D2D in Pest Control: Past, Present & Future

Cover Story: Top 100 - Cover Story: Top 100

Companies that sell pest control door to door have undergone a paradigm shift since they arrived in the 1990s. Their evolution — and expansion of the residential pest control market — will continue.

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Since door-to-door sales teams canvas neighborhoods, their route density is greater than firms using traditional marketing.
 

Selling door to door is nothing new. From encyclopedia sales that proliferated after World War II, to telecom, solar, security and lawn care — companies in all of these industries have sold door to door successfully.

My own experience with door-to-door (D2D) sales started during the 1990s when I was looking to hire a team and found companies like Apex Marketing Group and Eclipse Marketing Group. These firms recruited teams of college kids who had returned from their missions as part of their commitment to the Church of Jesus Christ of Latter-day Saints. After all, if these kids could show how becoming believers in their religion — a difficult task — would benefit those they canvassed, they certainly could explain the benefits of purchasing pest control to homeowners.

During the 1990s, these D2D marketing companies would offer their services to the large pest control companies like Orkin and Terminix that could afford to pay for these sales. (The cost per sale is among the most expensive marketing methods, but read on.) The so-called “summer sales” companies were successful, and over time, the young salespeople realized that the real money was in not only selling pest control door to door, but in starting pest control companies and growing them using the door-to-door method as the catalyst. Thus, many successful door knockers started their own pest control companies. It’s become a lot more competitive. There are approximately 7,000 or more D2D reps working in the pest control industry today compared to less than 500 in the 1990s.

The February 2016 PCT article, “Who’s Knocking at Your Door?” estimated the D2D segment at $200-250 million, which was probably accurate for 2015. PCO Bookkeepers, my accounting firm, provides CFO and other consulting services to most of the largest D2D pest control companies and many of the smaller up-and-coming ones. Based on the data we’re seeing, as well as our monthly PCO M&A Specialists/William Blair Pest Index, I estimate this segment will exceed $1 billion in 2022. Clearly, you can’t ignore this segment of the industry.

EFFECT ON INDUSTRY GROWTH. While it’s true that D2D pest control companies may lure others’ clients away, we’re also seeing them acquiring new customers — those who in the past did not see pest control as a service to be purchased on a subscription basis. This is especially true for homeowners in cooler states who traditionally handled pest control as a DIY activity or by purchasing one-time service when needed. What we now see is tens of thousands of accounts added annually using D2D methods, which is significantly expanding the size of the residential pest market.

HIGH VALUATION MULTIPLES? Many of the firms buying pest control companies today look at D2D companies differently than traditional pest control ones and assign lower valuations to D2D firms. The main reason for lower valuations relates to the lifetime value of a customer, which is a key valuation lever. D2D companies traditionally have a higher customer attrition rate, which can significantly affect a customer’s average lifetime value. Some traditional PMPs see average customer tenures between five and seven years. Many D2D firms have not even been around that long, making it difficult to determine their customers’ true lifetime value.

Additionally, the D2D sale is typically an aggressive sale, and some buyers cancel after their initial commitment. Some D2D firms with high attrition also may have service issues, compounding the problem. While best-in-class D2D companies can do little about the first issue, they can focus on service and building a great service team. In this regard we see first-year sales attrition a little higher than traditional firms, but once those marginal customers leave, the attrition rate becomes similar to that of well-run traditional companies.

Gross margin, another key valuation factor in the industry, also helps make the case for well-run D2D companies to earn higher valuations. Gross margin is a function of service dollars per hour. Service dollars per hour are a function of two variables: pricing and route efficiency.

While best-in-class D2D companies tend to sell their services at the higher end of the pricing spectrum, a few factors supercharge their route efficiency. First, D2D firms sell residential pest control as a homogeneous service, meaning all customers receive the same thing. They are all quarterlies, or they render service three times per year. And because their canvassing method blankets specific neighborhoods, their route density is off the charts compared to companies that primarily rely on digital or other marketing techniques.

Now, imagine routing accounts that look the same in terms of skills and time needed to perform the service, all in the same neighborhood. In this scenario, service dollars per hour are significantly higher than they are at most traditional companies. In my experience and based on the PCO Bookkeepers Operating Cost Study, best-in-class traditional firms show gross margins between 50 and 55 percent. Many of our D2D clients have gross margins as high as 60 to 65 percent or more. I would argue that this higher gross margin trumps the higher-than-normal attrition during the first year of service in terms of value.

CLIENT ACQUISITION & ATTRITION. There is no question that the cost of customer acquisition is high in D2D. It can be 70 to 75 percent of annual revenue for D2D, whereas digital and other sales and marketing costs are significantly less. What if we expanded this equation and considered higher attrition as a significant cost? What if because of attrition we assume that the cost of customer acquisition is 100 percent of annualized revenue as opposed to the actual 70 to 75 percent? Would this scenario affect valuation or the attractiveness of D2D?

We oversee deals all of the time at current valuations of two times to three times annual revenue or more. Obviously, the deals we do at the highest valuations are with best-in-class companies, meaning they have high gross margins, high growth and high ratios of recurring to nonrecurring revenue. Do you see where I’m going? It seems as though best-in-class D2D firms meet all these best-in-class attributes that garner the highest valuations, making the case to continue the D2D effort because it’s a lot cheaper than M&A. And because of the homogenous nature of the services, you can build a company that looks and feels exactly the way you want it to, instead of purchasing a company with some good work and some less desirable work.

COMPANY CULTURE. While company culture is one of the most important intangible factors we see in our M&A business, the rub on many D2D firms is they’re growing too quickly to build a good culture. My observation is different. Many of the best D2D companies are run by millennials. Building a great culture is paramount to them. I see strong core values when it comes to serving customers and employees as the cornerstone of their success. That said, when you build your company with the end in mind, you can focus on the core values that are most important to you and reward all activities in the organization that make the firm profitable and a great place to work. In most cases, these firms are run more like sophisticated high-tech firms than pest control companies.

WHAT’S NEXT? Technology has changed how we consume news and entertainment (and shop), so of course advertisers will spend money where the eyeballs are. As such, many companies will continue to spend on digital. But using the same logic, the pandemic is likely to increase the number of people working from home permanently; therefore, you also have many eyeballs at home. People are busy, but they do buy from firms that sell door to door.

As the industry’s D2D companies mature, many of the best players understand the D2D approach is only one of many techniques needed to successfully market pest control. D2D leaders are making significant investments in digital, technician leads and other marketing tactics, diversifying their marketing efforts over time and building durable, profitable ventures. The very best of these firms will have a role in building the industry in a meaningful way, and valuations will reflect this fact.

The author is a managing member of PCO Bookkeepers and PCO M&A Specialists.