I recently saw a poll, that during since the recession, the service industry’s profit margins have gone up on average 2%, compared to a -13% baseline. Services have tended to be quite resilient. Online advertising though has always been predominantly goods-oriented. Goods are commodities—every new DVD is the same as the other. And perhaps that is why they have sold so well online. Private instruction with a professional, though, requires an added level of trust, as well as an added level of information. Not only must you worry about receiving the service, you must also worry about receiving the level of service you expected.
These complications are usually enough for me to avoid local service industries. However, I talked with an acquantaince of mine recently, Caleb Tolman, a private professional swim instructor in Palo Alto, though, and his company’s numbers really surprised me. His company is alto-aquatics.com, Caleb is an expert swim lesson instructor who travels around Palo Alto, Atherton, and Mountain View to teach private swimming lessons. He also sometimes rents a pool downtown.) He told me that his advertising costs, since when he started in 2001, have exploded. In 2001, he was paying ~$1 per customer lead, and about $0.15 per click. In 2008, before the recession, he was paying ~$15 per customer lead, and about $1.50 per click. Now, four years of recession later, he pays ~$55 per customer lead, and about $5.00 per click. He even told me that he would not be surprised “at all” if he was paying “twice or three-times that much” in a few years.
His prices were doubling every six years, but his advertising prices were doubling every two years! I asked him why. He told me: “My costs aren’t linear. They’re crazy weird. I have mostly fixed costs, like pool maintenance, website maintenance, and equipment. That’s not all, though: my linear costs like gas and advertising, actually go down after a certain threshold. It’s very easy to be efficient when I have lots of clients. I am able to arrange the schedule to minimize time and energy lost. I am able to get referrals from most of my clients. And clients who discover that I am also teaching their friends refer ten times the average rate. Thus, even costs that appear to be linear are actually fixed. And if my advertising can get across a certain threshold, I am able to pass the entire increase on to the customer.”
Comments like these makes me wonder what more we can do to capture these high margins. If we were better able to separate out the best swim instructors, like Caleb from alto-aquatics.com, then instructors like him would have high margins every year—and could afford a sizeable advertising budget. …let me think about this.
…!
