Steve Clegg introduces a new subject in our blogs covering data analytics for a dealership from customer transactions to forecasting and everything relating to the business.

Originally, I had gone and taken, I went to Irish Chicago. And I had taken the summer and took a job in Eastern Europe. The Western work crew had walked off, and I found myself as the assistant manager of a huge facility. It was like going back into the 1870s or something like that. It was horse, and the roads were meant for carts, not cars. It was a great experience, but everybody had lots of U.S. dollars. in their pocket. So all transactions were translated into US dollars and the local currency was pretty much the official exchange rate was, I think at the time, maybe 17 or 18 Zawadi per dollar, but the black market was over 100. So there's a big market and people taking you know, official US dollars and converting them at the 17 rate and then pocketing the difference if you're in government. The corruption was pretty rampant. But what it gave me the, it gave me an understanding of the dollar overhang. So in graduate school, I wrote a paper looking at the dollar overhang in fiat currency because with the Britain Woods Agreement, we had gone off gold. So there was no underlying value to the dollar other than anyone's desire to transact business with the United States. And in the past, when fiat currencies had existed before, and I think the worst example was a Portuguese discovered that the African world traded in beads and they could automate the making of beads. So they totally bankrupted Africa. And the only thing they had left to sell were slaves. So it's a It's a very kind of a strange feeling when you have a dollar that loses its foundation, then goes across. And the only value is in doing business with whoever the party is on the other side, assuming that you can buy goods at that value based on the exchange rate. So I wrote a paper looking at the interest rates, exchange rates, and local pricing and the implications of that. Because I was buying when I was in Poland. I was buying bricks from Hungary. I was going into East Germany, buying shovels and doing all this other stuff and running into all this currency. But the only value that people would actually take is dollars. So the U.S. was shipping me like $50,000 to go figure out what I needed to buy, which actually went a long way. purchasing. So I wrote that paper and it turned out that a bunch of economists at Chicago had read it and I ended up taking a job at W.R. Grace and found myself there a couple of weeks and I got a call from, and they had hired me with the idea that somehow I had some deep understanding of all their problems of exchange rates and owning assets in foreign countries, which they had a lot of and they had no idea how to account for it. They didn't, it was pretty much arbitrary. There hadn't been any rules written on how to account for foreign assets. Other than I put a dollar in, how many dollars am I getting back? It's very much like the equipment industry. It's like, I don't care about all those things. It's just, I got a dollar. How many dollars am I getting back? It was basically, I'm running with how much cash do I have in the bank at any one time? pretty oblivious to the balance sheet implications.

It did. It's very similar to when people would take the coins and put other metals into the coins or make them smaller or... You know, this has been going on for thousands of years. This is not a new phenomenon. But the underlying value is only to the extent that that coin or that dollar can hold to value for an exchange of goods and services, which gets complex when you're buying materials from one country, manufacturing in another and selling them in a third. So how do you account for it? And how do you make people understand what the risks are? Because usually, as I discovered as I kind of moved through corporate America, CFOs were one step beyond moronic when it came to understanding what the implications of this were. And the central banks at that time, it was all a... old boys club. They would talk to one another, they'd get their six families on the end so they could move their money in anticipation of a devaluation. It was totally corrupt. And then with that, the investment banks were, and banks were party to it. So they were all managing this at the expense of the people that are trying to transact business and anybody else that was being paid in wages that varied from Just as we're facing now with this extremely inflationary environment, you got truckers that will go out of business as a result of not understanding the implications of printing money, which has no underlying value. And then having prices that the individual has to pay with contracts that have to be met at the old value, whether it's. exchange rate value or in the currency value, it's price, interest rates, exchange rates. And most people don't have a grasp of that because they live within a 20-mile sphere of wherever they do business.

Yeah, I think it's a real and much. You brought up the call I got from Arthur Burns. I didn't know who he was when he called me and says he wants to have lunch with me at the Bull and Bear. And I had no idea what the Bull and Bear was other than it was at the Waldorf. And so I found myself going to lunch as a kid. Yeah, kind of a totally naive. not really understanding what this was all about, for a four-hour conversation with, at that time, were the presidents of the various Fed banks across the country, along with Arthur Burns and Paul Volcker.

I think I was 25.

Knowing nothing, you know. But what was interesting was at that time, and Burns was very articulate about it, he said the Fed's role was just to make sure there was liquidity available for the overnight. Their role was to ensure that there was sufficient funds available for people to continue to transact business the next day.

Neither of those things are within the purview or control of the Fed. It's like, you know, you're responsible, Ron, for when the sun rises tomorrow morning. And if it rises too early, we're going to assassinate you.

And you go, OK, does the Fed control the printing press? Unfortunately, the Fed has been buying the U.S. debt. I think the balance sheet, which used to be a couple hundred billion and people thought that was a lot to have on the balance sheet. I think it peaked out at nine trillion. Yeah. So they bought they've been buying the U.S. deficit. at an ever-increasing rate. And we might as well be Brazil or Germany prior to the Great Depression. I mean, we are a joke financially.

We carry most of it. The outstanding debt is some crazy number up in the 20 to 30 trillion. And the obligations that we've got go way, way beyond that. So this is like if you bring this back to the equipment industry. This is the environment you have to operate in where you're buying parts and machines from foreign countries that may or may not align themselves. They try to align themselves and keep their currency in line with the dollar to provide some stability. But if that stability becomes untenable, which it appears to definitely be fraying at this point, you'll have a disconnect and the supply lines will shut down. both at the local level, just as the truckers who have fixed-rate contracts have gone from $100 a day for diesel to $1,200 a day. It's untenable.

They are. And also, if you're manufacturing here and our manufacturers, our currency are collapsing, then you're able to bring in, you destroy the pricing points within countries. So the used value of equipment, you'll have an inversion. So everybody that's holding on to any equipment becomes, you're looking at, in the past, retail is notorious for this. It goes to 10 cents on the dollar. It's just like, that's why you have dollar stores. You know, people get disconnected.

They're all over in there in the balance. And the balance was the efficiency of the supply chains were allowing people to move goods around the world very cost effectively. So after working at WR Grace, I worked for Avis. And this gave me a so I found myself again, a young age funding and managing the fleets around the world. So we were buying cars in Germany and Italy, shipping them to Africa and wherever else in the world. We're getting paid in the local currency. We're putting assets. Once you went through the barrier of moving up a car into a country, you paid enormous tariffs. So you're not taking it out of that country. So the value of the car was only a value that you could potentially recapture on a resale in that local currency. And so you had this problem of the cars didn't last that long, especially back then, putting them into the rental fleet. People were extremely abusive of things that they didn't own. And so you had to turn the cars every six months,12 months on the outside. So with that, you run into where you're sourcing from, where you're borrowing from to fund the fleet, how you're booking the facility and the cars that you have in country, and how are you collecting the money? Who's showing up? And are you able to convert that money into U.S. dollars and bring it back to buy another car?

Well, they tend to be very narrow. It's really most people operate with a narrow purview of their money. So the next paper I wrote, which was looking at the implications of how was it accounted for and the accounting. you know, or the FASB came out with FASB 8, which was, this is how you're going to account for your foreign assets. And it was clear that they had no idea what the hell they were talking about.

Yes, they came out with this. But the application tend to be myopic because it was US driven, not somebody looking in from the outside and vice versa. So a lot of this was the reality was it doesn't matter how it was accounted for what really mattered. And as I told people, what matters is cash because you can show a lot of money on your bottom line and go bankrupt. Yeah.

is. So look at all the money I'm making. It's all paper, because if you have to fund it with a working capital line because you took the wrong side of a transaction contract, you'll go bankrupt. Your credit lines will dry up. And that's what we're beginning to face today is you've got credit lines that are supporting supply chains that are being extended. And the working capital has been shrunk to the point that it's not likely the banks are going to be in a position to step up to resupply. and lengthy supply chain. So you're going to see a lot of dislocation coming forward.

It's perverse. It's what's happening is you've got a capital intensive industry by going into rental that the balance sheets throughout the whole system from manufacturer down to the dealer don't support that capital burden. So, and when you go into rental, because of what we're talking about, and this goes back to this, to the 70s. One of the questions, the first questions I got when I went to Avis was, we're making more money than we've ever made, but we keep on, our debt level keeps on growing.

So the reason for that is that they're making imaginary money by selling a car for more than they paid for it, you know, six months, a year ago. But when they have to buy the next car, They bought it for $1,000, they sold it for $1,200, but the next car costs $1,600. So that differential had moved Avis' debt-to-equity ratio from one to one up to, it started to push four to one.

not sustainable. No.

Well, that was an explanation I gave to a group of Japanese on that subject. I said that the dealers are like drug guys because. They drive around, you fly planes, they drive around fancy cars because they don't know when they're going to go to jail because the capital requirements, they're bankrupt. It's just, you might as well enjoy it before, you know, it collapses. And they looked at me like, what are you talking about? And I said, this is not sustainable.

Yeah, it's not pretty. And that's what's going on around the world is that people are losing touch with the underlying foundation of the financial system. And Unfortunately, we've got administration after administration. It doesn't matter if it's Democrat or Republican. You've got people that have come up. A lot of them don't have the education to be in the roles that they're doing. And their role is to kind of like the hunter goes out and begs the game and brings it back to the edge of the village. You know, it's like I'm only valuable if I can bring contracts. That's where I'm at, which means spend more money. And the way to get more money is set up regulations where you can clip and put your cup into the river.

Now, if the industry turns, I mean, it's an unusual industry where the average dealer turns 60% of their customers on a 12-month rowing basis.

It means that if I had 100 customers 12 months ago, I've got 95.5. In this 12 months. So every month I move forward, I lose another for the most most dealers, they lose another 5% of their customers. If you do that 12 times in a row, which they the average dealer does, you've lost 60%. You've replaced them, but you've lost 60% of your customer base on a rolling 12 month basis, which is really untenable.

Well, the radius, there's an arithmetic relationship for almost every dealer based upon the transportation distance and time from their service location. And literally, for most dealers, if one is a 10-mile radius, if you go out 40 miles, that's going to be 0.3 for retention, for revenues, for transactions. It is a straight line down. This goes to where do you assign your starting salesmen, sales territories. A lot of people put people outside their radius and they always fail. They go, no one's ever been able to get that territory. And you're going, yeah, you're giving them, you're going, you're telling them to go out there with a BB gun to go fight elephants.

Yeah, most of this, the real business, because most dealers have enough customers coming in all the time. The real business, as you mentioned earlier, was the retention. So every year that you retain somebody. And these are real numbers. We've got enough we can show you company after company. If you retain them two years, so let's say you're going to lose 60% of your new customers the first year. But if those 40% will buy twice as much in the second year, they'll buy four times as much in the third year. If you have their phone number in a system that someone else can call them, like parts service, the other departments. and have their email that you can reach out to them and do that periodically. You'll double that up again. So it'll go 248. So the real money is in your real money in this business is retention. And that starts with getting the customer that you currently have to refer you. internal to their company. So you pick up the parts and service additional equipment of any of the other decision makers within that entity. That's the business and the flow of new customers come in, but oftentimes they're not going to be a viable customer for two, three, four, five years, depending on the territory. Right.

I think the biggest thing is what we do is we run the analytics. And I tell people it's not accounting that we're looking at. We're looking at customers and transactions. And a lot of people think that the business is selling equipment. But from the customer standpoint, that's only 1% or 2% of the transactions. that a customer has with you in any given year.

And the manufacturers reinforce that because they're all about selling equipment, which is only one or 2%. New equipment's half of that. So half of it's used equipment. So you're looking at from a customer standpoint, a very small event, but the decision that you've got is, is going to be based upon parts service and to a lesser extent, rental,88% of your transactions for the average dealer. It, you know, they are parts and service. And you can sell somebody six sticks of bubble gum and. they're more likely to buy a million-dollar machine just because you've got a relationship with them. So that's why it's important to expand the reach and capture the interactions.

And also you got an industry like some of us, including myself, who are learning disabled and are not going to look at all that.

It does for the people that pay attention to it. A 1% improvement. So if you can take your 95% retention rate and move it to 96%, that generally translates into a 12% growth rate. So most people have already a customer base that with just a little bit of effort can move to 96%, which will translate that into a guaranteed growth rate going forward, just because of the flow of customers that have been coming, assuming they can handle it.

You've got people, the industry is a reactionary industry. It's like everyone's face now. I can't get machines, so I'm spending double, triple the time hand-holding customers who are waiting for a machine or waiting for a part. So it's a day of reacting, reacting, reacting. So the goal here is what can you do to improve the likelihood that you're going to retain those customers? And I tell people, the first thing you got to do is when a customer calls you, is say yes. Answer the phone and say yes. What do you want? They're going to ask you, do you have it? And the next thing is when. And you can say, oh, I've got it. And then they're going to say when. Oh, it's going to be a year from now. And then maybe they'll ask, rarely ask how much it's going to cost. Well, that's going to be a million dollars. Well, they can say no to that, but you're not second guessing. Just say yes. And it turns out if you do say yes, for most dealers,92% of the time you can meet their needs when it comes to parts within 48 hours.

Right. The number one reason is mismanaging their expectations. We track this for a lot of people. If I don't keep them informed, they have to call me. They're going to give me a negative comment, and I'm going to lose a third of those customers in the next 12 months. See, that's the other part.

Yes. And we also give them a forecast, which has gotten to the point for this industry, over a 95,96% accuracy for the next 12 months. But we're also identifying which customers at risk and who they should call first. Right. And then once they've done that, if they're able to, a lot of dealers aren't even in a position to engage the customers they do have. But if you're going to choose customers to come in, why not choose the industries and the distance and the people that are going to turn into what, quote unquote, stable accounts, which generate 10 times the revenue of their average customer. Those are easily identified. And it ends up. Who are you capable of selling? And are they going to buy frequently enough that you're going to retain them?

The idea that you will be able to sell a customer on a machine that you haven't done business with. But if you look at the time it takes to bring them on where they're buying parts from you and doing all this other stuff, it's a tedious process. So the manufacturers love it. That's how they're giving you market share. That's why the disconnect between the OEMs and the dealer, the customer. The decision to buy a machine used to be maybe 20% the OEM and price was 20%. Today, the manufacturer is down below 5% in the US. And what it costs, and this is hard for people to understand because price always comes up, but price is down to less than 8% of the decision to purchase. It's when, it really is, do you have it? When can I get it? And will it do the job? And I'm willing to pay a premium depending on my application.

They buy nothing. And actually, it's higher than that. When you look at the number of customers a dealer has, if a guy has two or three machines, he is buying at a minimum 12 times a year product and services that a dealer can. provides. They're not, but they're going to NAPA, they're going to alternatives because the dealer isn't fulfilling that demand, either because they don't have a good, better, best on filters, or they're trying to sell an OEM price that's been doubled up on margin every time it moves. So whoever manufactured it in China, whoever handled it. Coming across the border, the OEM puts their margin on, the dealer puts their margin on, and pretty soon the gray market, it looks like you're ripping me off because the OEM price that I have to pay is double or triple what I could buy on the same exact part that's being made by the same exact manufacturer over in China who's shipping in gray parts.

You'll get something that'll lead you to a better alternative. So I look at the way business works. We work with a lot of different industries. But people have to start looking at, and this is where Metz is right. If you look at the transaction, the moment, it's always two people, two people exchanging goods and services for something. That moment, then if you build backwards and go, well, what do you need in that moment? Well, you need to answer your phone. And you need to communicate with them. the most efficient way possible, what you currently have to offer that will solve their problems. Because again, people are so self-interested, they don't really care about anything other than what their needs are. So you build your organization from that moment and look at where do you come in contact and how do you optimize that? And that's why, I mean, the technology today, people get lost with the crypto world. But what's really underlying that is, the exchange of knowledge instantaneously without going to a central processor. You're going to decentralize the world and allow someone at that moment, whether it's a universal price other than handling and transportation for raw materials, for parts, for whatever you can, or the value of an individual's labor, whether they're in India or the United States, they can demand. what the world rate is for their services and knowledge. That technology is collapsing this world that's controlled by a handful of different institutions in every industry. And I always tell people it's like the farmers down in Texas when they tried to set up a co-op. I think I've told Ron this story before. They called out the National Guard until it killed about 125 of them. The idea that they were going to go negotiate with the banks, the grain elevators in the railroad. I was so, you know, you know, these guys, this is so un-American because it's you're reaching into my pocket.

Well, they're building the tokens, the cryptocurrency. People ignore the bullshit about the currencies. What's happening is they're creating tokens with all your information, your credit cards, whatever you want. And all you got to do is touch it. And you make the transaction. You haven't exchanged any data other than the immediate transfer of whatever the value is that you're offering to pay for whatever the service or product that you purchased. That's happening today. And the reason why you're seeing all these crazy things that are going on is it's happening at a very rapid rate behind the scenes. You've got central banks that are moving to crypto. in anticipation of all this infrastructure that has existed in clipping coupons off of everybody's transaction will disappear and you'll have a world market that will optimize the utilization of our assets. And you see it with Uber, you see it with Airbnb, this taking an asset, getting 100% utilization out of it rather than having... thousands of cars sitting in garages all day or taking up parking spaces within the city, adding to the congestion and problems.

Great. And it's very simple.

Very clear. Some of the components are put in a customer satisfaction program because it'll tell you what their expectations are and whether you're not meeting them. It's simple as that. When we looked at three years of dealers that were on a program versus dealers that weren't, the dealers that were on a customer satisfaction program grew 44% more. just by adjusting and improving and paying attention. It seems like it moves like molasses, but you'll be surprised how quickly.

Normally, we need three years of invoices. It's just a download transactions. We're not looking for accounting statements or anything like that. We're just looking for three years of interactions or more, usually three years and year to date. And the AI can then grab that data, determine what your radius is. And also, we use that to determine which industries and markets you're best able to serve.

Yes.

Yeah, it's a self-learning too. So it learns out of, so every branch actually is different.

Story level and department, because every branch has a different cast of characters from competitors to customers. Right, right. And also distance. If you have a major highway going by your branch, you can go out 60 to 100 miles.

Usually within a week or two.

We go through the reports and then you can decide if you want to continue doing the analytics. And also you can take the information and focus on a handful of things that you should really focus on.

It's really just based upon transaction costs. Well, not even that, Ron. It's by location. So it ends up being we charge people. $350. And for every additional branch beyond one, we charge them an additional 50.

Yes.

Step two is putting, you know, what... What needs to get done? A lot of times people don't have emails. You can't even reach the customer. So it's getting their master list in shape. So there's no point in talking about all the other stuff until you have a decent list.

Most dealers that we start with are lucky to have 15% of that information in any form within any system they've got. And even if they have a CRM. We maintain other people. We maintain CRMs because they never get updated and they're out of date. And with the change of personnel that's going on.

Yes.

It's usually just by the hours of calling. So that's part of the analytics. So we'll pull that list and we can populate. The analytics will produce the account and show where the holes are. And then you can download, we produce a master list every month for every dealer.

That's part of the ongoing feed. Normally, it's the same rolling price of the $350. plus the $50 in location going forward.

I think it's just going visibility and putting the time to it. We get sidetracked with other stuff.

Yeah, we'll put together a blog to do that.

Yeah, most of the dealers make it, they tend to react too much and they need to pay attention to that moment that someone's touching that customer and manage that event and see if they can automate as much as possible, which is what Metz is saying. Let's look at how do you make it so you can touch somebody and just touch them once and do it right and keep them informed. Again, the number one reason for losing the customer is mismanaged expectations. And number two is your personnel or their personnel changes.