How to Inflation Proof Your Outfit

During this 1-hour session, we covered important topics for outfitters and tour operators including:

• Explore innovative pricing models used in other industries to boost profits despite economic challenges.
• Analyze activities within your business to identify opportunities for maximizing profitability.
• Restructure financial strategies to benefit all stakeholders within your outfit, ensuring sustainable growth regardless of external factors.

Nikki:

Thanks for joining us. First of all, we're so excited to have our March webinar. So you guys know we are a booking software, marketing company and waiver sign, but our goal is really to just provide value to tour operators, outfitters, small business owners, and [inaudible 00:00:17] one of those ways is through bringing on industry experts and really speaking on what they know.

And here we have Zebulon. So without further ado, let's welcome Zeb. He is the owner of Zebulon LLC, an industry specific fractional CFO, which also provides a full suite of financial, leadership and business strategy services exclusively to the outdoor adventure industry. So Zeb is a certified CPA and he boasts a wealth of expertise in business management. Beyond the boardroom, Zeb is a devoted family man and has a deep appreciation for the outdoors. Okay guys, I am going to kick it off to Zeb now, and yeah, go ahead, take it away, Zeb.

Zebulon Smith:

Today's session is going to be about inflation proofing your outfit and it's going to be all about designing your operations to remain profitable or even grow your profits no matter the economic climate, including with this pesky and persistent inflation that's hit so many of us so hard the last couple of years. So during this session, we will recap the effects that past economic disruptions have had on outfitters nationwide, and it's commonly said that the best indicator of the future is your past. So we're going to educate ourselves on what's happened over the past few decades.

We'll get into some mechanical how-tos that you can implement in your outfit, and before this presentation, I asked my clients what of our efforts at Zebulon have helped you most in your outfit? And their responses are exactly what I'm sharing with you today, all of which have had significant positive impacts on their bottom lines, and above all, if you do what's prescribed, you'll feel confident about your outfit's financial situation, no matter what's happening in the broader economy.

So before we dive into it, and if you haven't heard me speak before, you might be wondering, "Well, who is this Joker?" My name is Zebulon Smith and I'm the owner of Zebulon LLC, which is a management consulting practice that works with outfitters all across the nation. But you can call me Zeb. I'm a CPA and a BBA. I regularly speak at outfitting conferences all across the nation. And outside of the outfitter world, I was recently announced as one of just nine finalists for most innovative practitioner by CPA.com, selected from over 431,000 AICPA members worldwide.

In the business of actually doing work, as Nikki said earlier, I serve as a fractional CFO and recently an executive for hire for outfitters all across the nation. So here's a map of the outfitters within the United States that I've worked with since 2016, as well as all of the companies who are currently on retainer today.

All right, so back to business. These are the talking points we'll cover. We've already breezed through the introduction, so next up we'll introduce historical trends, then we'll restructure your financials to help you make good intentional decisions for your outfit's future. I'll share with you key activities to analyze in your outfit, providing visibility into things within your operation you've likely never seen before. We'll get into innovative pricing strategies taking the world by storm. I'm not talking about your dad's approach to pricing based on your competition or the traditional cost plus accounting. I'm talking about what the broader business world is capitalizing on today, yet outfitters are slow to adopt. And finally, we'll conclude with some honorable mentions and a link to other resources that will improve your outfit's profits no matter the economic climate this year and beyond.

So a little disclaimer, this is a finance heavy operations focused session. I'm not going to hold back any punches, so I've crammed as much info as I can into a 60-minute presentation. Because of this, it's a very quick, fast moving, content heavy session, not much downtime to collect thoughts or engage. So that being said, I challenge you to stay focused and stick with me. There are a few hundred thousand dollar initiatives in this session and if you do them, you'll take home more dough this year guaranteed.

So let's go ahead and get started then with the historical trends for the last 30 years and how key events impacted consumers and employees in the economy. During this segment, I'm going to focus on how much time relevant economic indexes took to recover following each disaster. The first disruption we'll look at is 2001 when 9/11 happened. Many of you remember this and the impacts it had on your businesses. The second is 2008 and will forever go down in history as the housing crash. Just about everyone here was impacted in one way or another. The third is COVID, and despite the initial freakout, COVID stimulated banner years for the lot of you, closed travel borders, local and state government policies, social distance messaging, and more forced domestic travel to rural areas, the perfect storm for outdoor recreation.

Now we're staring down the barrel of 2024 and who the heck knows what's coming down the pipeline. We'll chat a little bit about my predictions, but one thing is for certain, at the end of this presentation, you'll have the right knowledge in your armory to take on anything 2024 has to throw at you.

So I'm going to chat through how each disaster impacted relevant key economic indexes including household disposable income, gross domestic product and inflation. I do want to let you know that these metrics are based on United States data only. This means your regional wages might be slightly different and if you serve international customers, your revenue might have been adversely impacted during each disaster. So use these trends as a baseline to understand the broader national implications of what happened in the past and what is happening today.

So starting with household disposable income, this index is essentially the average annual wage per person across the nation. It's the primary driver behind how much consumers have to spend on goods and services and is also how much money an average employee expects to make in a year. Here's a graphical representation of this metric showing average wages per person from 2007 until 2021. In 2001 at the turn of the millennium, the average worker made 30,000 per year. This is the year 9/11 hit.

Looking at the next two years, you can see that the US household earnings weren't impacted. Wage increases kept steadily trucking along year-over-year. Looking at the 2008 housing crash however, wages dropped from 40,000 to 39,6 per year, a 1% drop, and then rebounded the next year, only two years after the crash.

Now, let's look at COVID. In 2019, the average annual earnings was 54,000 per year. In 2020, it was 58,000, a staggering $4,000 increase, and in 2021, it was at 62,000, another $4,000 increase. Effectively, the average annual income grew 14% and $8,000 per worker in just two years, the largest jump in recent history. So remember this 14% when we're talking about inflation.

So looking at this graph, you can see that there's this very steep climb that's highlighted in the orange. So consumers had a lot more money to spend during COVID. No wonder sales were so good, right? I do want to point out that although this increase is awesome for revenue, it's not good for paying wages. This climb right now is what the employee pool expects for their employees.

So to bring this home for outfitters and looking at it from the perspective of wages paid to employees, at the turn of the millennium, an acceptable annual income was 30,000 per year. This calculates out to about $9,000 in a summer. Now last year, employees expected to make 66,000 in a year, which is 22,000 in a summer. So soak that up for a minute. How many of your guides made 22,000 last summer? Not many, right? This is absolutely a big contributor to retention and lack of commitment from employees right now, and with all the state transparency laws and online services like Last Door, it's easy to find wage data.

Unlike any other point in history, employees know what they can make elsewhere with pinpoint accuracy. They may not tell you their price shopping in an interview or even after they've been hired, but I can promise you, they're aware of this information during a job hunt and especially when they're employed by you guys. So we're going to get into rising costs and inflation in a bit. If you guys aren't keeping up with these wage increases, then be aware, employees are taking matters into their own hands right now and seeking higher wages elsewhere. Do a Google search and you'll find the tenure for workers is dropping quickly across all age demographics. If you want to retain employees, especially those critical 30 to 50 demographics, the majority of employees hat and above these wage ranges, then you need to ante up.

Now, let's shift to consumer spend. Gross domestic product in its simplest form is how much consumer spend in a year. Their spend is your revenue. If we look at each of the key time periods, consumer spend did slow but stayed stable following 9/11. During the housing crash, consumer spend did drop from 48,000 to 47,000 per person per year, a 3% drop. And if you recall, household income dropped 1% in the same time period, so spend slowed more than wages. However, consumer spend, like disposable income, did recover in the second year after the crash.

When we look at 9/11, consumer spend went from 65,000 to 63,000, a 2% drop, and then skyrocketed to 70,000 in 2021 and skyrocketed again to 76,000 in '22. That's a lot of spend in two years. So what do you suppose contributed to this skyrocketing steep spend climb? Is it that people are loosey goosey with their wallets or is something else at play?

You likely guess that inflation is at play here, and if so, you'd be right. Simply put, inflation is the change in household costs including food, energy and total spend. When I took economics in college, I remember learning that the target inflation rate was around 2% per year, and after 9/11, inflation dropped from 2.9 to 1.6% right in the sweet spot. In 2008, it dropped from 3.8%, the highest in over a decade, to a negative 0.4%. Things actually got less expensive this year, but quickly corrected itself within one year. Then before COVID, inflation was at the target 1.8%. In 2020, it took a small dip, then skyrocketed to 4.7% in 2021, and skyrocketed again a staggering 8% in 2022. That's a combined 12.7% in two years. So many of your suppliers are going to catch up this year. If they haven't done so already, you'll probably start feeling that.

So what's really interesting is since wages are climbing faster than inflation and GDP, remember wages jumped 14% in two years, employees, the end consumer, despite what the media wants us to believe, isn't the main demographic feeling this pinch. Because of the increase in wages and the increases in all other costs, the group hit hardest by these increases are small businesses, you guys.

So what does this mean today and what are my predictions for the future? Well first, if an economic collapse happens, then history shows household income and consumer spend, the biggest drivers in your revenue, should recover in two years. Second, right now you, outfitters are faced with paying those steep increasing wages and skyrocketing inflation cost, all the more reason to pay attention to the rest of the session and more importantly, adopt the material.

Before we get into that though, if we zoom out and look at other stuff happening right now such as the political and social influences on outfitters this year, there's a lot developing on Capitol Hill, which is anticipated to increase people's access to the great outdoors. This, in theory, means more revenue for you guys. Socially speaking, it's hot to be outside. Nature is the new sexy. Cellphones and social media are plastering our beautiful parks and really fun activities all over the place.

Also, there's a lot of marketing and messaging about the health benefits of being outside. COVID really did a number on people's emotional health, so the broader world is opened their eyes to the benefits of being outdoors. Young adults in their 30s and 40s, the next wave of big spenders, are referred to as the experiences generation. We're the first group in recent history who aren't making babies in their 20s or buying a house. Rather, we're living life now and delaying that life stuff until later. And because of this, the average wage to become a millionaire is 37 years old right now. There are a lot of wealthy young folks seeking experiences.

So to me, outfitters are in a prime position to do well revenue-wise in the foreseeable future. But because of the massive increases in costs, the craziness that has happened economically the past three years compared to any other point in history and the current $22,000 per summer earnings expectations, outfitters can't keep running business the old way of doing things. And in terms of your finances, this means running your business and making decisions with more intention than simply by your bank account balances. Outfitters must be much more intentional with money management and that's exactly what we're going to get into now.

So did you know that it is possible to grow profits no matter the economic climate? Before you dismiss me and say it's not possible, hear me out. In Colorado last year, outfitters experienced a significant drop in customer volume statewide. With few exceptions, the vast majority of Colorado outfitters will tell you passenger volumes dropped anywhere from 10% to 20% compared to the prior year. We're not absolutely certain what contributed to this, but I'm attributing it to, one, a drop in travelers, two, unseasonably cool early summer weather and, three, more competition in other experiences. I'm calling it Colorado's COVID hangover.

The COVID high in Colorado, like our elevation in population was higher than most states across the nation. Tons of travelers flocked to Colorado during the pandemic and sought once in a lifetime outdoor activities. And last year, we believe travelers went elsewhere and did other things. This drop in volume mixed with some of the nation's highest wages and inflation numbers resulted in a grueling hangover for many Colorado operators. And if Colorado is an indicator of future travels, rising wages and rising costs, it would behoove you to consider planning for a drop in volume yourselves.

The good news for Colorado outfitters last year is I spoke on rising costs and changing customer interests at CROA in February of 2023 and encouraged outfitters to adopt my suggested pricing models. Many took what I said to heart. A half dozen or so outfitters approached me at CROA last November and said that my suggestions had worked. A half dozen or more outfitters told me that despite the 10 to 20% drop in passenger volume, their revenue and profits had increased. So yes, it is possible to increase profits no matter the economic climate, even when that results in a 20% drop in customer volume.

So if you still don't believe me, here are the numbers from my clients last year. Despite a 9% drop in overall passenger numbers, my team and I helped my clients generate an additional 13 million in revenue and 3.9 million in net operating income over 2022, the year before. That means on average, each outfitter dropped a thousand passengers but sold 2 million more in revenue and realized a 507,000 net operating income. This profit metric is nearly double the industry standard. So the strategies were about to chat through are exactly what I did with these clients. So if you want to realize these numbers in your outfit, I suggest you pay attention, adopt the material, or better yet, reach out to me about working with each other and my email is on the screen.

So I want to acknowledge that every attendee in this webinar is in different stages of money management. Many of you still manage to make money decisions based on bank account balances, mind-blowing, and some of you are very knowledgeable of your money ins and outs. This presentation is designed for the masses here and the totality of this presentation should speak to about 80% of you. For those of you who are more advanced in your money management, please stay engaged because you will still find a new point to take home.

So I'm working with outfitters across the nation, and specifically those who have not struggled with inflation and profitability, there are three things we've done surrounding their finances and these three things you can do too. You must literally change how you view your finances by restructuring your financials, you must analyze key activities and you must adopt new pricing models.

This image is a continued circle, meaning the stuff I'm about to share today is recurring. It's not a one and done practice or a set it and forget it thing. The healthiest outfitters do this not just once a year, but do it continually throughout the entire year. Inversely, you may choose not to adopt the material in your outfit. After all, taking no action is itself an action, and if you choose to remain complacent and not adopt the material, you'll undoubtedly get beat up by this economy, or you can be like Rocky, push through the changes and knock it out of the ring. It's totally your choice.

So first step is restructuring financials. I've spoken on this numerous times. It's the crux of every good profit decision. If you've done it already, here's a refresher, and if you haven't done it yet, now's a good time to do it.

So here's a common, traditional and frankly useless way to set up your profit and loss accounts. This layout, a traditional chart of accounts, was likely built from a tax return or suggested by a software. It's shows income or revenue and arbitrary categories of sales, services and other income. For money out the middle section, all costs and expenses are thrown into this laundry list of items. There's hardly a rhyme or reason for this. Likely account names match the descriptions on a tax return and are sorted in alphabetical order. Then at the bottom is your profit or loss for the year. Because the majority of us want to minimize our tax bill, this number is often below zero, showing a loss, or as close to zero as possible, showing a minimal taxable income.

So I'm curious, who finds this useful? Please put in the comments if you do I want to buy you a beer, chat with you and learn how you use this to make good decisions for your business. Nobody. Nobody finds this useful. Rather, here's a useful way to set up your profit and loss. What makes this useful is, one, income by revenue stream, two, gross profit, three, condensed ledger lines, four, net operating income and five, total owner items. So let's go ahead and dive into each.

Starting with revenue, scrap the arbitrary sales, services and other income jargon. Use GL lines to call out income by revenue stream. I'm not talking reservation system deposits or stripe income. I'm talking rafting income, retail income, lodging income, et cetera. The reasons for this is to set things up to manage gross profit. To get to gross profit, you need to know your costs of sales. Your costs of sales will be anything directly experienced by your customers and variable to their volume.

In outfitting, your primary cost of sales will be guide and driver wages, gas costs, trip food, and if you sell retail, it'll be traditional cost of goods sold, being the money you paid to purchase inventory and costs to get it on your store floor. So I suggest using parent and kiddo accounts. At the top level account, a segregate cost by revenue stream. This will let you see gross profit, not only company-wide, but also by revenue. Then you can use kiddo accounts to capture more granular account of detail. These bottom level accounts are the accounts your bookkeeper codes transactions too. And in QuickBooks, there's a feature to set this up using subaccounts and another feature to collapse and expand these views. Great tools.

In your overhead expenses, you can use parent and kiddo accounts to condense your overhead to no more than five to seven categories. This helps us see how you spend your money at the view we as owners and managers naturally think of things. We can easily see how much is spent on advertising and promo in total, total overhead employee expenses, total general and admin expenses or the total overhead to run and maintain operations. You can use kiddo accounts to capture more granular detail for each. For example, facilities would include rent, utilities, repairs and maintenance. General often includes office, professional fees and insurance. And operating includes the small equipment, purchases like paddles, repairs and maintenance of boats, and anything relevant related to your vehicles.

In promo, you can split out marketing fees, online ads, print advertising and more. So I want to point out, this section does exclude amortization, depreciation and those owner pay items. Those go into the other expense section below net operating income. This is key. When you lay out your financials this way, the result is a beautiful net operating income line. This line is essentially the cash monies your business netted. It is the money collected from customers, less the cost of sales spent to deliver experiences, less the cash spent to run and maintain the business itself.

You can actually see that the 1.2 million money in made 310,000 in net operating income. This line is also referred to as owner discretionary income, is the amount of money an owner has at their discretion to, one, pay yourself in wages and dividends, two, invest back money back into the business for equipment and capital purchases, or three, pay down debts. And if you're looking to sell, this is a better number to call out than EBITDA. It will likely produce a higher multiple.

Then everything below net operating income is what makes your tax accountant happy. This is where you include your non-cash items like amortization and depreciation, as well as owner items. And if I'm working with an outfitter, owner items are where I'll throw the owner wages, owner retirement contributions, rents collected from the property to the owner that leases their property to the outpost and any of those blatantly obvious owner items that run through the business. Showing a big number here if you're looking to sell, is very attractive to a buyer and will drive higher value multiples.

So in summary, the results of restructuring your finances is awareness of actually knowing how much money your business makes, plus it sets things up well to dive into how to make your business more profitable no matter the economic climate.

Now, let's take a time to shift gears to analyze activities. So before we get into things, let's harness the power of Tom Cruise. And I want you to say it with me, show me the money. Go ahead, yell it out so your friends next door can hear you. Show me the money. One more time. Show me the money. All right.

Next up, there are three main business activities you should analyze regularly and monitor during the season. The first is gross margin by income stream. Show me the money. Thank you, Nikki. Generally speaking, to be a healthy, profitable business, all income streams should generate a 70% gross profit margin or higher. There are few exceptions to this rule, but for outfitters, a service-based business, the 70% rule applies. Gross margin percentage is calculated by taking gross profit and dividing it by revenue. A 70% gross profit margin effectively says for every $100 paid to a customer, $30 goes to trip costs and the remaining 70 goes to business to pay your overhead, the employees and profits. You want to perform this analysis for each activity. In one place, centralize all your activities, your income, your costs, and gross profit generated. Then compare the gross profit margin to each other. This tells you which activities are serving the business well and which are stealing from others. If your outfit has activities, lodging, retail and other income streams, you'll want to go through this exercise for each. But for the sake of time, I'm going to focus on activity income.

So here's an example analysis. In it, we've calculated the gross profit generated by trip and you can see at the very top, we have our gross profit calculation. And you see there are a few trips that are in the sweet spot of that 70 to 80% range. There's some that are kind of underserved, and then there's one that's very much very well underserving the business. So here all the detail down below is how we arrive at that gross profit calculation. You can use your reservation system to pull in last year's price per passenger on average. You can use your scheduling system or reservations or payroll systems to calculate out your number of passengers per trip on average, including the number of guides needed, their guide distribution, their wages, the distribution of the level of guide and the spend that you're spending accordingly on them, the estimated hours per trip, and then any other costs directly experienced by the customer in variable to volume such as driver wages, fuel, and so on and so forth.

So up here you can use this tool to shift things around to get that gross profit margin up to a better mark. So you can look to increase your price potentially. I'll go and put it up here, and you can see how that improves the gross profit margin. You can shift your distribution around, so on and so forth.

But if, for some reason, you're not able to change the marks such as your guide distribution because of water restrictions or technical abilities, then you may want to consider scrapping that activity entirely or pricing it to a point high enough that would discourage customers to do it, but still make it profitable. So after you've gone through this report, you can update things, make sure you get all of those metrics in the right position and generate an appropriate gross profit margin by activity as well as identify the right price point to charge on average to those passengers. We'll get back to that average pricing in a minute when we get to our pricing discussion.

At the bottom of this work paper, what you can actually see is that because of these changes, in this case, we actually are maintaining the same volume in passengers. You may be able to consider a drop in volume if you'd like, but you can... Oh, sorry, number of trips. Passenger volume did drop by 1000, revenue increased by 300,000, but gross profit increased by $400,000. So these are real numbers generated from a customer by the way. So it is possible to shift things around, get those price points in to make more gross profit.

Another thing to note is that every one of the metrics, including this document, is something to shoot for in the season. I'll oftentimes set monthly and weekly objectives with my clients to make sure that we're on track to actually realize this increase in revenue and increase in gross profit.

So at the end of this presentation will be a QR code that will take you to a resources page, which includes a link to download this template as well as a ton of other relevant resources.

So next step then is the employee fund analysis. I'll often call this the salary cap analysis or funds available for employees. It's effectively shifting your profit and loss around to see how much money is available for overhead wages, employee benefits and bonuses. Since wages are growing astronomically right now and more and more outfitters are realizing they must offer stable year-round employment and benefits to retain key employees or even remain competitive with other industries paying $22,000 in a summer. This analysis helps us wrap our minds around the largest line in our financials. There are a few ways to do this, but since we already addressed guide and driver wages and gross profit, I'm going to use this opportunity to focus on overhead employee expenses.

So go ahead and start with the gross profit from our gross profit analysis and subtract out your target net operating income, which by the way, should be around 20 to 30% of revenue on a minimum, and all other non-employee expenses. This is super easy to do if you have the restructured financials from earlier. The amount remaining is your funds available for employees. From here you can itemize out all the money spent on non-guide and driver employees. You'll want to call out manager wages, office and admin wages, cook wages, janitor wages, and any other overhead wages. You also want to include payroll taxes, workman's comp premiums, employee training and meal costs, existing benefits you pay to your employees and more. The final amount at the bottom is the funds available for raises, new benefits and bonuses. And if you start by using last year's number, this should be the amount you paid out in bonuses last year.

So from here you're going to want to add in any and anticipated and known changes. So starting at the top, bringing your projected gross profit from that gross profit analysis we did a minute ago, and in your desired net operating income line, again, 20 to 30% of revenue is a good starting point. Then you'll add in your increases to your non-employee expenses. If you're not in growth mode or you don't plan to purchase anything new next year, then build in a 10 to 20% increase this year simply to cover inflation. But if you're in growth mode or anticipating buying new stuff because of whatever reason, then budget for a 20 to 25% increase in those non-employee expenses over last year. This is also a good time to throw in any cash needed for equipment and capital purchases, debt paydowns or income taxes. The first year you adopt my gross profit and pricing suggestions, you'll likely have a stockpile of extra cash.

So it's going to be tempting to pay out that extra money in raises and bonuses right away. Just know because we improve net operating income, there will be new demands on that cash. So before you pay it out all out in bonuses and raises, get with your accountant, or better yet, get with me to make sure these needs are considered before you offload cash to employees and owners. Then you're going to go through your employee expenses, including those increase in wages, benefits and other employee expenses, including payroll taxes because of the higher wages and more.

So what's leftover? Well, if I'm not doing this with you, there's commonly very little left, nothing at all or it's negative, which means you must look elsewhere in the business to increase your funds available for employee raises, benefits and bonuses. So start with that gross profit number, get that up as much as possible and then look to your non-employee expenses. The one non-negotiable here is that net operating income line. Do not reduce that line.

If you can't get this number at the bottom that funds available for employees to be a positive, then you'll need to make employee cuts, and this can be a tough pill to swallow. So use this analysis to guide you through the process. Use it to make decisions and then make sure to put those decisions to practice.

So finally, out of these three things you must do is contingency planning. This is effectively scenario planning. At this point, you've structured your financials, done your gross profit analysis and your employee funds analysis. You'll know exactly how many customers you'll need to sell to and how much revenue to drive. But what happens when the Colorado COVID hangover hits and you experience a 20% drop in passenger volume? Enter a contingency planning. So I suggest you play out at least three scenarios, your baseline, which we've already done, a set bump in customers and a set drop in customers. In stable markets with stable tourism, predictable weather and predictable water levels, you'll be safe with a 5 to 10% drop and increase. But I know of only a couple places in the nation, let alone the world with that much stability.

So the majority of outfitters where tourism and weather is less predictable, I suggest building out plans for 20% swings in volume both up and down and even what happens in total shutdown mode. So have a good idea of exactly what will happen should the various scenarios take place, who will be hired, who will be cut and which non-employee expenses will be renegotiated should an unforeseen drop or bump in volume occur. Your restructured financials makes this really easy. Costs of sales naturally flex with the ups and downs of your volume. You can use contingency planning to understand your guide and staffing levels to manage a 20% drop or 20% bump in passenger volume. So play it out.

Your overhead will pretty well remain the same, but will flex just not as much as cost of sales. And your net operating income, if you've handled the employee fund analysis appropriately, will have the least amount of flex in any situation guaranteeing your profitability regardless of the economic climate. Many outfit leaders do this in your heads. Go ahead and put it to paper. Work through the scenarios with your team and exercise it often. You can't expect your guides to know what to do on a swift water rescue without documenting the steps ahead of time and practicing it with your guides. Same is true for managing the broader business, especially if shit hits the fan like it did in Colorado last year. So at the onset of COVID, I did a webinar on contingency and continuity planning for AO. You can find it on their website and I'll include a link to the resources page at the end of this presentation.

All right. Time for the last rally round, so who's still with me? Like any good night out, this last round is when the real fun starts to happen. So let's get into pricing. Most of this is pulled from my The Good, The Bad and The Ugly of Outfitter Pricing session that I've presented on numerous times. Obviously, I don't have time to give the whole presentation today, so I'm giving you the Cliff notes. Starting with the bad and ugly. You guys know what these are and if I put a poll to it, I imagine 98% of us use these as your primary pricing strategies in your outfit. You know what they are. It's when you cruise your competitors websites, whether it be locally or nationally, look up their activities and price your experiences relative to theirs. You may look at your competition and say to yourself, "I'm better than them, therefore I'm pricing my experiences higher."

Or you may say, "I'm not as big as those guys and I bet I spend less on advertising, therefore I'm going to charge less in hopes that my lower price attracts customers." You may even say, "I'm a middle of the road outfitter. I'm not the biggest and I'm surely better than that guy, so I'm going to price right in the middle." The other widely adopted pricing strategy is cost plus pricing. It's when you calculate your costs and add in a percentage markup over those costs. This approach was widely adopted because, one, it's been around forever and two, is probably the most common pricing strategy across the globe from the Industrial Revolution until the early 2000s. These approaches suck because they neglect your customers, your employees, and your shareholders interests. They're also dated and they lead to stagnant pricing. So for the love of your employees, your businesses, and believe it or not, your customers, stop pricing based on your competition and markup on costs. Just don't do it.

Now, the good ones we're going to briefly get into are needs-based, value-based, discriminatory, dynamic and subscription pricing. My objective here is to introduce these, plant thought seeds and how each can germinate in your outfit and to clarify some common misuses of a few that are making their way into the outfitting world.

So starting with needs-based. This is a Zebulon original that I built working with outfitters. Many of you have heard me present on this approach or have adopted it in your outfit already, and you commonly tell me you like it because it forces you to start with the end in mind. If you restructured your financials and analyzed the activities from earlier in this presentation, you'll effectively set your needs-based price for each trip. And the price you charge your customers is what's needed to, one, guarantee a predetermined net operating income, your cash profit, and two, generate enough gross profit to fund overhead, your employee raises, benefits, bonuses and more.

Now, let's jump into value-based pricing. Value-based pricing is pricing your experiences based on the perceived value your customers place on your experiences, not the value you as outfitters place on your offers. You'll undervalue yourselves every time. So what the heck does that mean Zeb? Well, value-based pricing is knowing what your customers, to their core, care about and for you to deliver on it. You effectively get in their heads, know exactly what they want, the upper end of what they're willing to pay and charge accordingly.

In the good, bad, and ugly presentation, I get a lot of the hows to the strategy. For right now, I'm going to leave you with a couple nuggets. A common phrase with the strategy is riches are in the niches. You must focus small to make it big. In the full presentation, I walk through discovering your target audience's true top dollar based on familiar life and entertainment spend, and adding a once-in-a-lifetime or fear of the unknown upcharge. In it, we discover that a modest family from the Midwest is comfortable spending 250 to $325 per family member per day for entertainment, which means if you charge your customers less than $125 per half-day trip, or $250 for a full-day trip per person, then you're walking away from a ton of dough, especially if you run 10,000 to 20,000 or more passengers in a season. I also run through value pricing a high-ticket, multi-day hunt excursion, so it's applicable to the high-ticket, multi-day excursions as well.

Next step then is discriminatory pricing, which is where you discriminate, or in other words, differentiate your price based on high and low demands. In discriminatory pricing, I'll look at an outfit's historical trends and identify heat pockets of high-demand periods. Outfits typically sell out on key holidays, days of the week or times of the day. If not sell out, there are obvious customer preferences when they'll buy. In your gut, you know them. They're the holiday weekends, Fridays and Saturdays and the warmer afternoon trips.

When determining your price, however, don't just use your gut. Use historical booking data from your reservation system to drive differentiated pricing decisions. In discriminatory pricing, use these data-driven hot pockets to significantly improve gross profits and net operating income. For example, let's lay your flagship trip is $100 per passenger. You bump your holiday weekend afternoon price to 149, and you offer an early-season, weekday morning price of $97. This is a wonderful thing because it better matches customer expectations with what they pay. A customer who'd happily pay for a convenient warm weekend trip pays a higher price. The customer who wants an inexpensive trip must go during the weekday when demand is lower or in the morning when it's cold to be on the water, a less desirable experience.

When push comes to shove, outfitters typically sell out these peak times and shift more customers to the weekdays. This is great because you collect almost $50 more per passenger for the majority of your trips and add more volume to the weekdays at your base original price. This increases customer volume overall, gets guides more work, increases their tips and significantly increases gross profits, funds available for employees, net operating income and so on. It's a win-win-win.

So one final point about discriminatory pricing is it's very commonly confused with dynamic pricing. The key differentiator is discriminatory pricing is static. You pretty well set your prices at the start of the season based on historical data and ride the same price through the season. You may update a few prices here and there, software permitting, but they're still static. Dynamic pricing however is dynamic. The price literally changes automatically in real time based on demand and bookings. Great examples are airline and Uber. When my team and I watch flights leading up to conference season, we can dynamically watch the flight prices change closer to a departure. Prices are cheap a year out, then get more expensive the closer to the day, will drop midweek when website traffic is low and maybe even drop last minute when the airlines want to capture every dollar they can for a flight. You can literally watch prices change week by week and day by day.

Another example is Uber. In my bar days, I remember searching for an Uber mid-evening to get to the bars and then searching again at 1:00 A.M. right as the bars got out. You can literally watch prices surge on your phone at 1:00 A.M. when all the drunk, happy and feeling lucky people want to get back home. This is perfect dynamic pricing. The biggest limitation with dynamic pricing right now is technology. It's not scalable for small non-tech companies like yourselves. A handful of reservation systems are rolling out with dynamic pricing, but be aware, a lot of ResTech companies are selling discriminatory pricing as dynamic pricing when in fact it's not dynamic at all.

So then the final strategy taking the world by storm right now is subscription pricing, also known as memberships. We're all buying them. Amazon Prime, Netflix and so many household purchases are now on subscription models, and the tours and activities industry, it's been around for years. Local ski season passes fall under the subscription membership umbrella. For outfitters, I think this is the best untapped opportunity. So many of us live in rural areas that attract second homeowners from other parts of the nation. These second homeowners live in our playgrounds three to six months of the year. Not all of them have the vehicles or storage to purchase big equipment like rafts, kayaks, SUPs and horses, although they love to get into your activities. So offering these second homeowners an exclusive subscription membership deal is a potential gold mine. If you're looking to sell, businesses and other industries are selling for record high multiples because of subscription pricing, some upwards of 10x on gross revenue, not our measly 4x on EBITDA, but 10x on revenue. A big driver to this is their loyal, stable, returning customer base, subscriptions.

If you took a minute and looked into the things you buy, you'll find subscriptions and memberships in just about everything that runs through your pocketbook. And if you look at your outfit hard enough, I bet you would find loyalists in existing customer base and new customers in your local communities ripe to try out a profitable subscription or membership program, especially new segments you never even thought about. It just requires you to look at things through a new lens. Like dynamic pricing, subscription pricing is a software limitation today. So if you want to do it, check with Resmark, and if enough of you ask for it, they'll build it out.

So each of these good pricing strategies, layer and build on each other in the order I presented. Start small, look internally with needs-based pricing, define and get to know your target audience with value-based pricing, understand what your target audience values and discriminate your offers accordingly, leverage technology to effectively use dynamic pricing and think out of the box to find a subscription opportunity and capitalize on this boom.

So one final to note, you don't have to go all or nothing into one strategy. Just like airlines, ski resorts and hotels dabble in multiple models, you can too. Start small, give something a try like a hundred local membership deals, see if it works and if it doesn't, audible, refine or move on.

All right, so let's start the conclusion. I'm going to throw out three honorable mention initiatives that outfitters I work with use to maximize profits, especially right now with record high wages and inflation. The first is sharing financial information with their employees. Doing so is a great way to boost your employee ownership culture, which is a huge need right now. Employers all over the nation want their employees to take ownership in what they do. I'm not talking ownership in the business, but ownership in their efforts. And although you may not think so, employees want more responsibility. It's just not how outfitters traditionally delegate responsibility. There's a new breed of employee out there and you need to manage them differently. Sharing financial information is one of those necessary differences. I recently wrote an article on this and you can access it using the QR code coming up.

So second is doing an expense analysis. In this exercise, outfitters graduate from being really good at spending money to business owners who are great at investing money. To do it, export every non-employee purchase for the last 12 months into Excel. Go purchase by purchase, every one for the last year and make note if each purchase as, one, recurring, meaning you expect to purchase it again in the next 12 months. Two, if it can be renegotiated or replaced with a better offer. And three, reflect on the purchase. In hindsight, was it really a necessary and effective purchase or not?

Let your answers dictate next steps and act upon them. Scrap the dead weight, renegotiate with key big-ticket vendors like marketers and myself to match your growth and profitability goals and use targets to hold them accountable. When rubber hits the road and we're purchasing items next year, you'll think through these three questions before every purchase. You'll be amazed how much money you, one, save and two, drive more revenue and profit. You can also bake this into your funds available for employee analysis to find more funds available for your employees.

And finally, everything I mentioned in the analyzing your activity section are targets to hit during the season. When I'm working with outfitters, we set monthly and weekly targets to hit through every stage of a season. This way, we know if any of the contingency plans are going to happen long before they're needed and can monitor profitability and future funds available for end-of-season bonuses. Outfitters love this proactive approach rather than doing things reactively. It's a huge peace-of-mind thing and guarantees end-of-season net operating income and those funds available for employees. I highly suggest you set and monitor weekly targets based on everything discussed so far.

And finally, drum roll. Here's the QR code to download resources from this webinar. Also, feel free to email me with thoughts, questions, comments, gripes and raves at zeb@zebulonllc. Cool. All right, we got a few more minutes left, so if there's any questions, by all means we'll be happy to entertain them.

Nikki:

That was really, really insightful, Zebulon, Zeb, that was awesome. Thank you. Thank you for that.

Zebulon Smith:

You're welcome.

Nikki:

Adam, John, is there anything you'd like to... any takeaways or anything that you'd like to kind of discuss further with Zeb?

Take that as we got it all covered.

Speaker 3:

Covered a lot of ground in an hour.

Nikki:

Yeah. Cool.

Zebulon Smith:

[inaudible 00:50:23].

Nikki:

All right, Adam, thanks. Yeah, he sent me a message. Cool. Cool. Well, just so everybody knows, this will actually be up on YouTube and our website today, and I will shoot everybody out an email with the replay link today as long as my internet loads it fast enough, and then we'll get some eyeballs on it. So yeah, is there anything else you want to kind of want to touch in on Zeb or Fory or anybody?

Zebulon Smith:

No, thank you.

Nikki:

Cool. We'll give you guys back five minutes and thank you so, so, so much guys. I appreciate it. And well, take care. Reach out to Zeb, reach out to Resmark if you need anything if you're watching this.