A conversational transcript of a Cameron Herold session addressing a founder/operations question about prioritizing gross margin vs. investment when scaling (~$40–50M revenue). Herold recommends (1) pushing regular price increases (1–5%), (2) negotiating supplier costs aggressively, and (3) tightening or removing early-payment discounts (citing his experience at Gerber Auto Collision and Boyd Auto Body where suppliers conceded discounts while still being paid at standard terms). He gives concrete examples (negotiated large FedEx discounts, suggested reducing early-pay discounts from 5% down to ~3% or lower) and notes inflation-driven margin compression as a driver for action.
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So when we were building Gerber Auto Collision and Boyd Auto Body, we called all of our suppliers and we said we're taking our early payment discounts, but we're still paying you at the 90 day mark because we're paying you every month anyway and they gave it to us. Like early payment discounts I think are one of the worst things that a company can give away.
This is a long question, but I'm going to just start from like we are a company, self funded company and what we pay attention to are lowering our cost. So one of the objective this year is cost to GP ratio, meaning we are going to carve out some money from our GP and we are going to invest it for next year. But some of the things that need investment does not necessarily mean they're going to turn into gross profits which will then delay the investment. How should we think about that? As a growing company at about 40, 50 million revenue and a gross profit margin, what should be the priority of a company at this stage?
You're focusing on gross margins?
Yes, at this point we are focusing on gross margin, lowering the cost. But lowering cost means you are not investing on certain things or delaying delaying the investment which then slows down your growth. But if you grow, if you invest a lot, then you won't have that cushion and then you risk the company.
How much have you raised prices in the last two years?
Well, every year we raise twice a year, beginning of the year and mid year and we push as much as we can. I think we might do better on that.
Yeah, I would look because if you can raise prices 1 or 2%, there's a really great past speaker Roland Fraser, who did a fantastic presentation on the ratios and numbers in our business. And one of them was just, you know, if you raise prices by a dollar or if you cut something by 30 cents, the impact on gross margin and net is massive and it's often less than we think it is. But right now we're getting margin compression because of inflation. I mean inflation was not thankfully as bad this year as it was the year prior. This year it was only around 3, they say 3 to 4% total. I think it was like 3.1% in the US. My gut is it was probably more like about 6. Last year it was between 9 and 10%. So you know, 9 to 10% margin is pretty substantial. But if you're not raising prices by 3 to 5%, you're really, really falling behind. I also think it's an opportunity that most people don't go out and grind down their suppliers. It's amazing to me how we often take the price increases, but we never push back. And I think there's always. And Mary, I even sent you a note about that a while ago about going back to stripe again and seeing if there's any way that we can even get another 0.1. Even if they say no, it's always worth asking. But whenever we go back to suppliers and try to negotiate, there's often room there, right? There's often room there if you go back in and ask. We had our One of my EAs 20 years ago called FedEx and with one phone call negotiated a 30% discount on all of our FedEx, which was about 300,000 a year. So she was saving us 100 grand. I said, how long did it take you to make that happen? She was one phone call and I kind of looked at her and a half hour later she came back to my desk and she goes, I got us to 35, like two phone calls. There's often room when you go out and actually cognizantly decide to look across your supply chain and look across your different suppliers to get some different expenses tightened up. It's often there. Who are you using for payroll product, for credit card processing right now or two?
Well, we don't normally get payments through credit cards. We invoice them, they send us the money. We use something like quick pay. For truckload carriers, what we do is we give them some discount if they pay early. So to encourage them, I mean, yes, we are trying to get paid earlier than we pay to the carriers.
I would also be careful with giving away the early payment discounts or I would tighten up your early payment discounts. If you currently give 2%, move it to one and a half. If you do one and a half, move it to one. If it's one, move it to 0.8. So when we were building Gerber Auto Collision and Boyd Auto Body, we called all of our suppliers and we said, we're taking our early payment discounts, but we're still paying you at the 90 day mark because we're paying you every month anyway. And they gave it to us. Like early payment discounts, I think are one of the worst things that a company can give away.
You mean even if we get paid earlier than the terms?
I'm not always sure that we get paid earlier than the terms. I think sometimes if we, we had one of our competitors that sent out all the invoices on pink paper and in pink envelopes and they stood out. And because his invoices were on pink paper and pink envelopes, he got paid faster than he used to. There's other ways to get paid faster. What. What is the early payment discount that you give today?
About, like, 5%?
Oh, God, that's so high. Yeah, like, maybe you take it down to three. That extra 2% drops straight to the bottom line. I don't think that anybody that's paying you is going to worry about 5% or 3%. I think they'll still pay you early to take the 3%. They might even pay you early to take the 2%. 5%'s a lot. You need to understand the difference between a coo, a VP of Operations, and a Director of Operations. And if you don't understand that, you're making huge, massive mistakes. So check out all the resources below on what the differences are between a coo, VP of Operations, and a Director of Operations, and how you can leverage the titles of people that are in those different roles.
