMAC TV. We've spent a tremendous amount of time, energy, and resources to build out that platform to bring you market updates, to bring you visual breakdowns of the merger acquisition process, and to tell stories and present information in ways that, frankly, it's not possible for us to do on The Boardroom Buzz.
Adding the visual element takes it to the next level. I want to invite you to go to YouTube and find us, it's POTOMAC TV. Potomac.tv will get you there. Go there and subscribe. Check out some videos and leave some comments. Let us know what you like and let us know what you don't like. Let us know what you want to see more of and we'll see you over there.
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Thinking, Fast and slow
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