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The power of pricing

HEALTHY MARGINS IMPROVE THE VALUE OF YOUR BUSINESS

By Michael McGregor

My father-in-law, Ed Tuck, was a pretty smart business was. Now, you can’t tell me that the Southern California guy. Before becoming a venture-capitalist and business environment is less competitive than the suburbs of founding Magellan GPS, he was a turnaround some Midwestern city. There was no particular compelling reason consultant to failing telecom businesses in the I found for this difference -- except the Midwest tire dealer was 1980s. (Read “A Sense of Direction,” Ed Tuck not aware of the power of pricing, and the SoCal operator was. and Mike Khaldun, Dog Ear Publishing, 2018.) I once asked him If the first reason you’re in business is to make a profit, the about the first things he did when he took over a failing business. second reason should be to improve the value of that business. Ed said that first, he’d find the person responsible for the mess Typically, the business and real estate you own as a tire dealer and fire that person just to get everyone’s attention. Then once is your largest investment by far. Improving the value of it with he got their attention, he raised prices. the power of pricing will enhance not only your current income,

Ed said that most good companies underprice their products but also your net worth. and services, and if they are losing money, that is especially true. “Market value” from a strategic acquirer is likely the highSo he’d raise prices until the first customers complained loudly, est offer a profitable tire business will get. Strategic acquirers but he was OK with that. He guessed those pay for your business based on its profits and customers might not be loyal or profitable and YOU‘RE IN BUSINESS FOR A the appropriate EBITDA multiple they apply he could afford to lose some of them. But he kept VARIETY OF VERY GOOD REASONS, (based mostly on their views of your size and on raising prices until the margins were healthy attractiveness). and the loyal and most profitable customers BUT THE NUMBER ONE REASON I had the pleasure recently of advising screamed. By then, he had a profitable business IS TO MAKE A PROFIT. IF YOU a family-run business that was looking to on a solid footing that could grow from there. I’ve employed Ed’s technique in tire stores, CAN’T DO THAT, SHUT IT DOWN sell after almost 50 years in business. In preparation for the sale, they continued to districts, regions and even helped at the national AND GO DO SOMETHING ELSE. focus on what they did very well -- retain level for a tire retailer that was losing money in and motivate a seasoned group of tire store the early 1990s and had not raised its service and parts prices in professionals and execute a disciplined sales and service five years. There was some serious inflation back in those days, so process within their stores. But they combined great people imagine the catching up we had to do. We employed a new pricing and execution with the power of price increases (often store strategy that was competitive with “signal” or “visible” items, but by store) and targeted expense reductions. They got what we arbitrarily jacked up the prices of everything else nationwide. I always strived for in business: the “triple bang” -- sales

Then it dawned on us that doing business in San Francisco increases on top of margin improvement on top of lower with its rents, wages and regulations was higher than, say Omaha expenses. The triple bang is a beautiful thing. Upon exit, they or Fargo. Duh, right? So, we made market appropriate price increases and put the local districts and regions in charge of setting and keeping up with market pricing. A lot went into the subsequent 25-year run of success this company had (including retaining people, improving processes, and focusing on just three key goals), but the power of pricing was an unheralded part of it.

You‘re in business for a variety of very good reasons, but the number one reason is to make a profit. If you can’t do that, shut it down and go do something else. My view is life is easier with healthy profit margins. I once analyzed the financials of a tire dealer with a few stores in the Midwest that was deep in debt and considering bankruptcy. I benchmarked that business with a profitable client in Southern California and found the Midwest business’ overall gross profit margin was half of what the SoCal’s doubled their valuation from the offer they had received just 18 months prior.

A lot of tire dealers I meet are baby boomers nearing or past retirement age. I’ve read that one’s perception of risk changes as we age. Often, we become overly cautious and afraid to take the bold steps like employing the power of pricing to get a business on a better footing. If you think this sounds like you, turn over the pricing responsibility to someone you trust, track it — and keep at it.

Michael McGregor is a veteran of the tire and service industry and a partner at Focus Investment Banking LLC (focusbankers.com/tire-and-service). He advises and assists multi-location tire dealers on mergers and acquisitions in the auto aftermarket. For more information contact him at michael.mcgregor@focusbankers.com.