If Lee Iacocca Owned a Funeral Home

There is an apocryphal story in accountant circles about Lee Iacocca’s first day as CEO of Chrysler.  As the story goes, Mr. Iacocca’s very first act was to call in the Chief Financial Officer and ask how many day’s cash was on hand.  The CFO responded that the company had 3 day’s cash available.  Mr. Iacocca responded, “Where shall we spend it?”

Last week’s commentary “A Horrifying Revelation About Price” addressed more than one concern I have about our profession and touched off a flurry of comments.  All of the responses were well thought out and worthy of reading.  But they made me aware that I need to drill down a little deeper on my points.

The Iacocca Lesson

In a limited resource environment Mr. Iacocca understood the vital importance of optimizing his resources.  Like most funeral homes, he knew the answer involved livelihoods.  It was no abstract theoretical question.  His query of the CFO understood principles I think are largely misunderstood in funeral service.

With so many funeral homes struggling to maintain the same profitability year over year (assuming they are profitable at all)  it is vital that limited resources be used in ways that shorten and optimize returns.  You can bet that there was a lot of demand for that cash among vendors and creditors.  Iacoca knew they would rather get $1 than the ten cents they would get in bankruptcy court.  So, he just blew right past them and wanted to know where he could get the fastest and highest return.  He needed to make his dollars generate more dollars and quick.  As John Horan observed in his comments to last week’s commentary, Iacocca knew he could not afford to: “Step over dollars to pick up nickels.”

Opportunity Cost

The need to generate more dollars from limited resources brings us to the central point of Mr. Iacocca’s strategy and one of my two points in last week’s article: this week I will address Opportunity Cost. This concept means that there is always more than one opportunity and what may seem like a good opportunity because “everyone is doing it” may not actually be the best opportunity.  In my response to Colleen Ellis’ comments I observed that Pet Care might be a viable strategy for some practitioners (if, and only if, it generates more human calls).  For others struggling to survive it could in fact be a fatal strategy.  Fatal because it overstretches limited resources with insufficient returns to make the risk worthwhile.

Opportunity Cost recognizes that if you choose to invest resources in an option so that another option cannot be pursued because you have exhausted your resources then the difference in return of the lost opportunity must be added to the cost of the option you chose.  An example might be that you have 3 different options for investing in ways that will improve your business as follows:

                         Option A           Option B          Option C

Investment               $50,000           $150,000           $200,000

Payback period            7 years          10 years            4 years

Annual cash return        $7,000           $15,000             $50,000

You choose Option B because everyone is doing it and it is less expensive and less boring.   The actual cost of Option B would be as follows:

Investment:                                                $150,000

Unrealized cash from Option C                             $  35,000

Payback period for option B                                10 years

Opportunity cost                                           $350,000
less: incremental cost of option c                       ($  50,000)

Actual cost of Option B                                    $450,000

My apologies to accountants and economists.  In order to simplify this illustration I have purposely ignored a number of other variables like the time value of money and risk.

To summarize this point:

• Warren Buffet and Lee Iacocca would demand that for every dollar invested an additional dollar beearned
• All options and opportunities should be weighed against other opportunities no matter how unsexy or boring they might be.

To illustrate further:  During the 90’s it was common for funeral homes to invest in the neighborhood of $50,000 in upgrades to selection rooms anticipating significant increases in sales revenues.  Interestingly, at the time, no one was investing even a fraction of that amount in staff training (an alternative investment option).  Here is how I would have looked at that scenario.

                                    Before      Selection room upgrade     Staff Training

Calls                                200                200                      205

Avge svce chge                      $2,500             $2,500                  $2,750

Average Csket sl                    $2,000             $2,500                  $2,500

Total Sales                       $900,000         $1,000,000              $1,076,250

Cost of Sales @ 17%              ($153,000)         ($170,000)              ($174,250)

Gross Margin                      $747,000           $830,000                $902,000

Incremental margin                                  $  83,000                $155,000 

Investment                                          $  50,000               $  50,000

Opportunity cost: ($155,000-$83,000)                $  72,000
Less: Incremental cost of Option C                 ($    -0- )

Total Cost of Selection room upgrade                $ 152,000

ROI                                                54% first year        310% first year

I think I know what Warren Buffet and Lee Iacocca would have done.

Post Script:

It was not my purpose to bash Pet Care but it stands as a good example of what might seem like a good idea but may not be the best idea.   Investing $150,000 to generate unit margins of $125 or less on a stand-alone basis is one thing.  But when you consider that investing $30,000 to $75,000 in a program that will train your staff in ways that will improve yield on existing customers whose margins are already in excess of $5,000 and improve services that will generate even more of those customers makes more sense to me.

A Horrifying Revelation About Price

I have long believed that most price shoppers in DeathCare begin with the price question solely because they don’t know what else to ask. That belief supports another which holds that what most shoppers are really looking for is someone they can trust. Thus I understood why it was important that we engage shoppers over and above simply answering their questions and that the longer the conversation the more likely we are to win the call.  All was well in my little land of making 2 plus 2 = 4.

Conversely, I have always struggled with what is, to me, the almost obsessive way DeathCare providers chase after unprofitable calls and ignore profitable calls.   Think about it!!   We will spend an unreasonable amount of our advertising money to attract direct cremation.  We will start cremation societies, and compete aggressively on price to go after what is (for at least a little while longer) the smaller, albeit growing, part of our market. Yet we spend little or nothing going after the higher end…who are often our best customers.   This inordinate and incomprehensible behavior has reached its peak in the pet cremation trend.

To be sure, I completely get the idea that pet services afford us an opportunity to interact with families we don’t currently serve in a positive way.  But spending in excess of $150,000 to chase after unit margins of less than $125 is beyond my mathematical ability.  I cannot help asking myself how much greater my return would be if I spent that same $150,000 chasing after unit margins of $6,000.  Then it dawned on me.  And if my epiphany has merit, it scares me. Perhaps we have so much trouble with price shoppers and so willingly distract ourselves…even to the point of sacrificing limited resources…because we, ourselves, don’t adequately relate to the value we bring.   Most price shoppers don’t know what the questions are so they resort to price.  It may be that we, too, have forgotten how to quantify the value of a life lived for ourselves and so we feel inadequate in explaining it to others.  Or, worse yet, we don’t know the answers.

If you are successful with price shoppers I hope you will comment.  Enlighten me.  What are the trigger points?

FaceBook Rolls Out New Brand Page Design

I have to admit I don’t know why I find myself commenting on Social Media as much as I do.  I guess, like you, I am still trying to figure it out.  I have noticed that I am getting messages telling me about FaceBook changes fairly frequently and I have even had to go in and change my settings a couple of times to avoid some kind of nefarious activity that I truly don’t understand.

I ran across this blog that helped me understand the changes and how they affect me or, better, you.  I only have a personal page, and I am still not sure what I am supposed to do with it.  But for those of you with company pages maybe this will help.

FaceBook Rolls Out New Brand Page Design

What Do Social Media Users and Cavemen Have In Common?

Olson / Zaltman is an internationally recognized market research firm spawned out of Harvard and Penn State Universities.  They developed and patented the groundbreaking research methodology (ZMET) that opens the subconscious metaphors consumers use to make buying decisions. Now widely used by the world’s largest institutions and businesses to develop marketing strategies, they are turning their attention to Social Media. In their most recent newsletter they draw a parallel between how people view social media today and the way mankind has created personal relevance throughout history.  Hopefully, it will create insights for you.   Pay close attention to the skunks.

What Social Media Users and Cavemen Have In Common:

DeepDives_Feb2011

5 Emotional Stages of Selling Your Business

Selling a business is a highly practical exercise wrapped in a thick emotional blanket.  Much like the grief cycle we know so well in DeathCare there are stages that are common and, if you know about them, you can prepare. The more prepared you are the better you will be able to negotiate what you want.

Stage 1:  The Reality Check

Your baby may not be ugly but it isn’t the most attractive either.  Pride of ownership or what you think you need to live on post sale often cause us to be unrealistic in our expectations.   The process of negotiation is a process of compromise to find the common ground between the lowest possible price at which you are willing to sell and the highest possible price someone else is willing to pay.   Read this article to learn how to find that middle ground for yourself before you start.

Stage 2:  Prepare to Negotiate

It is said that a lawyer who represents himself has a fool for a client.  In almost all instances the party on the other side of the table will have done this before and not only will this be your first time but you will be emotionally involved.  The need to master a very steep learning curve and to be objective will put you at significant risk.   All your life you have been in charge.  Now you have to put yourself in someone else’s hands and do what they tell you.   One of my best clients was an incharge type who really struggled at this stage.  He decided that the best way to cope was to take several negotiation seminars outside the industry.  Not only did this help him to deal with his need for control but it made him a formidable partner in the process.  The result: he got more than either of us could imagine because we were working together rather than tugging and pulling

Stage 3: Be prepared to lose your leverage:

There comes a time in even the best conceived plan where you will lose leverage.   One way large acquisition firms accelerate this shift is by purposely seeding rumors that put pressure on you to speed up the sale before everything “comes apart”.    But the official shift comes when you accept the Letter of Intent (LOI) of one company which usually contains a “no shop” clause.  It is then that the true due diligence period starts.  It is a common belief in the Eastern and Middle Eastern world that negotiation only really starts at the closing when the seller is at a disadvantage.  This practice has been accepted now in the Western World and so you might expect a 10% to 20% reduction in price between LOI and Closing.   I have frequently found it effective to provide as much of the due diligence in advance of the LOI so that that offer is based on the information to date and require that any negotiation after LOI be limited to new information that might be uncovered.    I just HATE surprises.

Free tip: no matter how badly you want to sell or how much pressure is on you ALWAYS be prepared at the closing to “quietly close your briefcase and go home” if things don’t go your way.  I coached a real estate friend recently in this when she was selling a house to someone from the Middle East and she was concerned about the closing.  She said that the attempt at negotiation lasted for about an hour and stopped immediately when she and her client got up to leave.   This strategy is bad behavior if there are no real issues and your best defense is to simply walk away.

Stage 4: Be Prepared to Be Outed

It is the rare sale that isn’t discovered before the closing.  At a minimum your unusual behavior and activity will cause people to wonder and suspect.   Beware of the person who pretends to already know in order to get you to confess.  Make sure actual knowledge is limited to as small a circle as possible including your best friend.  But most importantly be prepared with how you will respond and what you will say.   Practice in a mirror because people will look beyond your words for how they should respond.

Stage 5.  Post Partum Depression

As with the real kind this varies by person.  But, if you are like most people, there will be some.  If you decide to stay on after the sale you will have to adjust to being an employee and not having a final say.   Whether you go or stay you will have to adjust to a new self identity.  One of my clients told me it took him 6 years after the sale to actually publicly admit he was retired.

Summary:

For most businesses this is the single biggest and riskiest step they have ever taken.  Because it is an independently owned business it is highly charged and personalized with emotion.   Preparation and focus are keys to success.  It is a process and it takes courage and strength.  I often tell my clients to go to negotiation seminars to fully understand how it works and what to expect.   Having a professional negotiator represent you will pay for itself and then some.   But in the end you will make that final decision.