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Old 9th January 2017, 02:21 PM   #1

Join Date: Nov 2016
Posts: 2
Default Rethinking Business Model Due To Employee Expenses

Hello, this is my first post and I hope it's in the right forum. I've been having a dilemma with my business for some time and need some ideas or feedback. Thanks for anyone who replies.

First off, I apologize for my lack of business vocabulary as I have no formal training and am actually not very good with the financial aspect of things.

So this is the snafu:

I run a pet sitting business that I started in 2011. In 2013, I injured my back doing dog walks so I hired my first employee. We had about 100 clients at the time. Since then, I've always had between 1-4 employees and we currently have almost 300 clients. We have a solid reputation and are adding new clients at the rate of 1-3 per week now.

Problem is, the employee costs are very high and I'm not sure it's a sustainable business model. However, I can't do all the work myself anymore.

From what I can tell, labor cost is around 75%. I'm not sure if this is normal for a home-based service business but I know in the restaurant business we tried to stay under 18%. Here are the main contributors to the labor cost:

-- Payroll taxes. This is California, so these are high. We use Intuit.
-- Worker's compensation insurance. Required in California and based on payroll.
-- General liability insurance and bonding.
-- Mileage. California state law requires a business to reimburse employees for travel time.

Other than a few minor administrative costs, these are the biggest financial obligations in the business.

I know that when trying to increase profit margins, businesses look into cutting costs and raising prices (increasing productivity I don't think is an option). Obviously, I can't cut the employee costs. Wages are standard. Prices are standard.

An important point: Prices in this business are kept low because of app-based services (Rover, dogvacay, etc. similar to Uber in the taxi industry).

Here's how some other pet sitters get around this problem. They hire independent contractors, which avoids payroll taxes, worker's comp, and mileage reimbursement. Some do provide general liability insurance and bonding, but a lot probably pay under the table too.

I suppose the biggest problem is that I'm not willing to do these things. My business reputation depends on continuing to provide top notch service and to do that, I need to train and supervise (not allowed with contractors according to the IRS but many, many pet sitters cheat and some get caught).

This post is probably as circuitous as my problem, I'm sorry. I'm thinking about selling the business and getting into something else. But I just adore this business, my clients, and employees.

Ideally, I'd like to find a way to make this business model profitable enough to continue expanding. But the more employees I add, the higher costs are.

Is it time to cut and run?

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Old 18th January 2017, 05:25 PM   #2

Join Date: May 2009
Location: Charlotte, NC
Posts: 44

You mention that you're differentiating yourself from other sitters in terms of quality of service. And you're doing so by operating with well-trained employees who enjoy nice benefits, vs loosely-supervised independents who have to pay for their own benes out of their pay.

That being the case, then, is it feasible for you to position your prices a bit north of the average? If I desire a hotel in which the concierge is a pro, the dining room's waitstaff is cheerful yet efficient and polished, and the desk clerk's dress shirts are from Neiman Marcus, then I'm happy to pay more coin than what I'm charged at the budget rent-a-room chain.

Same question different way: If you can't charge more even when using better-trained, better-compensated staff than the bargain-basement approach of the competition, why incur the extra costs?

Since staff compensation represents nearly all of your cost structure, bottom line improvements are either from increased revenue or decreased compensation cost.

In addition to, or instead of, higher prices, how 'bout greater volume? (Same price x more customers = higher revenue, natch). Perhaps your staff, being a notch above those of the competition, can bring in new business (say, with a little commission incentive).

Point is, if you're investing more in your staff than the competition with their no-benefits, less-trained independent contractors, you're gotta get a return on that investment, either in the form of higher prices or greater volume, or both. Otherwise the investment isn't justified.

As a side note, your post suggests that you take an analytical approach, which bodes well. If the circumstances—including the CA overhead burdens—are such that the model just isn't feasible, you'll see it soon enough. Then you'll be on to ferreting out a genuinely profitable opportunity in a greener pasture, and your analytical approach will be your friend there as well. But I'm hoping that with some number-crunching you'll figure out how to make it work with the sitting.

Best of luck!

...it was early and I was full of no coffee...
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