How Big Is Too Big?

PARA1

Service business. I don't know all the MBA terminology, but my question is this: If your rates must go up to keep up with overhead how can a company afford to run 40+ trucks, there has to be a cap. The company I used to work for now has 46 trucks on the road, most in DALLAS/FT.WORTH and some in AUSTIN,CORPUS CHRISTY and WACO.

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Vinny

You gotta get what you gotta get when it comes to overhead and profit. I'll bet that company has a great reputation, and are also masters marketing aa well as advertizeing.

I would think the great part about the service side is on piece of the buisness feeds the other. The more service they do, the more often that van is seen in a nieghborhood, the more leads it generates for both new install as well as service.

Geeze Para, did you hit your head on the wing or somthing? J/K

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Roccies Asphalt Paving
The Right Way Driveway Company
If you say you cant, your a loser. If you say you wont, your a quiter. Which one do you want to be?

send_it_all

There doesn't have to be a cap. You seem to be thinking that overhead goes up as the company gets bigger. Overhead, as applied to job costs, is actually measured as a percentage of sales volume. So the bigger the company becomes, (in terms of annual revenue) the smaller the percentage of overhead they have to apply to each job. So very large companies can actually do the same job for less money than a small company who has to make up overhead in fewer jobs...If I'm making any sense.

gt4674b

To quickly paraphrase send_it_all above; the MBA word is "economies of scale".

If a growing service company's rates are going up in order to keep up with overhead, they are doing something wrong. Why do you think the price of toothpaste goes down at Wal-Mart? It's not just due to purchasing power. They are able to obtain HUGE operational efficiencies (the real secret to WMT) that enables lower prices. Logistics, marketing, headquarters support, etc. All of these costs go down as a percentage of revenue as they get bigger.

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http://www.chem-dry.net/lowcountry.sc
Carpet & Upholstery Cleaning, Stain Removal - Residential & Commerical
Serving Charleston, Dorchester, and Berkeley Counties

acarrothers

That is correct. As a company scales up they spread more units of volume across their fixed costs.

Putty Truck

While it may be true that fixed overhead is spread out across the 46 trucks, operating and variable overheads would sky.

If some fluke of nature (or a 9/11) made their phones stop ringing, the fixed costs would continue to accrue, while the variables would go down. If the business stayed slow, the plumbers would leave for greener pastures real quick, right? That would incur replacement costs and the gross would suffer still more.

You see the problem? Service is at the mercy of the public. We don't make gidgets to resell to a gadget factory. High overhead in our end is risky.

The risks are huge, but the payoff is huger. I myself have never been bright enough nor played well with others to look beyond 2-3 trucks in a limited rural market.

acarrothers

You just have to remain as flexible as possible and avoid all long term fixed costs.

PARA1

Well I'm about as flexible as stretch armstrong right now, am wondering when is best time to hire a second plumber (besides me)? Do I wait untill I'm super swamped or hire someone now and live on rice&beans so I can pay him?

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AintNoFun

my cousin always said sell to the classes live with the asses, sell to the masses live with the classes....

ruskent

Whats funny is that i wanted to grow into a big machine. Yet when ever i look to hire a new sub i looke for a small owner/operator type company because i think i will get better services.

I think some customers will only deal with a small company no matter what, whiles others could cares less. I have no idea what i am talking about.

Flacan

Para

Try Googling the terms below, & you may learn part of the answer to your question.

Economies of Scale, Diseconomies of Scale, Minimum Efficient Scale (where "Constant Returns to Scale" begins)

Or better yet, take a course in Micro-Economics.

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Raimo Kumpulainen
Those who don't remember the past, are condemned to repeat it.

Grumpy

How big is too big? When it's no longer profitable to grow. When it's no longer possible to deliver on time quality service. That time will be different for every company based on their own internal and proprietary systems of doing things.

Mike Finley

I think everybody is a bit backwards on their thinking here. What big elec or plumbing company can you think of that has low rates? Anybody have an example of a big plumbing or elec company with 50 trucks that is the cheapest price in town?

Bigger means a big machine to feed, tons of overhead and the only way I have seen it is their prices are always in the top tier. I know some guys think referrals are the way to go, but no big company can survive on referrals, they survive on massive advertising campaigns, biggest yellow page ads, bill boards, radio, lots of direct mail to feed that machine and keep those trucks running.

Over head is huge and profit percentage is low. The might only clear 3-5% net. But 3-5% net on 12 million is what? $500,000!

Flacan

Very lose use of the word "everybody".

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Raimo Kumpulainen
Those who don't remember the past, are condemned to repeat it.

Putty Truck

1 or 50 trucks, the price should be the same because the variable overhead is a constant. So it's not that the big company is expensive, it's the small company that is too cheap and will never, ever grow charging below market.

When have you heard of a large company closing the doors? I see small companies do it all the time....

$500,000.00 stone cold net...geez. Maybe I should get off the computer and go install that waste and overflow...

Mike Finley

Putty - do you advertise? What's your annual budget? How much do you think it costs to keep a plumber with one truck busy a year? How much do you think it costs to keep the phones ringing to keep 50 plumbers doing service calls? How much does it cost to keep your truck running? Do you do your own oil changes? Do you shop around on craiglist, go to garage sales for tires? How much does it cost to keep 50 trucks on the road? Pay a fleet manager, pay mechanics? Do you really think it's the cost of the single guy's truck times 50? Do you keep your truck in your home garage? How much does the property cost to house 50 trucks? I attached an image of a medium sized electric shop here in Denver called Mcbride electric, how much do you think that building costs to own and maintain? How much does it cost to have the parking lot repaved every ? years? How much does that single guy pay to have his phones answered? How much do you think a company with 50 trucks pays a year to have somebody(s) answering their phones and setting appointments? How about routing trucks, scheduling, accounting, payroll?, insurance? The list never stops, the overhead is out rageous and it's not something you just turn on and off with an ebb and flow of business. You can't call up your Yellow page company and tell them to take your $6000 a month ads out of the yellow pages for the winter cause it's going to slow down. Or call up the city and tell them to not charge you for your utilities for your 50,000 sq ft building this winter cause it's going to be slow.

Seriously, a real easy way to understand how the bigger you get the bigger your overhead is looking at profit percentages.

As a one man show you most likely are in the 20-40% net profit range. Maybe you think a 50 truck outfit is still in that range? Reality is going to be more like 2-5% for an outfit that big. The numbers don't lie if you just consider them alone.

Putty Truck

Mike,

Put another way:

Each truck is its own small business. It pays its own overhead, fixed and variable, and turns a profit. If you have 50 trucks, you divide the fixed among them and that is what you expect each truck to make at a minimum.

That $6,000.00/month ad bill is $120.00/month per truck.

(With two trucks and a $1,400.00/month ad bill, the cost to each truck is $700.00/month.)

So big shop's fixed is app. $30,000/month, right? That's $600.00/month per truck. That should be one job per truck to cover its share of the overhead.

Can a small shop claim that low per cost unit?

Flacan

The bottom line is, how efficient is the operation?

A small operation could be either very efficient, or very inefficient.

The same goes for a large operation.

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Raimo Kumpulainen
Those who don't remember the past, are condemned to repeat it.

The plumber

I'm at the same crossroad Para. I lost sleep last night trying to figure out how I can squeeze in a $20,000 job without messing up my business because I can't get many calls knocked out while I'm working on it. I do not want to hire some poor guy because I know I might not be this slammed next month.

PARA1

Man, all these opinions make me long for the good old days working for the school districts plumbing shop and all I had to do was show up for work, hand the union plumber I worked with the right tool he asked for and keep his coffee hot. I think Mike F. is on the money and Putty makes a real good argument also. THANKS

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