To Store or Not to Store
My friend thinks my business plan sucks. The plan is a path to profitability that includes taking on debt to secure a physical retail store.
My friend Joe believes this is a tremendous mistake, because I am already on a path to profitability which doesn’t include taking on debt or the enormous overhead that comes with a retail store.
The gist of my business is that I pick up people’s laundry, wash — dry — fold — seal it and deliver it back to them. I do the laundry at my house, which means just 1 washer and 1 dryer. Last week I got so busy that I had to outsource a large laundry order.
I charge roughly $1.80 per pound if you include the discounts and promotions. Outsourcing the laundry costs $1.00 per pound. Joe thinks that I should stop doing the laundry myself, outsource it all, and focus on sales.
This would free up all of my time for just deliveries and sales. It would also increase my maximum work capacity. It would be as lean as it gets when it comes to expenses. I become the middleman between the person needing the service and the person performing the service. I wouldn’t have to take on any of the operational costs or overhead of a retail location.
On it’s face this is a much better plan. I would be able to handle a lot more sales if my only duty was pick up and delivery. I could probably handle $1,000 a day or more in sales. Then I could become profitable, then reconsider opening a retail location already having a thriving delivery business.
Why not follow his advice? Below I lay out my reasons for creating a laundry business instead of just a delivery business.
The Difference Between an Entrepreneur and a Freelancer
The first and most important answer is the difference between being an entrepreneur and being a freelancer. A freelancer does the work. An entrepreneur builds a process for doing the work.
Sure I’m doing lots of laundry right now. And I’m doing the deliveries. And I’m doing the marketing, branding, everything. But I’m not tied to any of these jobs for the long term. I’m building a process so that I can eventually hire someone else to do these jobs.
A freelancer does the work. An entrepreneur builds a process for doing the work.
Outsourcing these jobs presents a myriad of problems, the most important of which is the lack of infrastructure for growth. Joe’s plan is fine if I want to make $100k a year delivering laundry. That’s not why I started this company.
I’m building a repeatable process for expanding to new markets and new cities. The goal is a business valuation of $10,000,000. The process must be in-house to be able to be replicated.
Be the Source Not the Middleman
What happens when I outgrow the capacity of my vendor? What if my vendor can’t keep up? Should I get multiple vendors?
Having multiple vendors in the chaos of a growing business is like juggling on a tight rope. This is a local service with a lot of repeat customers. Using different vendors is a sure way to create inconsistency in the quality and the brand. This is precisely the reason services like Homejoy went out of business.
I believe the core competency of the business should never be outsourced. I already made this mistake once.
Less Expenses in the Long Run
Let’s break it down in dollars.
My average order is 20 lbs. times $1.80 per pound = $36.
The vendor is $20, the gas and labor for the pick up and delivery is $10 which means the profit is $6 per order.
If I get 200 orders a month it looks like this — Revenue $7,200 — Profit $1,200.
If I get 500 orders a month it looks like this — Revenue $18,000 — Profit $3,000.
Now let’s look at costs with a retail location. The overhead is $2,500 per month, that includes everything needed to operate including getting a small business loan. An employee would cost roughly $2,500 per month including insurance and taxes.
For 200 orders — Revenue $7,200 — Profit $200 (Overhead $2,500, Employee $2,500, Delivery $2,000)
For 500 orders — Revenue $18,000 — Profit $8,000. It could be argued that 1 employee could not handle that workload but 2 employees surely could, given 4 sets of washers and dryers. We are still looking at a profit of $5,500, nearly double the outsourcing option.
These numbers are hypothetical but the point remains. There’s potential for much higher profits if the infrastructure is already in place. Initially, the overhead from the store and the employee will cost more. Eventually, however, as the business grows those costs (rent + labor) become a smaller percentage of the revenue.
At scale, it becomes cheaper to have the work done in my own store instead of outsourcing it. And since the process is in-house, I will have the ability to tweak it, make it more efficient, and lower costs even more. Not to mention the increase in sales from the foot traffic of having a store in the first place.
So there you have it. My reasons why I need to pursue this retail location. But here’s the thing, I may not have a choice. I need an infusion of capital to renovate the location and extend the runway until it reaches profitability.
Renovations are going to be about $10k, and I believe I will need another $20k to extend my runway out a full year. Given that my business is only 4 months old and my credit is sub-par, this may be a challenge.
I’m going to start by filling out all the necessary forms for an SBA loan and beginning the process. That’s going to be my focus for this week.
This story is part of a series documenting the journey of a 2016 Dallas startup called Feather. For your reference here is the Table of Contents for the series.
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