Certainly customers, no matter what the business, are the reason we open our doors each day. We work every day to be sure that ultimately we have provided them with the best experience possible with the hopes that they will return again and perhaps refer others! We’ve heard those types of customers being called “raving fans.” Whatever we call them, the fact remains that having customers is how we stay in business.
In the funeral experience, we monitor the delivery and perfection of our services through training, customer satisfaction surveying and the use of technology to document all of the service desires of the customer. It has been stated that funeral service is one of the most trusted professions. But what happens when that fails? What do you do when something goes wrong? Are there teaching moments?
The fact is that we know it’s a bad thing to have an angry customer, and we know it’s a good thing to have a happy one, but what are the financial impacts of both? I have had the unique opportunity over the years to be involved in almost all facets of funeral service, from the desire to buy a business, value the business (business valuation), manage it, design financial measures to track performance (accounting and incentive plans), survey those customers, work with succession plans and then sell to the next generation or outside party. When you tie all of these experiences together, it provides an interesting perspective on the true value of a customer at a funeral home, which I would like to share. I start the exercise by suggesting that a business owner should have in hand a valuation of their business. During this exercise, it will be clear to see just what the business value is, particularly on a per-call basis. This is different for every funeral business, but there are some similarities.
Let’s assume for the moment that you have a business valuation conducted, and your business is worth five times your free cash flow, or what is often called EBITDA (earnings before interest, taxes, depreciation and amortization). There are many steps involved in determining your EBITDA, which is a whole other discussion in itself. But the important part here is that we are assuming that your business is worth 5x. For example, if you have $200,000 in free cash, you can assume that the business is worth roughly $1,000,000.
Now let’s assume, for example, your average sale for all calls combined is $4,500. My challenge to you is, how do you track your average sale? Do you utilize software or some other method to know exactly what your average sale is per call type, all calls combined, by arranger, by location, etc.? If not, we need to talk! Let’s now also assume that your variable costs associated with delivering that average sale per call are roughly 30% of the sale. By this, I am simply stating that an additional call (sometimes referred to as an incremental call, where there is no extra labor involved, no additional facility needs, fixed costs, etc.) could bring quite a bit of incremental profit—70% in this example! Now let’s have some fun with this.
Scenario 1, Gaining Extra Volume
Let’s say you gain an extra call through marketing efforts or some other means, and you can clearly say your firm has just increased by one call on top of its normal average annual call volume. If this is the case, and no additional staff or other costs are needed outside of the merchandise for the service rendered; then using our example above, you could say the following: one extra call at $4,500 minus the associated merchandise cost of $1,350 (30%) equals profit of $3,150. If this profit adds directly to the budgeted free cash (EBITDA) of the business, then you could say that $3,150 times the 5x value multiple is the value of the customer in this case or $15,750.
These numbers can be different for each firm. However, we can conclude that if you have a stable operating cash flow and add one more call which requires no additional resources or expenses outside of merchandise, then the profit will most certainly be very high, as it would with any other type of business. How much more volume can you bring in before having to add additional costs and resources such as staffing, facility, vehicles, etc.? Using the model above, if you could add 10 more calls, you may be able to add $157,750 in value! Seem unreal? It is not; it’s just that we don’t look at it this way until it’s time to transfer our business. So start thinking about it now!
Scenario 2, Losing a Call
Let’s now move to the most sobering impact of call value. If we assume, through customer surveying or other method of discovery, that we have lost a call from our normal annual volume, what is the impact? Using the previous example, let’s say we have lost a call, and the average sale is $4,500. If the profit would have been $3,150, and our value multiple is 5x, then it’s easy to again assume that the value of the lost call was $15,750. Now that’s serious, especially if the loss can be attributed to poor arranger performance or other identifiable cause.
If an arranger lost $15,750 of your money, what would you do to avoid further impact on your revenue? Are you surveying your customers on a regular basis? Are you doing regular training? Are you budgeting? Are you sharing these impacts with your staff? The good news is that there are tools available that can help you with these goals.
From this, I think it’s clear not only what the value of a funeral call is but also the importance of protecting each call. Businesses can sometimes be penny wise and pound foolish when it comes to accomplishing this goal. My point is, when you consider the value of calls lost or gained, it’s important to seek guidance in helping maintain if not grow call volume. It could be as simple as implementing a very structured customer satisfaction survey program or perhaps an incentive-based compensation plan, budgeting, annual strategic planning, the list goes on.
I will leave you with a phrase I like that underscores the importance of defining and measuring good results: If you can’t define it, you can’t measure it. If you can’t measure it, you can’t manage it!