Paul Giannamore: We're entering into a stagflationary environment, people get that. Be honest, “My costs are going up just like yours. I've got to raise prices.”
Patrick Baldwin: P to the G, good afternoon.
Paul Giannamore: Hey, PB. How are you doing over there?
Patrick Baldwin: I'm living the servant leader's dream.
Paul Giannamore: You packed in all my favorite buzzwords in one sentence.
Patrick Baldwin: I put them all together. I didn't know you could roll your eyes like that. Thanks, Paul.
Paul Giannamore: How's everything going over there, PB?
Patrick Baldwin: It's great. It's the pre-Texas summer heat. I’m thinking about everything that's about to come and it will remind you why only your casket will ever come back to Waco.
Paul Giannamore: You've got the tenderloin in the smoker as per usual.
Patrick Baldwin: The tenderloin is going right now. I was talking to someone about coming to Texas, he lives in Florida, and I said, “Whatever you do, please don't come in the summer. You will hold it against me.” You came in August. I don't remember how hot it was.
Paul Giannamore: It was pretty treacherous. It was hot.
Patrick Baldwin: Between you and Dylan sweating up a storm. It felt like some pork in the smoker.
Paul Giannamore: That's a spring or fall trip for anyone. If you want electricity, don't go in the winter.
Patrick Baldwin: What is that?
Paul Giannamore: Didn't you guys have that electricity issue in the winter?
Patrick Baldwin: Yeah. February ’21, Uri. She's quite the gal. Paul, we got more listener questions right here. I'm going to surprise you.
Paul Giannamore: Let's plow through them, Patrick. I guess we're doing a lot of listener Q&A here.
Patrick Baldwin: I love it. Get some interaction here with our wonderful listeners. I've got one and this comes a little sideways. Andy Sanefski from Perimetek Pest Management up in Syracuse put this on LinkedIn and then sent me a message. He wants your take on it probably more so than mine. His post on LinkedIn is, “The pest management industry has dramatically changed over the past twenty years. I've suspected for a long time that the middle of the industry has been depleted, leaving only large companies and small mom-and-pop operators. To confirm this, I compiled some industry data that tells a striking story.”
He has pie graphs that present the market share controlled by companies in three size classes. Major companies, the largest handful of companies. The remaining top 100 are the rest of the companies on the PCT top 100 annual rankings list. Number three is mom-and-pop. This is the market share held by everyone else. There was a comment and then a reply and this is what Andy drew my attention to. LIPCA, the insurance company, had a comment in there about how they are getting a lot of mom-and-pop calls for insurance.
Andy replies, “That's very interesting. I wonder what that indicates. I was working on what factors may have contributed to these results and whether this trend will continue. Will we see a resurgence of smaller and mid-sized independent companies or is that era over? Are we headed towards a bifurcated industry that is made up of a limited number of larger consolidated brands and a huge number of very small local operators? Does this signal the arrival of pest management as a fully mature industry? If so, what does that mean for strategic planning for the smaller operators?”
Paul Giannamore: That's an interesting question, Patrick. I spent some time going through the acquisition spend chart that PCT asks us for every May. When they come out with a May PCT top 100 issue, we look at acquisition spend. In 2022, there was $1.153 billion spent, which is comparable to the $1.4 billion spent in 2021. The 2022 numbers do not have the Terminix acquisition because we wanted to make them consistent and comparable to prior years.
If you remember back to the early episodes of The Buzz in 2020, we talked a lot about the fact that suppressed yields or low-interest rates favor large companies over small companies and they dramatically increase the amount of consolidation in industries. Anyone that's got their eyes open sees that in pest, HVAC, and all the allied industries. It's these thirteen-plus years of negative real interest rates that have made it extremely lucrative for companies to go out and make acquisitions.
We take Anticimex, for example. Anticimex, in 2022, did $400 million in acquisition spend, roughly $450 million in acquisition spend in 2021, and roughly $250 million in acquisition spend in 2020. Thus far in May of 2023, they've got two small deals done in North America. I'm going to have to assume that 2023 will probably be the lowest spend for them on record. That'll be pretty consistent across the board for most strategics.
Interestingly enough, we didn't have private equity firms in 2021 or prior numbers. For 2022, this year, the chart shows $325 million from private equity or financial sponsors spent in the pest control industry. That consolidation will slow down because it's a function of when money is free and the larger companies are able to borrow at dramatically lower rates than privately held businesses. It stimulates acquisition activity. When the opposite happens, the reverse is true, the cost of debt capital goes up and that slows down. The consolidation in this in every other industry, for the most part, the acceleration is directly proportionate to what's going on in the capital markets.
It's interesting that Andrew did the study. I don't know if it necessarily means that pest control is a mature industry or not. It probably is pretty mature. I do think that the larger players will continue to get bigger. We do have the regenerative capacity. In pest control, there's a new company springing up every day. That's not going away but we probably will continue to have more and more concentration among the bigger players. What say you, Patrick?
Patrick Baldwin: It does take me back to thinking about interest rates. We're at 5% now in holding maybe.
Paul Giannamore: Maybe. I looked at the Fed Funds futures curve and it looks like the Fed Funds market, the traders, are imputing a potential 25% chance of a cut by the end of June or early July. I don't believe that happens, to be honest with you. I don't think that's going to happen.
Patrick Baldwin: I don't know if that changes your thought on an impending recession or not.
Paul Giannamore: It does not. The recession is in the bag. The recession is coming. Even though it was FOMC decision day, if you recall, you were down in Puerto Rico for Bubble Trouble. May 4th, 2022, and this year, May 3rd, 2023, was the FOMC decision. Powell had his presser and said that the banks are in good condition and inflation is still too high, dramatically above his target, effectively higher for longer. He's going to stand on that for quite a bit.
Patrick Baldwin: Trend-wise, you see a pullback in acquisitions. The big ones aren't going to get much bigger and we're going to have a lot of new ones form. Mom-and-pop is going to be developing in this cycle. I don't know if that's the takeaway.
Paul Giannamore: I don't know that it changes a lot of things for your average operator out there. I will say a lot of these private equity firms are making substantial investments in data analytics and a variety of different capabilities. They're able to go out and hire the best and the brightest and bring on a lot of smart folks to compete. Rentokil has more than doubled in size in North America. I don't know how that impacts me if I own a $5 million pest control company. There are a lot of people reading this that are like, “Hallelujah. Thank God, they merged because now they’ll screw it up and I'll take great employees and great customers.”
Patrick Baldwin: That's possible.
Paul Giannamore: I'm not smart enough to determine what happens there.
Patrick Baldwin: In his last question, “What does that mean for strategic planning for the smaller operators?” Are there key takeaways in terms of interest rates are up, they're borrowing less, or it's harder to get the return? Acquisitions are going to slow down. I don't know what that means for smaller operators other than keep doing what you're doing and pick up the pieces where acquisitions do happen.
Paul Giannamore: I don't know how the consolidation of the industry, either decelerating or accelerating, would necessarily change strategic planning unless he's talking about planning for an exit. From a strategy perspective as to how you're playing on the playing field against your competitors, I'm not sure if that changes much of anything.
Patrick Baldwin: Andy, if you're ready for an exit, you know who to call, call Uncle Paul.
Paul Giannamore: I like that.
Patrick Baldwin: Got another one here. I've got a few more so bear with me, Paul. Tanya writes, “From Enron to the First Republic,” this is the week, regional banks are taking another beating, “Are there common themes between these massive blowups? Are there lesser-known failures to glean information from?” I know you were quite the study of history, especially in economics. Paul, what do you think? Who doesn't like to watch a good burn burner?
Paul Giannamore: Over the last twelve months, what started back in May 2023, we've effectively gone through the most dramatic and violent increase in nominal interest rates in US history. They went from zero and cracked up the notch. I don't think for a second all this change in monetary accommodation has hit the market. I don't feel like Titan money has flowed through the system. As Fed Chair Powell said, “Monetary policy acts are long and variable lag.” We're starting to see the issues.
The problem is we've got thousands of banks out there that are potentially insolvent. If you think back to the great financial crisis in 2007 and 2008, we had a solvency problem and the government attempted to solve it with liquidity. We didn't have a liquidity problem. We effectively had a liquidity problem caused by a solvency problem but we had a solvency issue and we're starting to see that now in the US banking system.
Patrick Baldwin: Is this the House of Cards and the regional banks are sitting there praying that no one's pulling their deposits out and putting them into the bigger banks?
Paul Giannamore: We raised up another 25 basis points so interest rates continue to rise. We've got short-term government paper paying dramatically higher rates than deposit accounts. The problem that the banks have is if they raise the deposit rates, it dramatically squeezes profitability. If they don't do that, that money gets pulled out. Of course, these banks are borrowing short and loaning long. Long-duration securities are sensitive to interest rates. When interest rates go up this quickly, it dramatically decreases the amount of assets on their books.
When I talk about a solvency issue, what I mean is there are virtually thousands of banks in the United States now that have more liabilities than they do assets, which is a problem. We've got a Fed that raised rates again creating more incentive to pull deposits out. The federal government came in over the weekend and effectively wiped out the bondholders and the shareholders of First Republic and sold it to JP Morgan.
When I looked at that, I thought to myself, “Why on earth would I be a bondholder or a shareholder of a local community or regional bank when the federal regulators come in and instead of giving it proper price discovery, effectively handed it to JP Morgan wiping out bondholders and stockholders.” It creates a perverse incentive now to dump these things. If you look at the KRE and the financial indices, they're having brutal years. All these bank stocks are rolling over. I have been a heavy shorter of banks over the last couple of months.
Patrick Baldwin: More so the regional banks.
Paul Giannamore: As a matter of fact, I've been short regionals and long SIFIs.
Patrick Baldwin: I'm thinking City, Bank of America, Wells Fargo, Chase, and JP Morgan.
Paul Giannamore: JP Morgan is Chase. Effectively, short a basket of regionals. I'm not sure what the question is. There are a lot of things to learn from one financial calamity to the next. Paul standing here now watching the Fed say, “We may not have a recession. If we do, it will be mild.” Look through 40 years of Fed minutes. I don't recall one instance where the Fed had ever forecasted a recession while they were raising interest rates so that's a first. They continue to hike rates into a decelerating economy. We've got GDP stalling out. The PMI is down. It's a situation.
Patrick Baldwin: Outside of current events, is there a lesser-known story, a failure that comes to mind?
Paul Giannamore: I have a huge list of personal failures, those are certainly lesser known.
Patrick Baldwin: Let's go. We got all day. Air those grievances, Paul.
Paul Giannamore: What's going on here and what we're going to see is we've got the making of a real banking crisis. All of the firms that have lived on extremely low and artificially low-interest rates are beginning to have funding problems. We've got roughly $1.3 trillion in real estate loans that are going to be repriced this 2023. I'm talking about on the commercial side. Commercial real estate was selling at nosebleed cap rates, extremely low cap rates during the financial crisis due to negative real interest rates. Now that's all changing and so it's going to create a lot of bankruptcies and a lot of issues.
Rentokil can't go out and borrow at 50 basis points anymore. Anticimex can't go out and borrow at 250 basis points anymore. They got to pay 300% of what they were paying historically. That's going to change the game. On the financial sponsor side, the financial sponsor market is going to continue to be red hot here for the foreseeable future. I do think it's going to ultimately fall apart. I often use the word financial sponsoring instead of private equity. If somebody might not realize that term, of course, private equity is investment into pest control. It's going to be potentially a billion in volume this year just from private equity but that's going to be relatively short-lived.
Patrick Baldwin: Paul, thank you. I've got another one. This one came in anonymously-ish. I had quite a few comments from our episode about dollars per technician, episode 127. In the last listener-submitted question episode we had, I referenced Tony Sfreddo 267 per technician with Triple-S and DC Metro. You referenced a business in Singapore with these high rises, 349 comes to mind. We've got a business, grew on the doors, highly dense, residential book of business.
The question is, is there a downside to two high revenue per technician? Our friend, our listener here, his technicians are doing between $380,000 to $420,000 per technician. Let's call it $400,000 per tech average. They get done with their day, usually around 3:00 or 4:00. He has a backup technician so there's even extra to spare if someone calls in sick. Are there risks associated with too high revenue per technician?
Paul Giannamore: One problem might be a potential burnout of the technician. I don't know exactly what these guys are doing. If they're leaving at 3:00 or 4:00, and I don't know what time they're starting but it doesn't sound like they're burning the midnight oil over there. Having extremely high revenue per technician should be one thing that everyone and their brothers focused on because that demonstrates that you likely have great pricing and you likely have a great density in routing.
Patrick Baldwin: $50 a month subscription billing quarterly service.
Paul Giannamore: Those are great rates. Pricing is phenomenal. Having been built up on the doors, it's probably dense. I don't see any risks. Do you?
Patrick Baldwin: No. This is a business that's grown on the doors, adding about a thousand accounts a year. The attrition is roughly 1.5%. 16% to 18% annual customer attrition, which sounds like an organic number to me.
Paul Giannamore: It does. You want to stay below that 2% monthly churn number. He's on the right side of the red line.
Patrick Baldwin: What I love is that he pays his technician's production commission.
Paul Giannamore: I figured you'd like that.
Patrick Baldwin: That’s my boy. This is almost all pest control too, not a lot of termite, and not a lot of mosquito. He's got room to take it up.
Paul Giannamore: The award goes to whoever has the highest threshold. Was it 500?
Patrick Baldwin: Give me 500 per tech. We'll get the data. We'll make a little trophy or statue. It'll be a beautiful bust. I don’t know if I make it their face or mine. They could have Fat Pat sitting on their desk.
Paul Giannamore: With a big barbecue in front of you and a bag of Chick-fil-A and some mud puddle cookies.
Patrick Baldwin: Come on. There we go. I couldn't poke a hole in it. You look at deals all the time. I didn't know if you've ever told someone, “Your revenue per technician is too high.”
Paul Giannamore: I've never done that. I often don't see somebody doing $400,000 per technician per year. It sounds like a small company. If he's adding on a thousand accounts per year, do you have any idea how big the company is?
Patrick Baldwin: $2.7 million.
Paul Giannamore: That's not tiny and it's not huge but it's in the meaty part of the bell curve. For $2.7 million in revenue, that's high revenue per technician. Kudos, that's great. Keep that up.
Patrick Baldwin: Good job, anonymous listener. Game on. The competition is on. We're coming for you. There's good healthy competition out there. Moving on to Dan's question then, “Top line question and bottom line question. Is there a common trait that turns off all buyers, Paul?”
Paul Giannamore: The biggest one is trying to sell a pest control company that's not a pest control company, meaning a company that does all one-time sales, and they're out there. It's shocking to me that you'll still see a business that does a million or a couple million bucks a year in revenue and is doing all one-time and no ongoing services. Those exist.
If you want to build a company that's almost entirely unsellable at any reasonable number, go ahead and do all one-time services. That's the universal issue. The other issue that can be problematic, sometimes it's slightly problematic, and other times it's a catastrophe, which is pricing way too low. I've seen instances where a company’s price is so low that no one wants to buy it. Low pricing impacts all sorts of things, particularly the bottom line.
Patrick Baldwin: Recurring revenue and pricing are the two big.
Paul Giannamore: There are all sorts of things that happen that make companies desirable or undesirable. You should try hard to have an 80% recurring portfolio. Not everyone is there. Sometimes it's okay having 60% or 70%. Your target, running a pest control business, should be 80% recurring. Your target, running a lawn care business, should be 80% recurring. If you can do better, more power to you. That's what your goal needs to be.
Patrick Baldwin: Have you had clients come to you and they’re sub 50 and it gets anywhere in the market?
Paul Giannamore: On rare occasions. In 2021, we saw those things sell. Those are not selling now. In 2021, it's, “Sell everything. Everything must go.” It's the 2021 sale. Now, that's not the case. It's important to focus on recurring services.
Patrick Baldwin: Thank you. Cathy writes, “I love the question and answer segments of your shows.” Thanks, Kathy. She did have a question though. “We did as Paul suggested and raised our prices for new customers and we are working on raising pricing for our existing customers starting June 1st. She read an article about raising existing customers and they made some interesting points.”
“Their view is that you raise customers in fall and winter as the competition is less likely to poach your customers or by raising prices during the end of the busy season, clients are likely to forget about the increase. We've been raising our pricing at the beginning of the season when folks are already seeing stuff running around as they need us at this time more than they do in the winter. What is your opinion of when to increase existing customers and does it change depending on the area?”
Paul Giannamore: I know Cathy. Cathy is one of my favorites out there. Thank you for the question, Cathy.
Patrick Baldwin: She's one of my favorites too. Thank you.
Paul Giannamore: Now that we've got that covered. I had this discussion when I was traveling with an actual client because he needs to raise pricing and he had a myriad of different questions. One of my points to him was, “I don't have any opinion on it. You should test it.” He was trying to understand, “Should it be a 5% price increase, 6%, or 10%?” We were talking about the aggregate amount of price increases.
There's a simple way to do that. You can export your customer database, put it into an Excel file, and then do a random sample. A thousand customers get a 5% increase and a thousand random customers get a 10%. You can test it and get data as to what that is. I'm personally not aware of any study as far as seasonal timing. I can tell you that the companies that probably spend thousands of dollars for some consultant to tell them what to do or companies like Rollins, for example, tend to increase price at the beginning of the season, March and April, somewhere in that time zone.
There have been instances where I've seen them do multiple price increases per year. At the end of ‘21 and ’22, they did more than one price increase. I'm not sure if that was across the board. My gut would tell me, which is never a good way to do anything, you would want to do it at the beginning of this season. To your point, Cathy, when things are crawling around, people are going to be much less price elastic when they've got an issue.
In the off-season, that's when they start wondering, “Why am I paying for this service anyway?” When the price increase comes in, it's like, “What do we do about this?” I'm less concerned about your competitors poaching your clients and more concerned about at what point in time they might be more or less price elastic. What I have told people is, in general, do it now. Whether it's March, June, August, or whenever they ask, do it now. Now, get it done.
The pest control industry right now is growing at low double-digit rates and the extreme majority of that is price increases. I would say the sooner the better. You should raise prices up until the point where you lose customers for raising prices. If your customers are not pushing back, you're not exerting enough price pressure. You can't charge $15,000 of service and then they all leave, that's not what I'm suggesting.
People often go into this a little bit light and probably should amp up the increase a little bit more. They are going to lose people and that's inevitable. You'll lose somebody for raising prices by 1%. You got to get it to the point where people are not particularly happy. Right now, it's been hard on the input side of the equation so you got to raise customer prices. At some point though, when I was in London, I had an extensive conversation with Andy Ransom about pricing. One of the things he was talking about is that they continue to raise pricing because input costs were going up.
Now, as the price increases are not accelerating at the same rates and they're starting to peak, they have been able to roll off price increases and keep them steady. I don't know what Rentokil will do this 2023. The other point I want to make about price increases is right now, there's no recession in the United States. We've got economic indicators turning down but right now, unemployment is not at 8%. In fact, it's 3.5$ or maybe 6%. It's unbelievably low. Right now, you can get away with it. I don't know if you'll be able to get away with it a year from now.
Patrick Baldwin: I've got some follow-up questions to what you said, Paul. I hope you're ready. Based on what you're saying that you're putting pricing pressure on, you're checking their pricing elasticity, is there a target cancellation rate you think would be healthy? You mentioned 1% but you're putting money into the bottom line. Even if you have customers cancel, at least all your customers that stay are paying more. Is there a 5% number? It’s like, “Go ahead, raise it till 5%.”
Paul Giannamore: What would have to be the cancellation percentage for me to be concerned about me going a little bit too far?
Patrick Baldwin: Yeah.
Paul Giannamore: Cathy did specify geography. Some geographies are more transient than others. The Washington DC metro area tends to be transient due to the changes in Congress and changes in administration. A Republican leaves, a Democrat comes in, and they hire all their friends. That market tends to change quite a bit. There are other parts of the country. Miami tends to be a particularly transient area. There are other areas that are not transient at all. You're going to have cancellation rates that change based on geography. Always the best way to do this is to not listen to me, not listen to you, not listen to an article, and try to test things yourself.
Could you go back over time and see what your cancellation rate is? Do you have enough data? Are you marking down the reason for the cancellation? How much of it that is due to price? How much of that is people moving away? Having something to compare it to historically is a good thing to do. I'm not talking about greater than 5% of your customer base. I had a guy tell me, “Paul, I'm going to push this until 10% of my customer base says, “I'm out of here.’” I said, “Do you think that's a smart idea?” He's like, “I don't know. I'll let you know when I get done with it.”
Patrick Baldwin: Please, let me know.
Paul Giannamore: This is a multimillion-dollar company. This isn't a $400,000 shop. That's a pretty aggressive move. Where I'm curious is what price increase would it take to have 10% of your customers depart. If he charges $450 a year right now, is it going up to $700? If he does go up to $700, is he better off then with 90% of those customers at an 80% increase in pricing? He probably is.
Patrick Baldwin: That's huge.
Paul Giannamore: How sustainable that is? I don't know. I'm certainly not recommending anyone try this at home.
Patrick Baldwin: That's not what I heard.
Paul Giannamore: This is one of those things where I do think these are the areas where actual data matters as opposed to just taking opinions. If you've got a big enough customer base and you start to track this, you can get scientific about it.
Patrick Baldwin: Question, when you mentioned your conversation with Andy Ransom about price increases, it doesn't matter, residential or commercial, would you approach those differently? When you do the price increase, how do you decide to do the price increase? How much? Residential can be homogeneous. This is a neighborhood, this is the size house, and this is the size yard, almost cookie cutter. Commercial is all over the place.
Paul Giannamore: I would venture a guess that in a lot of areas, the commercial market tends to be more competitive. If you've got a customer out in suburban Dallas who found you online, has been using you for three years, and you raise the prices, they might have a door knocker or two, but there are no pest control companies calling on them. A block down the road, that industrial park there has Orkin, Terminix, and Presto-X, and the big players are all calling on these people. You do have that competitive pressure to contend with.
I also think that there are ways to get a little bit creative on the commercial side whereas you can't do that with residential. You could change prices for expanded services. There are a variety of things that you can do on the commercial side that don't exist on the residential side because they've got a residential contract. It's $32 a month. There's nothing else you can do. Can't charge them for extra beetles.
Patrick Baldwin: I don't know where beetles came from but Thanks, Paul. Great point. I have made the suggestion a lot. As people are changing and working on pricing, they're also thinking about credit cards on file, subscription billing, changing from bimonthly to quarterly, and all this stuff. Correct me if I'm wrong, I always tell them, “Do that with your new customers.” People that are calling in today, roll out your new pricing, your subscription billing, your quarterly service, or whatever that is. Do that now because when you take that approach to your existing base, that's your nest egg. Don't mess with that first. Mess with your customer or your prospect that's calling in today, figure out all the objections, and then go apply what you learned and approach your existing customers with that.
Paul Giannamore: It's great advice.
Patrick Baldwin: It only took 129 episodes but I'm here.
Paul Giannamore: It puts you in a position to say that you've already raised prices across the board and then you go back to your existing customer base after those price increases are already in effect and say, “New customers have already been paying this price.”
Patrick Baldwin: There you go.
Paul Giannamore: On the pricing discussion, a lot of guys ask me the question, “Should I inform my customer that I'm raising the price?” Particularly the ones on credit card auto-pay. There are a lot of contracts out there that specify, “We can raise prices.” You're hitting the credit card once a month. It's spelled out in writing, “We can do this.”
Patrick Baldwin: I'm listening with caution. Go ahead.
Paul Giannamore: Is it a good practice? If you're paying 32 bucks a month, PB, and, in my service agreement with you, I can increase prices, starting on June 1st, do I bring you up to $35 bucks a month without telling you? Do I send you a letter or an email? What do I do?
Patrick Baldwin: I don't know if this is a consumer mindset or the service provider mindset. Either way, I feel like if I've got my internet cable or whatever, they've got my credit card on file, I don't go through line by line and check everything on my credit card statement. I feel like it's almost deceptive to me to not tell me. Communicate it, phone or email, I don't care, but let me know. Let me make that decision if it's still worth it. That's what my gut says. If I'm providing for service for someone, they accepted the service at that price, and I can communicate that, “What we're providing now cost more.” That's my gut.
Paul Giannamore: I agree with you wholeheartedly. When I had the grand phone mishap in London, it caused me to shut all sorts of things down. I had Apple Pay on my phone so I had to do a full audit of the credit card statements. There are a lot of services over the last year or so where we got price increases. Spotify sends you an email and says, “Life is rough up here and we don't have any sun. All the women look like men and the men look like women. We need to raise your prices.” I was okay with that. I was like, “You know what, it does suck. Raise my prices.”
There was a service provider that I noticed the price had gone up on my credit card bill when I was doing the audit and I canceled them. I got an email asking me why I canceled the service and I said, “You guys raised the prices and didn't inform me.” It was irritating to me. I was like, “This is what I signed up for and you didn't send me an email like Netflix or Spotify or everyone else and here we are.”
Patrick Baldwin: We're on the same page.
Paul Giannamore: I'm probably not the only person out there that would do that. I don't know if it's outta principle or spite but it's out of something.
Patrick Baldwin: We're on the same page. Thank you. I don't feel so bad for saying that's a bad practice. Paul, would you ever increase your success fee without telling someone?
Paul Giannamore: No. It's a bad practice raising prices without notifying, and people do it all the time. In our industry, I've talked to a lot of people that say, “Nothing happened. It was okay.” It looks somewhat dishonest. Everyone realizes that we're entering into a stagflationary environment, people get that. Be honest, “My costs are going up just like yours. I've got to raise prices.”
Patrick Baldwin: Doesn't life come down to communication at the end of the day? We talked about in the partnership episode about conflict avoidance. Come out and get it out. We might dive more into that in a future episode, we'll see. I've got some of my sleeves. Paul, I've got one more for you and this is right up your alley. Brian asked, “Paul, you've mentioned SPARC, will you dive into architecture? We're a $20 million business but I feel like we've gotten here on grit and determination, not a lot of structure in place. AS CEO, I feel like I'm doing just about everything on the executive level and then some. Help.”
Paul Giannamore: SPARC in architecture, all right, PB. We're running a little bit long today and this is a long discussion so we'll cover this in detail in a future episode. I'm going to ask the asker a question. To refresh everyone's memory, when we talk about SPARC, we're effectively breaking a company down into Strategy, People, Architecture, Routines, and Culture. We're drawing on industrial and organizational design and organizational theory when we do this.
When I talk about architecture, there are four main aspects within the architecture of a firm, and number one being incentives, which we talked about. Number two being boundaries, three is structure, and four is alignment. It sounds to me that he might be talking about incentives a little bit on structure and maybe some alignment-type questions. I want to get a little bit more detail on specifically what the asker is asking. Am I able to do that? Can I ask the asker a question, Patrick?
Patrick Baldwin: Paul, it's your show. You do whatever you want, Paul.
Paul Giannamore: Those are certainly long discussions. It's a great question because determining if your business is going to be decentralized or it's going to be centralized what the alignment mechanisms are within the organization as you grow it. Everyone out there that's grown a sizable pest control company knows that it gets more chaotic the larger it gets. It's a great question. We can certainly go into that. I want to get a little bit more clarity. Send us a more detailed question and I'd love to take a whack at it.
Patrick Baldwin: You're putting boundaries on his question.
Paul Giannamore: I am.
Patrick Baldwin: You want some more structure.
Paul Giannamore: Speaking of boundaries, Patrick, let me ask you this because we have talked about this on the show before. When we're talking about firm architecture, what do we mean when we say boundaries?
Patrick Baldwin: What you do and don't do.
Paul Giannamore: Correct, that's exactly right. You run a small or mid-size business, you have to make a decision. Are you designing your website in-house or not? Are you doing your bookkeeping and accounting in-house? Are you not? Creating logos and business cards and how much the advertising you're doing. What are the boundaries of the firm? What are we doing in-house versus out-house is probably not the right way to say it.
Patrick Baldwin: I love out-house. Welcome to Texas.
Paul Giannamore: Are we in-house or out-house? There we go.
Patrick Baldwin: I was thinking about what services you offer and don't offer but that would probably roll up in the strategy.
Paul Giannamore: That's more of a strategic question, the trade-off. You can't do everything. You can't be everything. You've got to make some decisions. That's more of the strategy side. Boundaries are effectively what you're doing and what you aren't doing within the organization.
Patrick Baldwin: Got it. Brian, you've heard the man. Uncle Paul wants to know a little bit more information. Paul, what have you been up to?
Paul Giannamore: We had some filming down here in Puerto Rico. D-man rolled out at 5:00. It's been a busy week.
Patrick Baldwin: Is it always coqui season? Is that year-round?
Paul Giannamore: Always. Coqui, for those who do not know, is a Puerto Rican tree frog, which is small. Did you ever see one of those, Patrick? They're nocturnal.
Patrick Baldwin: Only the artwork. I don't know if I saw one in person.
Paul Giannamore: They're super tiny. They're the size of a quarter but they're loud.
Patrick Baldwin: I could barely hear you.
Paul Giannamore: I will say one thing. We do have an interesting episode coming up and you know nothing about this, Patrick, and I'm not going to tell you any more than I tell you right here on The Buzz. A little bit later in May, we will be in another country and a former client of Potomac will be giving me a tour of his adopted second country, food, art, bars, and the whole nine yards. I'll get the grand cultural tour. We've also got some interesting interviews lined up in the country. I'm super excited for this because this is a place that I've never been to before.
Patrick Baldwin: This is too much mystery. You've got to tell me.
Paul Giannamore: I can't tell. I will not tell you.
Patrick Baldwin: I might just show up.
Paul Giannamore: We're going to be driving around the country with the camera and he's going to be taking me to all of his favorite places and enlightening us all. He's got some cool stuff on tap so I'm super excited to go and do that.
Patrick Baldwin: Awesome. I'll be here enjoying the summer heat eating cookies and Chick-fil-A, that's what I do.
Paul Giannamore: Enjoy your barbecue, PB.
Patrick Baldwin: Awesome. Paul, have a great week. See you next week.
Paul Giannamore: You too, brother. Talk soon.
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.