First Person: How Consumer Spending Impacts Us

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Victor Hammel, formerly with J.C. Ehrlich, discusses how consumer earnings affect customers’ ability to afford our services.

May 14, 2020

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Victor Hammel

After my discharge from the Army in May 1970, I rejoined my family business J.C. Ehrlich in Reading, Pa. At that time, Ehrlich’s customer base was 85 percent commercial and 15 percent residential. Residential was primarily one-time services, which included termite control. There were virtually no residential customers with any type of ongoing maintenance service. By 2005, our last full year before we sold to Rentokil, the ratio was 60 percent commercial and 40 percent residential. What happened?

The commercial business continued to grow — from just over $1 million to $64 million. But the big revenue story was in the development of the residential business, which took place in the relatively low pest pressure Mid-Atlantic states we serviced.

We recognized the need to modify our service program for residential purposes and then market it. Substantial credit goes to my brother Bobby Hammel who was instrumental in designing a Year-Round Protection Plan that included just about every household pest. Most importantly he converted the billing system (which previously coincided with the three-time per year scheduled service) to a monthly fee that was automatically charged to the customer’s credit card. Hence, there was a lower payment with a much higher annual value, which also resulted in a system with a higher customer retention rate.

But, I must also give substantial credit to the U.S. economy. Back in the early 1970s, the few customers on our initial residential plan were “upper class.” In fact, some of our technicians referred to it as the “doctors and lawyers” plan — the only ones who could afford it. Today, that would be thought of as a plan for the top 1 percent.

From the 1990s thru 2005, there was a generally thriving U.S. economy. But, we first must define what “thriving” means to our industry. It is not simply a booming stock market or even just good employment figures. A thriving economy is one that increases the number of consumers who have discretionary income — money they can spend on goods and services in addition to basic necessities.

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The Professional Pest Management Alliance (PPMA) has done a magnificent job of convincing consumers that professional service is both needed and superior to DIY. PPMA has statistics to prove that far more people are using professional pest control since its start nearly 25 years ago.

But, if consumers do not have sufficient disposable income, they will not be able to purchase an ongoing service program even if they’d like one. The initial service may be considered necessary but ongoing service is often discretionary, bordering on a luxury. And, even in the parts of the country where ongoing pest maintenance may be viewed as a necessity, the consumer with limited disposable income will be forced to revert to DIY or purchase from the lowest-priced service provider.

The pest control industry should be concerned about the financial squeeze that is currently on the middle class — the people who became customers and substantially helped grow J.C. Ehrlich. We could have a lengthy political and moral discussion about income inequality. But, in this article I’m simply focusing on the value of increasing the number of consumers who have sufficient disposable income to become a pest control maintenance customer.

Since 70 percent of the Gross Domestic Product (GDP) is consumer spending, it is obvious that robust consumer spending is a major factor in growing the pest control industry. It’s likely the major factor! And when a family has discretionary income, they will be spending some of that money with our commercial customers: at restaurants, hotels, amusement parks, etc. For many years I have believed the financial status of the middle class was critical to our industry. As a result of this pandemic, I believe it even moreso.

Middle class is defined nationally as family income of $44,000-$126,000 (but it varies by location). Prospective maintenance customers are likely at the upper median of that group. From a purely economic standpoint the most major obstacle currently facing the middle class is the outbreak of COVID-19. Unemployment rates have skyrocketed. And since earnings are a critical obstacle for most in the middle class and much of their savings will have been depleted, the coronavirus will remain the biggest factor to disposable income for the foreseeable future. Besides coronavirus, other factors that have historically affected the middle class:

  • Housing costs (driven by high interest rates).
  • Health-care costs (out-of-pocket costs are prompting a growing number of Americans to deplete their savings and often go in debt).
  • Family and student college education debt ($33,654 average per student — depending on private vs. public university; typically requiring debt and interest payments for 10 years or more).
  • Inflation (if exceeding wage growth).
  • Taxes (federal, state and local). It is obvious that any reduction in taxes, which puts money in the pocket of the middle class, is a good thing — at least in the short run. But the many political considerations, including the resulting increase in the deficits of all levels of government and other long-term implications are so complex, that I almost didn’t list tax as an issue.

If I proposed policies that would resolve these issues, that would be expressing my political opinion. Rather, I suggest that at every NPMA Legislative Day, each PMP should ask their congressperson what she/he is doing about these issues to ease the burden on and revitalize a vibrant middle class. You can remind her/him that the dollars that become disposable income for the middle class will be spent and, therefore, will have one of the highest economic multipliers, which will positively stimulate the economy. So, you’ll be doing your patriotic duty by asking him/her to enhance the middle class. And, by the way, you’ll also be helping your pest control business. That’s under the assumption that you agree that more customers is a good thing!

The author is former president and CEO at J.C. Ehrlich, Reading, Pa.