How I'd Design a Guarantee With Real Costs — Transcript

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1. 0:00My name's Cody. I sell roofs to people.
2. 0:02We did 140 million last year.
3. 0:04>> Sick.
4. 0:05>> Trying to do 250 million this year.
5. 0:07>> That is sick.
6. 0:08>> Trying to figure out how to follow the
7. 0:08principle of giving away more
8. 0:11and guarantees and and bonuses when I
9. 0:13have such high hard cost
10. 0:14>> Yeah.
11. 0:15>> and such a high ticket item.
12. 0:16>> Yeah. Well, what are gross margins right
13. 0:17now?
14. 0:18>> Uh 40%
15. 0:19>> Gross. What's net?
16. 0:20>> 10 to 15.
17. 0:21>> Okay, got it. Um
18. 0:24do you want to sell it or do you just
19. 0:25want to keep it forever or
20. 0:26>> Well, I actually just sold my roofing
21. 0:28business and now we're part of a PE firm
22. 0:30that that now I'm directing that that
23. 0:32entire all
24. 0:33>> So, are you the platform?
25. 0:35>> Yes.
26. 0:35>> Okay, so you're the platform and how
27. 0:36many tuck-ins have they done?
28. 0:37>> Eight.
29. 0:38>> Got it. How long has it been since they
30. 0:39started?
31. 0:40>> Uh about three, four years. Um I I just
32. 0:43got acquired 30 day or we just closed 30
33. 0:45days ago and now they're trying to roll
34. 0:46everything into my brand and I'm
35. 0:49>> Chaos.
36. 0:49>> spearheading, yeah.
37. 0:50>> Yeah, got it. Okay, so sorry. Go back to
38. 0:52the original question cuz now I have
39. 0:53like better context on this.
40. 0:55>> So, how do I give you know, follow the
41. 0:56principle of give away more value, make
42. 0:58the you know, offer so good
43. 1:00>> Yeah.
44. 1:00>> You got to feel dumb saying no when I
45. 1:02have such high hard costs. I you know, I
46. 1:04can't really do a money back guarantee.
47. 1:05I can't really
48. 1:07give away more than a you know, a roof.
49. 1:09>> Well, the question is is that the
50. 1:10constraint? Like is that the thing
51. 1:12that's limiting the growth of the
52. 1:13business?
53. 1:14>> In in my theory, yes, because if I
54. 1:16create a good enough offer, then I could
55. 1:18roll that offer out to the other eight
56. 1:19eight other brands and that would be the
57. 1:20biggest amount of leverage that I could
58. 1:22deliver you know, in the shortest amount
59. 1:23of time.
60. 1:23>> And is everyone insurance-based?
61. 1:26>> Well, that's why they acquired us cuz
62. 1:27we're retail.
63. 1:28>> So, you're so you're the only guy
64. 1:29selling just new roofs. Everyone else is
65. 1:30doing storm chasing and damage repair
66. 1:32and [ __ ] like that.
67. 1:33>> Correct. And what they want us to do is
68. 1:34bring the retail model to the other
69. 1:36brands and add another layer as we sell
70. 1:38everything 100% virtually. So, no
71. 1:40in-home appointments. It's it's all you
72. 1:42know, digital. And so, that's what they
73. 1:43that's the vision is is taking that you
74. 1:46know, nationwide.
75. 1:46>> Centralized sales virtually.
76. 1:49>> Correct.
77. 1:49>> So, you want an irresistible roof offer.
78. 1:51The greater the change, the greater the
79. 1:52risk that the change doesn't yield the
80. 1:54outcome that you want in the business.
81. 1:56And so, fundamentally, you're always
82. 1:57making a bet that you're going to get a
83. 1:58higher return off of incurring the cost
84. 2:00of change than it cost you to do the
85. 2:02change, right? And so, in this instance,
86. 2:04he is now, you know, 30 days in or 60
87. 2:07days post acquisition of his roofing
88. 2:10company getting bought with seven other
89. 2:11roofing companies and for them to try
90. 2:13and combine them. He's the one who's
91. 2:14supposed to like lead the effort of
92. 2:15combining all the stuff. And so, the
93. 2:16idea of like, let's change the offer.
94. 2:19The offer is one of the highest leverage
95. 2:21things you can change, but it also
96. 2:22affects every department. It changes how
97. 2:24you bill. It changes how you sell.
98. 2:26Changes how you advertise. It changes
99. 2:27everything, right? Which is why it can
100. 2:28change a business overnight, but it can
101. 2:30also destroy a business overnight. And
102. 2:31so, when I see a business that in
103. 2:33aggregate between those eight has a $140
104. 2:35million in revenue and 30-ish million
105. 2:36dollars in EBITDA, you're talking about
106. 2:38a business that's got probably $300 to
107. 2:40$400 million enterprise value. I would
108. 2:42be very hesitant to immediately change
109. 2:44something that's obviously working. And
110. 2:46so, there's lesser degrees of change
111. 2:48that have higher likelihoods of working
112. 2:50that could still materially impact the
113. 2:51business in terms of increasing the
114. 2:53likelihood that it exits, right? And
115. 2:55fundamentally, I'm guessing that's what
116. 2:56he wants to get his slice from.
117. 2:57Centralizing the sales would allow them
118. 3:00to decrease costs because they could not
119. 3:02have guys on the road. It's just cheaper
120. 3:04to do it. It's also easier to hire sales
121. 3:05people who are remote. All of these kind
122. 3:07of downstream cost savings. The other
123. 3:09benefit is that when you hire remotely,
124. 3:11you have access to a bigger pool. So,
125. 3:12you can get better sales people at lower
126. 3:14prices who close more deals and they
127. 3:16could cut down all the The real big cost
128. 3:19for this business is sales people who
129. 3:21are unproductive. All right. So, people
130. 3:22who are They're losing leads on people
131. 3:24who can't close. And so, by reducing
132. 3:27costs, increasing talent, and increasing
133. 3:30sales utilization, all three of those
134. 3:32things reduce costs and increase
135. 3:33revenue, which could disproportionately
136. 3:35drive EBITDA, which is what that company
137. 3:37is being valued on. And so, when I look
138. 3:39at that, I'm like, this is a change that
139. 3:41you have to do in order to sell the
140. 3:42company and will result in revenue and
141. 3:46EBITDA growth. And so, let's do this
142. 3:48massive change first before risking the
143. 3:51biscuit, right? Because we might just
144. 3:52found out that just from doing that, we
145. 3:54get a 25% increase in EBITDA, and that
146. 3:56might be enough. Just bring everything
147. 3:58together plus adding the 25%. You like
148. 4:00you might be right as rain, and at that
149. 4:02point, why risk it?
150. 4:03>> I feel like if I were in your position,
151. 4:05the first thing that I would do would be
152. 4:06centralize everything first without
153. 4:08trying to change basically I wouldn't I
154. 4:11would take the model that I already know
155. 4:12works is what was your revenue before
156. 4:13you did the before you were acquired?
157. 4:15>> Okay, you're doing 20. So, I would like
158. 4:17in terms of introducing levels of
159. 4:19change, so this is actually pretty good
160. 4:20for everybody like
161. 4:21I I would typically not try and change
162. 4:23like five things at once. And so, you
163. 4:25centralizing all sales is going to get
164. 4:28cost efficiency improvements, and you're
165. 4:29going to be able to have higher sales
166. 4:31utilization, so you probably
167. 4:33cut off the bottom third of the sales
168. 4:35force that's local forming. That alone
169. 4:37might give you a 25% lift in general
170. 4:39because the best sales guys will take
171. 4:41more of the sales, and you'll have
172. 4:42centralized all the costs like we have
173. 4:44centralized all the costs, right? And
174. 4:46so, you'll have an increase in revenue
175. 4:47and a decrease in cost that's paired.
176. 4:50That would probably be my first step
177. 4:52before
178. 4:52>> of the acquisition deal. That's the only
179. 4:53way I did the acquisition is if they
180. 4:55were going to give me full control and
181. 4:56centralize all the sales, so
182. 4:57>> So, but like I wouldn't I mean
183. 4:59I know the question is about roofing,
184. 5:00but like that's what I would do first,
185. 5:02and that will probably take you 6 months
186. 5:03or more.
187. 5:04>> Okay.
188. 5:04>> Um realistically. Um in terms of in
189. 5:08terms of the offer to roofs, um
190. 5:11an offer that's worked really well in
191. 5:12home services is instead of being a
192. 5:15money back guarantee, um
193. 5:17I position it as a profit guarantee. So,
194. 5:19it's like listen, um you want your thing
195. 5:21to be on time and on budget, probably.
196. 5:23And so, I guarantee that I will deliver
197. 5:25it on time and on budget, or I'll give
198. 5:26you my profit, which is 20%. Whatever.
199. 5:29And that way it's like you're not
200. 5:31underwater, and you still have 40% gross
201. 5:33margin, so you're not really losing on
202. 5:34the deal.
203. 5:35Um but then people are like, okay, so
204. 5:37he's got skin in the game. And so,
205. 5:39that's a way of closing significantly
206. 5:41more deals cuz the two biggest um
207. 5:44obstacles that well, you would know
208. 5:45this, but in most home services it's on
209. 5:47time, on budget, and probably for roofs
210. 5:49it's like in how much am I going to be
211. 5:50displaced, how much it's going to
212. 5:51interrupt my life. And so I would put my
213. 5:53guarantee around those items, and then
214. 5:55just have a marginal amount that's back,
215. 5:58but it's really just cuz all they don't
216. 6:00So, the big thing that we just worry
217. 6:01with guarantees is that people don't
218. 6:03want their money back. They want the
219. 6:04roof. And so they just want to know that
220. 6:06you care enough to make sure the roof
221. 6:07gets delivered. And so that's really the
222. 6:09the solve for the guarantee is that just
223. 6:11pays down risk of them not getting what
224. 6:13they want. And so as long as that that
225. 6:14gets accomplished, you don't have to do
226. 6:15with money back. You can just do it with
227. 6:17some money back that gets them to say
228. 6:18yes. Does that help?
229. 6:19>> It does. Thank you.
230. 6:20>> Perfect. So, he wanted a better offer
231. 6:23despite all of those improvements, and I
232. 6:24was like, okay, I think I can I can
233. 6:26think of something for you. So, if you
234. 6:28if you look inside of the Offers Book,
235. 6:29page 125, I talk about guarantees. And
236. 6:32so this is the guarantee formula. And so
237. 6:33whenever you're thinking about adding a
238. 6:34guarantee, like this is what I think
239. 6:36through. So, if you don't X in Y time,
240. 6:40we will Z. Like that is fundamentally
241. 6:42what a guarantee is. And most people, I
242. 6:43would see a lot of times people would
243. 6:45just say, I guarantee it. But that
244. 6:46doesn't mean anything. You have to say
245. 6:48what the terms of the guarantee are on a
246. 6:50timeline. What do I get if you don't
247. 6:51perform, right? And so with this
248. 6:53business, and some people he was like,
249. 6:54well I can't give a money back guarantee
250. 6:56because I would just lose too much
251. 6:57money. Understandable. Now, if you have
252. 6:59hard costs like he does, then what we
253. 7:01can do is we can just give something
254. 7:02else. We can give them a lesser portion
255. 7:03of money, we can give something else for
256. 7:05free. And so the guarantee is a
257. 7:07consideration. It's what are we going to
258. 7:08do to show you that we're just as
259. 7:11invested as you in the outcome being
260. 7:13positive, right? And so we basically we
261. 7:16shift some of the risk from the customer
262. 7:18onto us. And this is this is all you're
263. 7:20doing as a business when you do a
264. 7:21guarantee is they take some risk of
265. 7:22buying, and you're saying, no, I'm going
266. 7:23to take some of that risk. And so, sure,
267. 7:25you can take 100%, but in this in this
268. 7:27situation, it he'd be taking like 200%
269. 7:29of the risk. Basically, he'd be losing
270. 7:31money, right? And so, the idea is again,
271. 7:33you can add stuff. So, hey, if you don't
272. 7:36get what you want, I can add things,
273. 7:37which is like, hey, if you don't hit
274. 7:39your goal, I'll add more time, which
275. 7:41does work as a sales tool. Sometimes
276. 7:43though, in the actual in the real world,
277. 7:45if someone's not getting a result,
278. 7:46they're like, I don't want any more from
279. 7:47you. I hate you, right? And so, it does
280. 7:49still work as a sale, but it's one of
281. 7:51those like mid, right? Now,
282. 7:53alternatively, you can go the reverse
283. 7:55direction, which is take away negative,
284. 7:56which is a discount, right? So, hey, I
285. 7:58can't give you all your money back, but
286. 8:00I can give you back my gross profit, or
287. 8:01I can give you back 20%, or give you
288. 8:02back 10%. All right, these are all
289. 8:04things that you can choose to give back.
290. 8:05And the thing is is it just shows that
291. 8:07you have skin in the game, and all we
292. 8:09have to think about this is the point of
293. 8:10a guarantee. So, I want to make sure I'm
294. 8:11very clear. The point of a guarantee is
295. 8:13not to have the craziest guarantee. The
296. 8:15point of a guarantee is to maximize net
297. 8:17conversions. All right, so we just need
298. 8:19to increase sales more than we increase
299. 8:23refunds. So, proportionally, we net more
300. 8:25sales. And if you can just do 10% back,
301. 8:28then that's enough to change behavior.
302. 8:30And that's the point. Like, if there's
303. 8:32no difference between giving 25% back
304. 8:33and giving 100% back in terms of the
305. 8:35actual performance of the sale, then
306. 8:37give 25. And so, you can move your
307. 8:40guaranteeing in order to find the sweet
308. 8:42spot and figure out what's actually
309. 8:43compelling to your to your customer. And
310. 8:44most times, the the things that you want
311. 8:47to guarantee around are their biggest
312. 8:48fears. In home services stuff, it's
313. 8:50usually more on time and around budget,
314. 8:52right? Are they getting it done on time?
315. 8:53Are they getting it on budget? If it's
316. 8:54other services, it might be different
317. 8:56than that. And so, you'll know your
318. 8:57services better, and but you want to you
319. 8:59want to list out what their biggest
320. 9:00fears are, and then crush those with the
321. 9:02guarantee.
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