Business Evolution
Written by: Glen Gould President and CEO of MKJ Marketing
Humans have evolved to adapt to their changing environment; as have animals. Likewise, businesses and industries evolve to adapt to evolving business environments. Chinese restaurants become Chinese buffets, airlines dropped their fares to compete with discount competitors, and began charging for checked luggage, food service, even luggage stowed in overhead bins to recover lost revenues.
Churches evolved from Sunday services and Sunday school, to providing all manner of family services from financial counselors to child and elder care. Banks sell bonds and stocks; Las Vegas casinos realize more profit from their bottle-service night clubs than gambling revenues.
Profit margins for funeral homes nationally, as reported by various associations and industry accountants, have declined from 15% range to 5% as the cremation rate has increased to approximately 50% nationally. The majority of these businesses have avoided adapting by:
- The age-old cure all of raising prices; which in the current environment is a strategy for continued decline but at an accelerated pace.
- Consolidation, accepting the lower profit margin, but increasing volume.
- Adjusting overhead, which is another way of saying they reduce service and delay facility maintenance.
- Learn to live on less.
At the same time, progressive firms have evolved by expanding their offerings while improving service, building new facilities, and attracting profitable business. How do they do it? There are no secrets; they have not invented new ways of selling caskets, instead they expand services by experimenting with new offerings.
According to Johnson Consulting Group, the death care industry’s premier provider of financial analysis, reports that the EBITDA (earnings before interest, taxes, depreciation and amortization are charged. Many businesses evaluate their success based upon EBITDA versus profit, volume or cash.) for a traditional ground burial service is 30% to 35%. JCG provided examples of primary cremation based funeral businesses that have EBITDA from cremation business similar to a traditional burial service.
Michigan
- Total cost of goods 15%
- Personnel 26%
- Facilities & Automotive 10%
- Advertising & Promotion 1%
- Total other funeral expenses 4%
- Total other operating 9%
- EBITDA 35%
Arizona
- Total cost of goods sold 10%
- Personnel 38%
- Facilities & automotive 16%
- Advertising & Promotion 2%
- Total other funeral expenses 4%
- Total other operating 6%
- EBITDA 23%
Pennsylvania
- Total cost of goods 4%
- Personnel 37%
- Facilities & Automotive 13%
- Advertising & Promotion 6%
- Total other funeral expenses 2%
- Total other operating 7%
- EBITDA 31%
New Mexico
- Total cost of goods 11%
- Personnel 36%
- Facilities & Automotive 15%
- Advertising & Promotion 4%
- Total other funeral expenses 3%
- Total other operating 4%
- EBITDA 21%
Canada
- Total cost of goods 8%
- Personnel 37%
- Facilities & Automotive 17%
- Advertising & Promotion 5%
- Total other funeral expenses 2%
- Total other operating 10%
- EBITDA 30%
Washington State
- Total cost of goods 14%
- Personnel 33%
- Facilities & Automotive 12%
- Advertising & Promotion 1%
- Total other funeral expenses 1%
- Total other operating 11%
- EBITDA 25%
Take away from the above:
- There is no correlation between personnel cost and EBITDA. In some examples personnel costs were greater, in others less; but it does not appear to impact the firm’s EBITDA. Families will not pay more just because there are more people present at an event; it’s more important what those people are doing.
- In most of the case studies, there is a direct correlation between advertising investment and EBITDA; lower advertising budgets resulted in lower EBITDA; higher budgets produced greater EBITDA. This is supported by an examination of the most successful funeral businesses nationally. A business that invests in advertising will surpass similar businesses that don’t.
- The lower cost of goods sold, the higher the EBITDA, which suggests the higher profit margins are received when the emphasis is on services versus merchandise.
- In general, the EBITDA for a cremation firm is similar to a funeral home that serves primarily burial families. In some cases, the difference is significant, as in Arizona, New Mexico and Washington state. However, in the other examples, the EBITDA is well within the 30% to 35% EBITDA of primarily burial firms.
Funeral businesses that have evolved to meet today’s challenges differentiate themselves by aggressively pursuing hospice; promoting their reception room services, offer services at alternative locations including outside and celebrants. Cemeteries are investing in multi-purpose gardens separated from the memorial gardens that offer up-rights, niches, mausoleum, etc. at premium prices. Death care is a declining industry that offers superior profit opportunities, but demand creativity and financial investment.
Summary:
“If you don’t understand consumers as shoppers, then you don’t understand consumers.” — Tim Manners
“Disrupt” has been the most over used term over the past couple years, from international politics to business, even religion. Typically, in reference to technology companies undermining traditional brick and mortar retail businesses by analyzing industries to identify the friction points where consumers’ and the providers’ priorities conflict. In retail, consumers want lower prices and greater convenience, hence Amazon.
In food service, consumers want restaurant quality meals at home, hence the gourmet meal delivery service diners prepare themselves.
Travel agents are practically non-existent today as technology allows travelers to purchase tickets.
Technology is not significant in all disruption; Walmart and Amazon have caused significant disruption in the grocery store segment. Aldi is the largest grocery store chain in the world, and has recently invaded the US market with their low price, low overhead format. Concerned that their low prices will attract only low-income shoppers, Aldi aggressively advertises its low prices on quality wines to attract higher income shoppers.
Every six months or so, a new company enters death care with the promise to “disrupt” funeral service; most of them focusing on the arrangement process. What they don’t understand is that for the traditional funeral customer, meeting with a funeral director and making the arrangements is not a friction point; it’s part of the funeral process and consumers expect and want to meet with a funeral director.
The reality is the industry has been violently disrupted beginning in the 1990’s by the minimum service cremation businesses prior to the technology revolution. These businesses rack-up huge call volumes, with many of them handling 1,000 to 5,000 cases annually. As a result, funeral home market share of at-need deaths has declined precipitously over the past several decades, leading to facility closures and consolidation.
As demonstrated above, funeral businesses can do well with cremation families; the challenge for funeral homes is not cremation, instead it is the competition from minimum cremation businesses. To compete for this business, funeral homes need to intercept families before they make contact with the cremation provider.
Generally, minimum service cremation businesses lack significant name awareness and repeat business. Consumers generally find them through Google searches, which is why the cremation businesses have invested heavily in digital marketing.
Many funeral home websites are built from templates designed to sell flowers or caskets, which is why the sites are very inexpensive or even free. These templated sites receive negative citations from Google which penalize the funeral home in search results.
Intercepting cremation business means funeral businesses need marketing websites that bring shoppers to the firm through search engine optimization.
BY LINE: Glenn Gould is CEO of MKJ Marketing. MKJ marketing seminars in February and March will address the opportunities and challenges in death care, including competition with minimum cremation businesses. To learn more about upcoming MKJ seminars, go to www.mkjmarketing.com.