VALUE OF A ROUTE CUSTOMER

 The reason for this report is to determine the proper INVESTMENT to secure a monthly recurring revenue account. In order to determine the investment, we should first look at the value of such an account. We will look at three methods of determining VALUE of a monthly recurring ROUTE customer.

 ASSUMPTIONS

Suppose your average monthly recurring customer generates $150 per month in revenue. Lets assume the following for the purpose of determining the VALUE of this average customer.

• "LIFETIME" for keeping a customer is three (3) years
• Discount rate for discounting cash flow is 5%
• Recycling revenue is 5% of total revenue (it would be much higher if you are baling)

 Based on these assumptions, the LIFETIME CASH value of a ROUTE customer is over $5,900. If your equipment were generally operating at capacity, then your "costs of goods sold" would be about 40% of revenue. The gross profit of the $5,900 in revenue would be about $3,600. I assume this because traditionally a professional mobile shredding truck will generate $25,000 per month in revenue and have costs of about $10,000 per month (debt service, driver's costs, fuel, maintenance, etc). When the truck is at capacity, the direct cost is about 40% of revenue. Gross profit would be about 60% of revenue.

To learn more about my assumptions of shredding truck revenue versus costs, read the article titled "General Rules of the Shredding Industry". You can download the article from the Evergreen web site at:

http://www.evergreenfinancial.com/Document_Destruction.htm

HOW MUCH SHOULD YOU INVEST TO SECURE SUCH A CUSTOMER?

We will evaluate the amount of justifiable INVESTMENT in securing new customers, using three different methods.

• Lifetime Cash Value Method
• Return on Cash Flow Method
• Business Valuation Method

 LIFETIME CASH VALUE METHOD

Assume you want to generate $10 in LIFETIME CASH VALUE for each $1 you INVEST in marketing. Therefore you could justify INVESTING up to $590 to secure a monthly recurring revenue account that provided $150 per month in revenue. This is about four (4) times monthly recurring revenue.

RETURN ON CASH FLOW METHOD

In this second method, assume you require that the INVESTMENT in sales and marketing is to be paid back by the revenue generated by the new customers in three (3) months. You could then justify investing up to $450 in sales and marketing costs for each new monthly recurring customer who provided $150 per month in revenue. Does $450 seem high or low to you? Read on.

BUSINESS VALUATION METHOD

This is the third and simplest method. It has been commonly said that the value of a Document Shredding business is 24 times monthly recurring revenue. For each $150 you add in monthly recurring revenue, your business value increases by $3,600. The buyers of document shredding companies are investing as much as $3,600 for each customer, who provides $150 per month in monthly recurring revenue. That investment towers over our previous two examples of three (3) or four (4) times monthly recurring revenue.

In the "lifetime cash value" and "return on cash flow" methods, we discussed numbers ranging from three (3) to four (4) times monthly recurring revenue. In the "business valuation method", we discussed investing/paying up to 24 times monthly recurring revenue. In the home alarm business, the multiple has been as high as 42 times monthly recurring revenue. To justify numbers approaching 24 times monthly recurring revenue, let examine some less conservative assumptions.

LESS CONSERVATIVE ASSUMPTIONS

Any of the following events would cause your revenue per average route customer to increase greatly.

• If you assume revenue for each customer will grow at about 10% per year
• If you are baling and therefore your recycling revenue exceeds 10% of total revenue
• If you assume you are keeping the accounts for four years

If you take into account all three factors listed above, the LIFETIME CASH VALUE of an account is about $9,500. If your criterion was that LIFETIME CASH VALUE exceeds 10 times INVESTMENT, you could then justify spending up to $950 to secure any account, which provided $150 per month in monthly recurring revenue.

CONCLUSION

Lets extrapolate from the "per account" analysis listed above to a "per month" analysis. If you want your business to get a new shredding truck every eight (8) months and the truck generates about $20,000 in monthly recurring revenue, then you have to add $2,500 per month in new monthly recurring revenue accounts. If the average customer generated $150, then you have to add 17 new customers per month. If you agree you have to spend three or four times monthly recurring revenue to get each account, then you would have to spend $7,500 to $10,000 in customer acquisition costs per month. I have seen financial statements for companies who spend much more than $7,500 in sales and marketing each month to get those very same results. Are you investing enough in customer acquisition to grow the way you want?