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To Diversify, or Not to Diversify

Jun 8th, 2012 | By | Category: Nick Kemper's Blog

Diversification and multiple revenue streams are terms thrown around quite loosely in the world of business. In the product business, we face decisions every day about expanding to include new products or removing products from our listings. Is it better to focus on doing a few things better, or doing as many things as well as you can? I read an article in Success magazine last week, in which a business owner was interviewed and asked what business decision had the greatest impact on her business. She said that when she focused on her best customers, her business turned a corner toward success. She referenced the 80/20 rule that I’m sure most of you are familiar with. We often think about the 80/20 rule in terms of our labor force. You know, 20 percent of your people do 80 percent of the work and, unfortunately, vice-versa.

I was curious to see how this applied to our customer base, so I ran some numbers from 2011. It didn’t come out perfect, but I came up with this:

Our top 20 percent of customers, based on income, accounted for 65.5 percent of our business.

Our top 25 percent of customers, based on income, accounted for 71.4 percent of our business.

Our top 30 percent of customers, based on income, accounted for 76.2 percent of our business.

That’s not quite 80/20, but it’s amazingly close.

You might have similar numbers in your business. You might want to ask yourself, as I did, why is the attention sometimes inverted? Shouldn’t we be giving most of our attention to the small number of customers who account for the majority of our business? I guess that would lead to the next question: if you focus on your best customers, will that lead to increased business?

These are all tough questions. I hear about diversification in our industry, and it has taken on a different meaning than when I managed a tow company ten years ago. For us, diversification meant that we were going to try to do more of different types of tows. We did a lot of police work and a lot of private property impounds. We added a contract to tow all of the municipal abandons, which helped feed our vehicle auction and made better use of our carriers. We expanded our work for vehicle donation programs for the same reason. But it wasn’t all about expansion. We had an agreement with two local cab companies to provide their towing, at a very low flat rate. The problem was that these tows were always urgent — when a cab is down, it’s not producing revenue, so the owners naturally wanted it brought in as soon as possible. We determined that the amount of effort expended in towing these cabs fair outweighed the return we received from the low flat rate, so we simply ended the agreement. Our drivers were sometimes missing impounds due to slow response times, directly related to the cab tows. Now, if we had been so slow that drivers were sitting around, we probably wouldn’t have been so quick to give that up, but that doesn’t mean we shouldn’t have.

We did our own lien processing, so we marketed that arm of our business to other companies and built a division that brought in enough income to be profitable all on its own. That plan seemed to work fine. However, when I came onboard, we were dispatching for five other tow companies and the burden on our dispatchers was tremendous. We calculated how much time each of these companies was drawing from our dispatch labor, and we compared it to how much revenue we were receiving, which from some of our customers was as little as $300 per month for night and weekend dispatching. Now, you don’t have to screw up too many of your own calls to wipe out $300 worth of earnings. We studied how this work was affecting dispatch performance and decided that it was leading to increased dispatch times for our own calls. Throw on top of that the level of service that was expected for $300/month, and it was a no-brainer. We dropped all but one company, the most low maintenance customer we had.

I’ve talked to companies that are making more money hauling scrap — not just scrap vehicles, but actual scrap, like old appliances — than they make towing cars. One of our customers just secured a dump box and a permit to haul refuse and is offering the service to property owners — turning their tow trucks into garbage trucks.

Another way to diversify is to expand your coverage area, another choice we faced where I worked. We were bringing in impounds from as far as 30 miles away from our centrally-located base, so we reasoned that it would be better to have satellite storage facilities. Where to place them was a major consideration. Ideally, they would be near a major freeway, midway between the central base and the furthest property we served, in a location that would make us eligible for more municipal tows. Our owner was looking at a property to purchase that was beyond any property we served, which meant that whenever one of our drivers towed a car there, he would have to go away from our central base (which is where all the trucks were stationed and where all the drivers reported for work) to drop the car, then further back to central base, if that was their next stop. Now, maybe the deal was sweet enough to make things inefficient, but we had to advise him that, logistically, it didn’t make sense.

Equipment is another way to diversify. A medium-duty truck might lead to more work for your company, but with enough versatility to justify the addition. A heavy wrecker, on the other hand, might be unwarranted no matter how cool it looks.

I guess the bottom line is that no approach is going to work the same for every company or every situation. Each opportunity to diversify or expand must be approached with as much accurate forecasting as possible, and it must be measured for return on investment. I do think we can agree, however, that it is unwise to take for granted our best customers — those top 20 or 25 percent — who are responsible for the bulk of our business. This might be the answer in itself to the question of whether or not to diversify, or how to diversify. Maybe those customers are the ones who should be advising you on those decisions.

Have a safe and profitable week.

Nick Kemper