Making Sales, But Not Making Money?

You stride into your office, particularly confident and pleased after a meeting with your sales staff. The word rebound is happily bouncing around in your head - it came up often in the meeting. Your company's sales have been rebounding. The economy is rebounding. Your whole outlook on doing business is rebounding. Then the phone rings. It's your accountant. He's calling to tell you that your company's profits are in the toilet.

"What?" you ask in disbelief. "But my sales have been rebounding! The economy is rebounding! My whole outlook ..."

The bottom line, your accountant explains, is that there's nothing to put in the bank. "Oh, by the way, congratulations on hiring a new sales guy," he adds. "But, you'll have to let him go if you want to meet payroll next month." With that, he hangs up the phone.

Hunter Allen, president of Aloha NY (Orangeburg, NY), has made it his business to avoid this kind of phone call. He's made internal business adjustments to battle the commoditization of Windows-based POS (point of sale) software and stay profitable despite shrinking hardware margins. His company's mission is to achieve "relationships with customers around recurring revenue models," while maintaining an operating margin of 10% or greater.

His "relationships" rhetoric might sound like a fancy way of saying the VAR is committed to good service (just like every other VAR out there), but the business model Allen has created is more specific than a vague promise to be there when a customer calls for help. His revenue model includes a client-specific hardware renewal cycle to complement the subscription-based software maintenance and upgrade program offered by POS software vendor Aloha Technologies (Bedford, TX). The staggered hardware and software upgrades combat sticker-shock, keep Aloha NY in contact with customers, and address the problem of end user resistance to sweeping change. And Allen stresses the importance of a relationship-based sales approach in his New York City market, where due to a saturation of single-unit operators, selling costs are much higher than in most areas of the country. More on that later.

Can You Profit Selling Peripherals?
Not that Allen has completely forsaken his product portfolio in his quest for profit and relationships. But, he observes that hardware, software, and even service have become commoditized to the point that POS VARs are quite similar, and he points out a minimal barrier to entry for resellers in the hospitality arena. "While our focus is on relationships, I can't say anything about my service that makes me distinctly better than the next guy," he admits. "I provide service that's as good as the next guy's, but I run my business so that I make more money than the next guy."

Staying profitable is all the trickier when you maintain a diverse line of peripheral products. As its name implies, Aloha NY is a dealer of Aloha Technologies' POS software. But the company resells more than POS software and hardware to support it. Visitor surveillance, liquor control management, and guest and server paging are examples of the value-added peripheral products the VAR pushes in its effort to endear and retain customers. But because more than 80% of the company's profits come from Aloha software, how does it justify the effort involved in peddling peripheral systems? "The overhead is minimal, which leads to increased profitability," says Allen. "Furthermore, we capitalize on our existing relationships with established customers to achieve additional sales with little or no additional sales overhead. For non-customers, we try to position ourselves as a technology solution provider and we use peripheral products to get a foothold." Aloha NY is strictly a reseller of surveillance, paging, and liquor control systems and does not invest in research and development.

Eat, Sleep, Breathe Operational Goals
But, what exactly does Allen do to tighten the belt on operational costs? Most importantly, he says his company eats, sleeps, and breathes quarterly goals. Aloha NY employees used to be reviewed on an annual basis. However, only the most recent quarter was fresh in the minds of those involved in the review. Consequently, it was difficult to lay out a strategic plan for the employee's next 12 months, let alone chart a course for the entire company's coming year. Furthermore, supervisors found that annual reviews were not providing an incentive to keep employees working toward their goals throughout the year. Employees were given broad objectives, but if they weren't achieving them, it wasn't identified and addressed for 12 months. "Quarterly goal setting and reviews helped supervisors think strategically about what their staffs should be doing in three-month increments. Broad goals turn into focused steps, which are rewarded with salary increases quarterly rather than annually," Allen says. This approach helps him closely monitor business trends at Aloha NY as they are happening, allowing him to continually make adjustments.

Don't Add Staff Until You Have To
According to Allen, single operators make up the bulk of restaurants in the New York City area, creating a unique situation for his sales staff. In a rich market like New York, "if you can cook, you can open a restaurant," he says. While at first glance it may look like a hospitality POS dealer's dream come true, a closer look at the city's restaurant market reveals otherwise. "Go to Orlando and drive around," challenges Allen. "Every restaurant you see down there is a chain or multi-unit operator." In New York City, the majority of operators run one to three stores. "We would go to dealer meetings and be blown away by resellers in other parts of the country, whose average user is five or more stores. These guys are selling 12 or 20 units at a time, just like that." Allen's average user is one and a half stores. This means that Aloha NY usually only wins one installation per successful pitch, whereas dealers in markets that hold multi-unit operators can knock down several stores with one swing. "For someone in Florida to generate $250,000 in sales, they might be looking at selling two or three customers. I might have to sell 10 customers to achieve that figure," he explains. You can see the importance of recurring revenue and relationship development in such a unique business climate. "If we've spent all that energy and expense to sell a single customer upfront, you can be sure we're going to capitalize on everything we can from them."

The volume of sales pitching it takes to land new business requires the VAR to employ a sales force, but Allen observes that the wanton addition of staff to gain top line sales can easily cause profits to plummet. "If you have two salaried people responsible for completing installations and you're selling six installations per month, that's three installs per person and you're running at 100% capacity. Life is good," he explains. "Then you think, 'Hey, the market will sustain seven sales a month,' so you go out and hire another person. You've increased your personnel overhead 50%, and maybe you're increasing your actual sales 15% to 20%. Bumping sales up sounds great, but the associated overhead might very well wipe out profits."

Business Managers Aren't Born, They're Educated
Allen felt some pain during the early growth stages of his business. When he started, he was "the best and only salesperson in the organization." Recognizing that others could do it better was a step in the right direction for the company, albeit a nerve-wracking one for Allen. "In the early days, when I had two salespeople, the thought of losing one and saying goodbye to 50% of my revenue was a terrifying place to be." But he learned how to recruit the right people for the job, people who knew the sales cycle and had an aptitude for technology. Then he figured out how to maintain what he calls the "sweet spot of profitability" mentioned earlier, while adding staff as business demanded it.

Allen makes it his business to keep tabs on what other VARs similar to Aloha NY are doing. He cites the going rate for compensation of POS salespeople as an example. "I look at my competitors and dealers of Aloha POS software in other regions, and there's undoubtedly something they're doing better than we are," Allen admits. The trick is building information-sharing relationships with those other dealers. "It's ultimately very valuable to sit down and talk to other dealers about business practices. You have to be willing to cross the trust bridge though, because this is competitive information."

Today, Allen and partner William (Bill) Gordon only join the company's sales effort 10% to 20% of the time, leaving the rest of the selling to the four full-time sales staff they employ. The rest of the principals' time is spent managing business operations and learning. "I didn't come out of a business school; I have no MBA," Allen explains. "I realized early on that I had a lack of knowledge about running a profitable multimillion dollar business. I was acutely aware of this during our early years." So rather than taking his lumps and learning from the school of hard knocks, he sought an informal education. He learned by talking to other dealers, both Aloha allies and competitors; joining professional organizations in his area, such the Young Entrepreneurs Organization in New York; and attending a three-year entrepreneur training program called "Birthing of Giants" put on by Inc. magazine at Boston's MIT (Massachusetts Institute of Technology). He also stays involved with ICRDA.

Allen claims continuing education is what instills and reinforces the basic principles on which he bases Aloha NY's business model. He says that the course at MIT, in particular, has helped him understand where the "sweet spots" of his own business are. All of the learning pays off. Today his company is supporting hundreds of customers in a 60-mile radius of New York City, and he has clients as far away as Boston, Chicago, and Harrisburg, PA. Aloha NY operates a sales suite on Long Island, in addition to its Orangeburg headquarters, to help cater to the huge metropolitan area it serves. And the company recently won IBM's highest sales growth rate award and Aloha's Bicentennial Club Award for number of installations completed. But as much as Allen relishes acknowledgement of his company's sales volume, he's not likely to get a high-profile award for maintaining a profitable business. A pleasant conversation with his accountant will have to do.