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Old 9th January 2017, 01:21 PM   #1
FPPS
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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, 04:25 PM   #2
ArcSine
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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!

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Old 18th January 2017, 06:29 PM   #3
FPPS
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Thank you for the smart reply! You showed me some new ways to look at the problem. Someone else suggested including quality of staff in marketing materials, I just hadn't thought of it as an ROI issue (which of course, in business terms, it absolutely is).

I increased prices last July, and will plan another for this summer. But you're right, the prices could go up. We actually are the highest rated pet sitting business in our service area, which is large and well-populated, but more sitters concentrate on the metro areas. We should be able to trade on that.

Increasing volume would be easy. Currently, we don't advertise besides having a website. The problem is, the employee costs increase in exact proportion to volume, so there's no way to inch ahead, as I understand it. But I could be missing something?

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Old 19th January 2017, 04:37 PM   #4
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"We actually are the highest rated pet sitting business in our service area..."

Indeed, get that into your marketing content and toot that trumpet. Folks who love their pets enough to spring for a sitting service tend to have that "nuthin' but the best for my li'l Fifi" mindset. (Yeah, I know, preaching to the choir here)

"The problem is, the employee costs increase in exact proportion to volume..."

Not a problem, unless you meant something other than "exact proportion", strictly speaking. As long as you've got a positive spread (revenue over employee costs, in percentage points), then increased volume = increased net bottom line to you.

For a simple 'fer instance', if your employee costs tend to be a constant 75% of your revenues, then yes, employee costs will increase "in exact proportion" to revenue. Revenue goes up by 30%, employee costs will rise by 30% as well. But so will the net profit which comes to rest in your personal cigar box.

Say, total revenue of $100, you've got $75 of employee expense and $25 to you. Double the revenue to $200, then employee cost doubles to $150, but so too does your bottom line double to $50.

Of course, there's no substitute for converting all this vague discussion into hard calculations on paper or spreadsheet, but the fundamental idea remains the same. Kinda along the lines of the familiar, "I'd rather own 10% of what 100 people bring in, than 50% of what 4 people bring in."

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Old 19th January 2017, 09:30 PM   #5
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I was wondering if there are ways to increase your revenue. One idea that came to mind was if you could do some cross marketing/advertising. It seems from your overview that you have a niche audience's attention. Both when a new customer signs up and also over a long period of time. My idea was would it be possible to provide advertising/promotion services to other businesses within the dog market. For example, would your favorite local pet store pay you $XX to provide each new customer with a "treat" bag that promoted their business? Or another natural idea that came to mind was to tie up with a local veterinarian. Maybe even provide an added service where you take the dog to the vet for the owner, or in another service your dog walker takes the dog to be groomed. These other businesses who provide dog services/products may be keen on reaching your captured audience - providing you an additional revenue stream through advertising/promotion. And you could have some "added" services to further distinguish yourself ... such as dog walking to the groomer, vet.

Another idea for how you could advertise other dog related product/services would be to have a monthly newsletter. You could include advertising for these other businesses interested in reaching those dog owners. Do you have a website? Would your local favorite pet store pay to advertise on it? How about the vet, groomer, trainer, etc? Anyone who wants to reach your 300 dog walking customers. As you grow your customer base, the value in the advertising rises and you can charge more when there are 1000 customers.

Of course you could also do cross marketing/trade by trying to promote your dog walking services with vets, groomers, pet stores, etc.

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Old 20th January 2017, 06:18 AM   #6
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Default Create a Niche

I would certainly consider raising your prices, you are clearly offering a very good service and are a "cut above the rest" so perhaps a re-branding of the business where you are marketing this angle only.

My father used to a chauffeur in a very flooded market for his local area, however, he refused to lower prices and refused to take certain work as he wanted to be different and be "the posh taxi" if you like. He, like yourself, had well trained staff, his cars were always immaculate, he provided morning coffee, newspapers, roses for the ladies etc etc. This meant he could command a higher price than the guy down the road and he wasn't driving up and own the road with a lady to the dentist for a fiver!

It became well known that if you called his business the price would be more yet the service provided was far superior - he has now retired but the business model did not fail - he ended up driving the Formula1 drivers!

I feel the same applies to you, up your prices, keep your productivity and well trained staff, the last thing you need to do right now is send a message that you are now hiring semi-able staff.

All the best with your venture

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Old 22nd January 2017, 11:32 AM   #7
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I like Logan's idea. You should not leave your business, however you can definitely add more services for extra fees. + If you have website, you can put their some ads and take money for that. Just puts some ideas to the list how you can grow your business adn I am sure you will succeed ) We hope to hear news from you))) Good luck

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