Owner Occupied Episode 7 - Source of Income Discrimination and Renter's Choice Legislation

All right, welcome back everybody to Owner Occupied. Uh, we're here with episode 7 and we've got a fantastic episode ahead for you. I'm so excited to let you dive in and get to the meat of what we discussed here. Uh, just to give you a little sneak peek, we start out today's discussion by talking about Section 8 and housing vouchers and how that's affecting landlords and property managers and, and some of the new legislation that's coming down the pike with source of income discrimination protection. We move on to a really in-depth look at the Renters' Choice legislation, which has to do with security deposit alternatives and how those are affecting landlords and property managers and tenants as well. We have a great discussion about the unintended effects, uh, or sort of accidental, um, outcomes that, that can happen when legislation like that is passed without considering all of the possible outcomes. Then we move on and talk about some topics relevant for small business. We do a really deep dive on two critical KPIs for small service businesses. We talk about the revenue per unit, or, or essentially the revenue per product for a small business owner and why that's so important to have a good understanding of that. And then finally, we wrap up with a discussion about looking at the KPI called direct labor efficiency ratio, or DLR. So stick around, we've got a great show ahead. And let's jump right into it.

Good afternoon, Peter, how are you doing?

I'm doing great. Excited to be here.

I'm excited to be here too. Every week we try and include a couple things, we talk property management and the things more generally small business. I'm excited about what we've got teed up for us today. You were talking this week on Twitter about income discrimination in rental housing. Why don't you tell us a little bit about what's going on in that area?

Yeah, I'd be happy to. So let's see, what's a good way in here? So when you're screening tenants to apply to live at a home or an apartment that's for rent, it's tricky business, right? Because the whole— And I'm going to talk a little bit from the landlord's perspective first. So the whole idea is you want a great tenant, and a great tenant is someone who's going to pay the rent. They're not going to cause a bunch of trouble. They're not going to damage the property. They're not going to be late with rent or end up having to get evicted. And at the end of their lease, they move out, the property's clean and in good condition. That's, that's how every landlord's dream. That's what they want. The problem is people are people and some people don't behave that way. Unfortunately, some people can't pay the rent. Some people tear up the property. And damage it or leave it a mess when they move out. And so landlords worldwide have come up with various ideas on how can we predict in advance the likelihood of someone being a good tenant, or what factors can we use in reviewing rental applications to help increase the chance of getting a good tenant and decrease the chance of getting "a bad tenant." And this is no different than, you know, when you apply for a car loan or a bank loan, uh, or a job, you know, you're being scrutinized, your background is being scrutinized. Okay, now housing is a very special, uh, transaction. Okay, it's not like buying a banana at the grocery store. Housing, um, has correctly, I think, been called out at the federal level and at the state level as a very special right and a special arrangement between a landlord and a tenant where the power is concentrated in the hands of the landlord. And because housing is so important to living a prosperous life and the foundation for the rest of your success, governments have stepped in and said, "Okay, Landlords, we understand that you want great tenants in your properties, but you can't just not rent to Black people. You can't just not rent to women or pregnant mothers or whatever. That's not allowed. And so I think we all agree that's a good thing. And a lot of that came about in the '60s with the fair housing legislation and things like that. So what that did was it carved out protected classes, and it's been further refined in the years since. And even at the state levels where certain classes are considered protected and you can't discriminate against those protected classes when you are approving or denying somebody for housing. So the ones everyone's familiar with, you know, race, age, sex, uh, ancestry, origin, uh, familial size, which basically means how many kids do you have, um, you know, these things that historically people were unfairly discriminated against and were cut off basically from having a place to live. And housing, by the way, has a horrific history of discriminating against those people. So it's not like these laws just came about from a vacuum. There was a horrible, horrible history of discrimination in the housing industry, both the rental industry and among mortgage lenders and realtors. And some of that still goes on, by the way. So What this did is it set up these special protected classes, and those protected classes are not allowed. You're not allowed to discriminate against those. Anything that's not explicitly called out as a protected class, you can discriminate against. And we discriminate here. We discriminate against people with bad credit. We discriminate against people with no job. We discriminate against people who've been evicted before, and that is common for most landlords. In the same way that if someone was applying for a job, the employer may discriminate against them if they've been fired from their last job. Right. So certain things, it would make sense that you would discriminate against those things. And it's sort of like a— it's like an opt-out arrangement where if it hasn't been explicitly identified by some legislature somewhere as a protected class, it's up for grabs in terms of discrimination. Okay. So that's the backstory. So where are we today? What's going on? So what's going on is various governing bodies have decided that source of income should now be a protected class. Well, what the heck does that mean? Well, what it means is where does your money come from to pay for your house or to pay for your rental apartment? Well, a lot of people think, well, okay, everyone has a job or, you know, what does it matter where the money comes from? Well, it's taken a while to get here, but it really has to do with Section 8. When you hear Section 8, I think most people have this idea of this government housing, these big towers in big cities. Well, what actually has happened is the Section 8 program, I think, has evolved over time. Correct me if I'm getting any of this history wrong, but it's a voucher program now, which means if you are extremely poor or you're disabled or various other factors, you can go and get a housing voucher, which is sort of like a ticket, And then you can take that housing voucher and in theory, apply to live anywhere, good neighborhood, bad neighborhood, near your friends and family, across the country, wherever you want to go. And then the housing voucher, you show that to the landlord and you're like, here's my housing voucher. And the voucher says, we the government are going to help pay this person's rent.

So why would a, why would a property owner not want a guaranteed source of income from the federal government? Like if, if, if you, when you said people want their rent paid on time, check. I don't— why would, why isn't there a line of property owners battling to get in that row?

Yeah, great question. Well, there's a lot of reasons for that. And it's not because they don't want to rent to poor people, or they don't want to rent to minorities or whatever. Now, maybe, I'm sure there's 1% of landlords or something that have that idea. But The reality is that what I just described sounds great. The problem is in the actual implementation of this program. And the way it's set up is every individual city or metro area has a local administrator that hands out these vouchers. And the vouchers are— they come with stipulations. And the stipulations are that the rental unit is subject to an initial inspection by a local inspector. And if anything's found to be problematic, they have to— they'll make you fix it. And then there's an annual inspection as well. And you also have to comply with certain requirements that they want to see on your lease. So they will actually redline your lease and then you have to adjust it. Okay, so what ends up happening is now some cities can have multiple of these agencies. The one here locally is called the Columbus Metropolitan Housing Authority. CMHA for short. So when people hear CMHA, they think Section 8. And by the way, they don't like you calling it Section 8 anymore. They want you to call it the voucher program. So these local government agencies, you already know where this is going. They're a bureaucratic nightmare. You know, these inspectors come out and if the guy had a fight with his wife that morning, you're not passing your initial inspection. I'm sorry, you're just not. We even got to, because we have, we manage a couple dozen voucher program units. And it's like, depending on what inspector you get and whether or not, you know, you try and bring them donuts, maybe, you know, warm them up a little bit for that inspection. Because if the inspection fails, it's a big deal, right? Because not only then is the tenant not going to get into their unit right away, but you have to spend money to fix these. And sometimes they're calling out cosmetic items that have nothing to do with, you know, health and safety. So there's that issue of the inspections. And then also these local administrators, it's like, if there's an issue, you're trying to get ahold of someone, no one's calling you back. The payments, at least here in Columbus, you don't actually get your rent money from the government until the 3rd or the 4th of the month. And I'm like, "Well, guess what, guys? Rent's due on the 1st." So that's annoying. And they actually tell you what the rent's going to be, So when you initially, so you may have advertised an apartment for $800 a month in rent, and then they come in and say, "Well, actually we think the market rent is $750." You're kind of like, "Okay, well, I guess I could either back out now. I've already wasted 3 weeks, or I'm just going to take this." And then they also control the rent increases thereafter. So you have to apply for a rent increase and you can only do that once a year. And then they'll come back and tell you how much you can raise the rent. So there's pros and cons. Um, but all that to say, what's happening now is that governments are saying— because here's what happened, is that it was getting so obnoxious to deal with that a lot of landlords are just like, you know what, forget it, and they say no Section 8. You see that all over the place if you look at homes and apartments for rent. No Section 8, no Section 8. And that means those landlords will not accept those vouchers not because they hate poor people or because they hate minorities. It's because it's a pain in the butt to deal with.

And I'm saying to the program, not to the applicant, is really what I'm saying when I say that.

Yeah. Yeah. And so, so instead of taking a look at the source of the problem, the, the governments are now saying— and this is state, actually many states have passed laws that say that's not allowed. You actually have to accept Section 8 tenants if they are otherwise well qualified. So that is— they're calling it source of income discrimination protection because they're calling what the landlords are doing there, uh, they're saying they're discriminating based on their source of income. Um, and they throw in some other stuff here too, like you can't discriminate against— you can't— you have to count in the income things like child support, unemployment, you know, whatever, any income that the applicant has you have to treat it all equally. You can't say like, because I think our rental application criteria says something like we won't count child support as income because that could stop at any time.

It's not, you know, the evaluation on the, on, on the dad's ability to pay the child support. I can't evaluate that. I can't— I don't want to take that risk on.

Exactly.

You're making that determination.

So the source of income discrimination protection, it was just passed here in Columbus, which is why it's top of mind for me. And a couple of the other local neighboring small cities have passed it as well. And I know that a bunch of states have it also. So that's, that source of income discrimination protection.

Well, when I look, I hear that, I hear the law of unintended consequences. I can see, I can see how people will will try and ferret out and do what they need to do to get a good tenant in there. And in a way that's either not illegal, or they're not going to get in trouble for. If I'm a, if I'm a raging racist in 2021, and I want to discriminate against Black people, I know I can't run an ad that says no Black people, but I can screen out an application that has Shaniqua as a name, or, or, or I can do an interview. And I meet the tenants I interview, I just put that application on the bottom, I pick another qualified tenant, I can, I can do that. So as we do these income verifications, if you're allowed to— one of the unintended consequences, I imagine, if you're allowed to check credit score or, or a debt-to-income ratio. Those, those ratios are going to skew toward, against Latino or African American applicants. And legally, that would be a legal way to do something that a good landlord would never want to do. But winds up hurting African American and Latino tenants.

Yeah. So what you're describing is real. And in fact, even with the source of income discrimination protection in place, we need a short way to say that, by the way. So landlords can still use all their other normal factors. So the minimum criteria. So our minimum criteria is like 3 times the rent and income, minimum credit score. Clean rental history, no, no recent violent or, you know, felony criminal convictions. And you're right, that, uh, that may have an unintended effect of screening out, uh, disproportionately screening out minorities or other protected classes. And actually, the, the government has addressed this. They call this disparate impact. That's the key language here. Which basically says that, and where they've really come down on this is in the criminal screening. What they found was that a lot of landlords and property managers were screening out applicants who had any criminal history whatsoever, whether it was a traffic stop or a murder. The property managers were just using a blanket rule and saying, "Even if you got picked up for shoplifting 20 years ago when you were 16, we're still not going to rent to you." Okay? So So the HUD came in and they did some studies that found that this was disproportionately impacting minorities, no surprise. And they said, because your screening criteria is disproportionately impacting minorities, even though that wasn't your intent, it is still a form of discrimination and you're violating the Fair Housing Act. And they brought the hammer down before. So now it's best practice as a property manager or a landlord And HUD came out with some guidelines here. They say you need to tighten up your screening criteria when it comes to criminal histories. You need to tighten up the timeline and you need to tighten up the scope. You can't just say any criminal history whatsoever. You have to somehow tie the offense to something related to housing, or it has to have some business purpose. So you're still probably fine if you screen out tenants who have committed a financial crime and been convicted within the last 5 years or have a felony within the last 3 years or what have you. And of course they don't give you— they don't— of course they wouldn't give you an exact number you can use. It's all, it's all hand-wavy. But so yeah, it's, it's kind of a new world out there.

What are the consequences if I'm a— if I've got a second unit, I threw off a little extra income, got a side unit and I'm doing my best to comply and, and I messed this application up in some way that someone claims they were discriminated against, or maybe I did in fact unknowingly violate a rule or a law in this area that I was just unaware of. What are the consequences?

The consequences can be severe because this is federal law that we're talking about. And there's— not only can the person themselves bring a complaint against you for a fair housing violation, HUD can independently step in and say, we find you to be in violation even though no one complained. We did our own independent investigation and found an issue with what you're doing. And in fact, there's multiple agencies, not just HUD and not just the actual person who applied I think I saw a list, there's like 4 or 5 different government agencies that can and do bring these types of cases against property managers and landlords. Now, I'm not necessarily saying that everything I just described is a bad thing. I think there probably is some truth to what they're saying. As a property manager, I just wish they would be a little bit more clear about how I can stay in compliance. Because if you talk to property managers, Half of them are like, well, what you need to do is tighten up your screening criteria, set a rubric, a set of objective minimum standards by which you're going to approve tenants, and stick to it. Never make exceptions. Okay, so that's—

if you, if you mess up that process, what does, does your landlord pay the penalty for your mess up?

The way we have it written, the landlord, their insurance company probably would step in and have to defend us. But we separately purchased— you can actually buy insurance to protect against this type of activity as a property manager. And we have that. Got it.

So you've, you've set up systems in compliance with your, your insurance requirements, your best understanding of the law. To not run afoul. You took a pretty extraordinary step of you don't look at the names, you don't have access to the names or racial profile of an applicant at all in your approval process.

Exactly, yeah. Let me describe that. Before I, let me just jump back a little bit. So half the property managers say, set objective criteria, stick to it and never deviate. And then the other half of the property managers say, "Well, actually, if you read the HUD guidelines, they almost seem to imply that you need to be evaluating people on a case-by-case basis, and you can't just blanket deny people without looking at the facts and the details of—" So you're kind of stuck between a rock and a hard place. Like, "What do I do here?" So anyway, yeah, I have a belief that I think inherent biases are— I think unconscious bias is a real thing. And because of that, and because I'm committed not only to doing the right thing, but also finding the best people for our homes and apartments, the way we have it set up, when the person applies to live, they fill out the rental application on our website. The leasing agent then, who may have shown them the property, the leasing agent then takes all their information that's relevant and populates a spreadsheet. And the spreadsheet has the rent amount, the person's credit score, their income, their criminal history if they have any. There's probably 20 data points that they enter. But the spreadsheet, it doesn't have their photo and it doesn't have their name. So there's no personally identifying, there's no way that— So then that spreadsheet goes over to our director of property management and the director of property management looks at the spreadsheet and grades it against our rubric for our minimum criteria and then makes a go/no-go decision on approving or denying, having never seen the name, never seen the photo, never met the person in real life. I'm— I'll kind of like die on that hill as that's the right way to do it. That's the most fair and I think the most accurate way to be— to me, to be making these types of decisions for approving or denying a rental application. That makes sense.

As you also mentioned, the Renters' Choice legislation. Yeah. What is— what is that?

So Renters' Choice is what they're calling another type of sort of supposedly pro-tenant package of legislation that is related to the security deposit. So, you know, everyone's familiar with the security deposit. A lot of places charge one month's rent as a security deposit, and some, some apartments and stuff, they'll charge a little bit less. But renter's choice is legislation that forces a landlord to offer alternatives to a traditional one month's rent security deposit. And there's several cities around the country that have already passed passed legislation like this, and there's more and more taking it up every day. And usually the way it looks is the landlord has to offer the tenant to either pay half of one month's rent as a security deposit upfront, or the full security deposit over a period of monthly installments up to 6 months. So instead of taking the full thing upfront, the landlord would receive it over 6 months. Or the third option that's often thrown in there is offer the tenants a security deposit alternative insurance product. And I have a huge long blog post. I did a deep dive on these options. I won't get into that here, but there's these new products that have come out that basically the tenant pays a small monthly fee and they essentially have an insurance product or an insurance-like product that's supposed to cover the landlord and take the place of the security deposit.

I read that blog post, and we may bookmark that for a later conversation. But I viewed that, and I know, I look at it and say a 1-month deposit never seemed adequate protection for the damage that could occur. And, and circumstances, I see nightmare scenarios from property owners where there's a small fire or or a larger fire or things where I would love it if they had renter's insurance, might provide additional opportunity. So I looked at it and I know property owners are not loving these alternatives. They like having the check in the bank, but I look at it as an opportunity. If you can pitch a package where maybe they can get renter's insurance and security depositors insurance, and that's going on, you're better protected than you otherwise would be by the 1-month deposit. I don't know what those, what those parameters look like. But if I were, if I were running legislation in Ohio, I would be looking for how do I improve my situation? How do I get better protection on my unit? Rather than trying to explain that I don't want to fight with the insurance company to get my money. I want to just take it out of the deposit. I would rather have that conversation if I were—

Yeah, agreed. I think there's many, many cases when the one month's rent is not sufficient to cover the lost rent and the damages. And when I think about, when I think about the source of income discrimination, and also the renter's choice. There's a part of me that's, you know, I'm, uh, I believe in free markets. Um, I have, I have a mixture of political views, but I'm a believer, you know, I'm a business owner, I'm a capitalist, I'm a believer in free markets. Uh, and I think when you start trying to interfere with markets, you got to be really careful, right? And what the, what I see happening, so Take New York City as an example, as an extreme example of the other side here, where New York City has all kinds of tenant protection laws. They have, you name it, they've got it in terms of protecting tenants from landlords. Well, guess what happens? The harder and harder you make it for landlords to make a living with their rental property. For example, evictions, It takes 6 months to a year to get someone out of an apartment in New York City if they stop paying the rent. Okay? So on the one hand, you're kind of thinking, "Well, okay, well, that's actually a good thing because people come on hard times and housing is sort of the bedrock of stability. And that's how if you disrupt someone's housing, it makes it really hard for them to—" And all of that is true. However, what ends up happening when you pass laws like that is landlords are like, okay, it's going to take me 9 months to get a tenant out. I am going to screen the hell out of anyone who applies to live in this apartment. Right. And they're going to need to have like an 800 credit score, you know, 4 times the rent and monthly income.

And so all that ends up happening is the consequence of a bad decision goes up, the criteria get more narrow, and you get an unintended consequence of excluding people who would have had no issue if you just let them in. If the barrier moving on from a bad decision were lower, you could take more risk in who you're renting to. Exactly, exactly.

And that's what gets left out of these discussions is the very people you're trying to help, which is kind of folks that are like on the edge of making it financially. The harder and harder you make it for landlords to operate their properties, the stricter and stricter and stricter their standards are going to become for accepting those tenants. So as a counterexample to New York City, I'll use my own state of Ohio as an example. Ohio is a fairly landlord-friendly state in the grand scheme of things. They still have plenty of landlord-tenant laws on the books. But because of that, if you talk to landlords and property managers, and if you're a tenant looking for a place to live in Ohio, It's fairly easy to find a landlord or property manager who will work with you if you have a marginal background. So if you have a ding on your credit or you have kind of a shaky job situation or just some sort of imperfection in your past, because the Ohio landlord knows, "Hey, if this guy is an issue, I can get him out in 6 weeks, 8 weeks. I'll have my apartment back. Yeah, maybe it gets a little bit messed up, but at the worst case, I'm losing 6 or 8 weeks of rent. Then I have the security deposit." I'll get the thing turned over and I'll get it rented out again. So because of that, they're willing to take a chance on a marginal tenant, or they're willing to take a risk on someone who just needs a second chance. But if you throw all these laws on the books, that's going to evaporate. And suddenly it's like, no, actually, we're not renting to anyone at all who doesn't have a 700 credit score because we can't take the chance. So that's exactly the opposite of what I think we're trying to accomplish here, which we all agree It's a laudable goal to make housing more within reach for more people.

We've had some success pushing back in California against some tenant rights activists. And we don't always win in the press or in, in the public statements. But I will often have these conversations and show progressive legislators the impact of some of the rent control legislation, San Francisco, Berkeley, Oakland had really large diverse populations. And as you instituted each of these measures, you saw minority population shrink. And it wasn't because people explicitly had malice. That has happened over the, over the years. But in those communities, that wasn't the motivation they were, they thought they were, they had good intentions, but that law of unintended consequences is undefeated. Yes. I agree. Those things. But for you, this increases, um, what you talked about in the past, you know, about how much money per door you're going to make. Uh, and you wire that in over the course of more and more knowledge with more and more units over more and more time. Those really get dialed in, those key performance indicators. And that's not just for property management, that goes for a variety of different businesses. I've been reading since a podcast a few weeks ago that we were talking through that and trying to figure out what that is for both my existing business and then for things I'm looking at in the acquisition space right now, the printing. We just entered escrow on the first printer. Nice, congrats. So by the end of April, everything's done. We just have to get through a notification process, but I don't see any hiccups. I suppose I may hear some. But those KPIs for service-based businesses are, how do you evaluate those? What do you think some of the most important KPIs for a service-based business?

Yeah, so this is a great topic and I love, you know, my analytical background as an engineer. I love getting into the nitty-gritty of the numbers on business. I know a lot of business owners shy away from the numbers. They have a natural flair for sales or for other areas that have made them successful. I've leaned heavily on my sort of numbers and analysis and my business partners as well to help us overcome our own weaknesses, which is probably more on the sales and marketing. So if you look at service-based businesses, local service businesses, there's two metrics I think you have to keep a really close eye on as the business owner or the CEO to make sure that you're on the right track. Okay. And so the first one is, is revenue per unit. And I'm using unit here as a placeholder for whatever your service is. So if your service is plumbing, you need to be looking at revenue like per appointment or revenue per customer. If your service is property management, for us it literally is revenue per door, revenue per unit on a— and we look at that as like an average per month on a monthly basis. So whatever your unit of sale is, whether it's a property management door or a plumbing house call or whatever, you need to know what is the average ticket price, right? If I, if I add up all the money that's coming in my business in the last year and divide it by the number of units sold, essentially, what is the average? Is it, is it $100? Is it $1,000? What, what is that number? Okay. Um, so that's the first one, and maybe I'll come back to that. The second one is what I call your— or what, not just me, but what is called your direct labor efficiency ratio, or DLR for short. And it's a fancy way of saying, for every dollar you spend in labor, basically your payroll cost, what— how much revenue came in? And so obviously, if, if for every dollar in payroll costs, you only made $1, you'd be losing money because— so ideally, right, you would want that multiplier. It's actually expressed as just a number. So, so if you take the, the total revenue and then you divide by your payroll cost, you should— you're going to get a number somewhere between probably 2 and 5. Maybe as low as 1.5. You want that number to be higher, so the higher the better. So 3 to 4 is starting to be good. And that's basically saying that number is expressing how, how much it costs you to produce your product, basically. So, so how many dollars is going out the door for every dollar I get in from my customers?

Tied to labor though. So you're not counting cost of goods sold, but the mechanics of the— for the plumber example, you're not talking gas to get there or the sink or whatever it was that went into it, the actual physical cost of the goods, but just the labor cost per unit. Is that— that's the efficiency ratio.

Okay. And the reason is a couple of reasons to just to sort of narrow and isolate and just look at your payroll costs or your labor costs. For one thing, because that figure tends to dominate a small service business's expenses. So if I look at our own company, I mean, our payroll is like a third of our overall expenses. So rent and utilities and tools and equipment and blah, blah, blah, all that other stuff, it's just basically a rounding error compared to what we spend on labor. So by understanding at the very sort of crushed-down, simplified level, how efficient— it's basically telling you how efficient are my employees being, and it accounts for their various pay structures, right? So everything from your receptionist making $13 an hour to your experienced senior plumber guy in the field, you're paying him $55 an hour or whatever. It accounts for all that. So what you can do is you can watch that trend over time, and you can also try and understand if it's trending down or if it's too low, you know that you've got some sort of a problem with your efficiency of your employees. You're either paying them too much relative to the value they're providing, or you just have too many of them, or there's an issue there. So because that labor is so important to profitability. That's why you need to focus on this, um, on this direct labor efficiency ratio, DLE.

How do you— so if I've got a receptionist, um, she sort of, sort of touches every job that comes in, but I couldn't assign it to it— assigning it wouldn't work that directly. You just You sort of base case it or spread it around? How detailed do you get on assigning who did what if multiple people touch a job at different points?

Well, for the direct labor efficiency ratio, you're not actually breaking it down like that. You're literally just summing up the whole thing. Yeah, you're summing up all the revenue and you're summing up all the labor and you're doing a division. Now you exclude management labor. So if you have a, like, a manager who's overseeing the store or something, you don't include that. And you don't include your labor, presuming you're not primarily engaged in operations. Okay. Um, so, so, so that's what you do for that. And if you're finding that your direct labor efficiency ratio is too low and you feel like everyone's being efficient and everyone's being paid appropriately, that probably means you just need to raise your prices. Or speaking to the first metric, revenue per unit, find some other way to increase your average ticket price or your average, whether that's upselling, cross-selling, multiple plans. There's got to be ancillary revenue streams. You may have to get creative to try and figure out how can I make more dollars per unit Because that's— that the thing about these small service businesses is every dollar of revenue you add, say, so given a steady state of your business is operating and it's chugging along, every dollar of revenue you add is like pure profit. And so by only increasing your prices by, say, 5%,, you may be doubling your profits, right, depending on how that's structured and what your current profit margin is. So that's why it's so important to keep an eye on this, this like unit economics, which is like this revenue per unit.

That makes sense. And you could— I was thinking of it on each product line. But if I know what the margin is on those various products, I can at least target my sales team to say, let's target selling these higher margin items. But if I don't know what those margins are, or it's all a conglomeration, I can focus too much on the revenue number and just increase the size of the revenue, which it would be an inefficient way to approach this. If I had drilled down a little bit more on what it costs me to do X, Y, or Z, I can drive higher profitability. By understanding this labor efficiency ratio.

Yeah. And on the revenue per unit, I think it's fun to go through this because the exercise of first figuring out what is my, my revenue per unit on average, that's an interesting number to figure out. And then you're like, okay, well, how do I increase that? It's a fun creative process. And the goal is not to soak your customer for every dollar they've got. The goal should be value-additive, right? You should find a way to add value to the customer's life in a way that's relatively easy and inexpensive for you. So let me use plumbing as an example. Let's say you ran a bunch of numbers and you found out that your average house call, uh, was $400, and that includes everything. Because some— sometimes you're going there and you're doing nothing other than fixing a leaky pipe and it's a, you know, it's $80. Other times you go and you're replacing a whole hot water tank and it's $1,500 or whatever. But whatever it is, let's say it comes out to to, uh, to— what did I say? 400. 400. Okay. Um, so, okay, okay, great. So now you know, now you know it's 400. Interesting. Um, what could we do to drive that up? Well, I can think of a few things right off the bat. The first thing is I would be training my techs to, to be looking for ways to make my customers' plumbing home experience better. So for example, when they're replacing a garbage disposal, maybe the plumber presents 3 options like good, better, best, and takes a few minutes to explain the benefits of investing in a better higher-end garbage disposal. Well, it's going to be quieter and it should last longer and blah, blah, blah, blah. Or maybe while he's there, he says, hey, you know, we're running a special this month. Um, we're— I can do a complimentary, uh, plumbing and sewer inspection of your whole home and try and preemptively identify any, like, maybe leaks you didn't notice or code violations or other issues so that you could, you know, possibly head that off. Um, and because I'm already here, you know, you can, you can see where I'm going with this, where it's— it would be easy once you understand what you need to do to get creative and, and try and improve that. And you can pull in your people too, right? Because your plumbers may have great ideas about 'cause they may have people asking them. Maybe it turns out that half the time they go to a house call, the homeowner's asking them, "Hey, would you look at this? Would you look at that?" But the plumber, because his mindset has always been, "Well, you got to get to the next job. You got to get to the next job." The plumber has actually just been saying, "No, no, I got to keep going. Call the main office if you want that." Well, that's a huge opportunity then to say, "Well, actually, what if we did 3 calls instead of 4 per day, but we targeted higher?" So anyway, I'm getting all excited. I went, I'm going to go.

But if you— how do you train your tech to be a salesperson, or how do you incent them to give your customer the best service, which would include this diagnostic stuff, and raise the average ticket price so that it's good for your customer, it's good for your business, and ultimately, I think if you aligned your incentive structure, it would be good for the tech as well.

Exactly. And there's definitely a way to do like a revenue share on an upsell. Yeah. And I know that— I know plumbers are doing that. Good, good.

Well, those are two ratios that I think that people can get their mind around. And I can see where if you drill down on that, you can make decisions, shape your business in a way that's going to add value for everybody in your chain.

Yeah. All right.

Anything else for today? I think that's good. That's a lot of value packed into a few minutes. The audience will let you know if they— So we'll see. I know I got something out of it.

Great. And as we wrap up, we want to encourage people, if you're listening and you like what you hear, let us know. If you hate what you heard, let us know. Please do share, you know, comments on social media. You can find us both on Twitter. I'm twitter.com/pslohmann, and I think, you know, our Twitter is in the, is in the outro in the show notes. Um, so yeah, we, we welcome your feedback. We want to make this, you know, the whole idea here with what we're doing is, uh, Russell and I, we want to give back to the small business and real estate community that's been so helpful for us over these years, um, and try and share what, what we know in a way that's, you know, useful and valuable for the audience. So we welcome, you know, ideas and feedback on how we can do better with that.