To Guarantee or Not Guarantee
That is the question
Pardon my poetic license with Shakespeare. It is morning and I am feeling a little perkier than usual. And, no, I am not going to address the nobility of preneed.
The question of guaranteeing or “freezing” the price has always been a concern among DeathCare professionals. This is especially so when it comes to discussions of shortfall. In my opinion there is only one answer to the question of whether or not you as an individual firm should guarantee that has any real integrity:
“It depends.”
Frankly, I think most practitioners are aware that the answer cannot be a simple: “Don’t do it.” or “You must do it.” or there wouldn’t be an ongoing debate…a debate that seems to be occupying a greater part of our industry dialogue than ever before. So, my purpose in this commentary is not to give you a “pat” answer but to open the issues that must be considered if one is going to make the best decision for their individual circumstances.
No one else does it.
We often hear various pundits and practitioners declare by rhetorical question: “What other business sells something today and guarantees delivery tomorrow at today’s price?” The inference is that we have been hoodwinked by a sinister “them” (usually the insurance companies) into something that is bad for us. And, further, that we are somehow fools for perpetuating the practice. Having been there when preneed became popular on the funeral side (it’s been around for millennia) I have to respond that I don’t remember it that way. But that is a side comment not germane to our discussion.
The inference that no other business would be stupid enough to sell a product or service with a locked in price is simply not true. In fact, a whole multibillion dollar industry is built on it. It is what selling Futures is all about and the Futures market offers a singular and helpful metaphor for a fundamental philosophical concept. To reduce a highly sophisticated and technically complex industry to a single idea I look at the sale of futures this way:
If I believe prices and profits will go up in the future I want to buy. If I believe prices and profits will go down in the future I want to sell. And this, in a nutshell, is why I am pro preneed.
The following chart adapted from Federated Funeral Directors shows funeral home profits since 1978 projected out over the next ten years:
Now I don’t really believe the entire industry will go into the red. But it isn’t a happy picture either. So, if I were trading futures what would I do? I think I would sell. (By the way, there are other products and services I can think of that are sold in advance. But that’s not my point) The parallel with selling futures is a fairly good argument for selling preneed but it has some holes relative to guaranteeing the price. Although I haven’t yet addressed the guarantee issue, you should know that if the trend in prices and profitability turns the other way you can expect me to step over to the other side and be opposed to preneed selling.
I think the real questions people are asking (and if I have this wrong I truly beg you to let me know and get it right) is whether guaranteeing the price is too much risk and if you have to do it at all. Again, the answer is: “it depends.”
Shortfalls
The first issue of risk relates to shortfalls. A few years ago I developed a “Shortfall Calculator” which I use with audiences to gauge the true impact. I project the worksheet on the screen and the audience collaborates to fill in the data with realistic averages. I make no attempt to influence their numbers. When it comes to shortfalls the answers are surprisingly consistent across the country. Always there are individual anecdotes about $1,000 or even $2,000 shortfalls. But the consensus among literally dozens of audiences is that shortfalls average about $300. This is their number not mine. We then go on to quantify all the other financial factors affecting a firm over the past ten years. This includes the decline in family loyalty, the tendency toward choosing lesser quality, the growth in cremation etc. Without exception the numbers bear out that you are better off suffering the shortfall for exactly the same reason you want to sell futures.
Since this is usually the first time an audience has ever quantified the impact of preneed combined with the impact of shortfalls, I challenge them to check the conclusion by going home and comparing the preneeds they are serving today with the at needs they are selling today. Here are the responses I get when they do. “Of the 3 copper caskets we used last year 2 were sold preneed.” “My preneed conversion average is almost $1,000 higher than my at need average even with the shortfall.” and so on. It’s an easy test. You can do it yourself.
Competitive Factors
Part of my personal frustration in this debate is that it tends to hide what I think is the most important issue and that is:
Market Share
On the funeral side the industry averages a variable unit margin of a whopping 83%! That means that for every dollar of revenue you generate above your breakeven point 83 cents goes crashing to the bottom line. So the fastest remedy to your profit and cash flow woes is to control increasing amounts of market share. Yet, as a profession very few people really focus on gaining market share. I haven’t understood this except to wonder if two things are in play:
1. Funeral Directors already have all the business they want. No, really, I think this is part of why busi nesses are so static. And ,
2. The very long sales cycle has everyone convinced you really can’t shift market share.
Again, not germane to the discussion at hand, but if you can explain this industry-wide delusion to me I would be interested.
The competitive question really requires you to think about several factors among which are:
1. What will my competition do? Or its corollary, I have no competition so why am I doing this?
2. Do I really need to guarantee to maintain an ad vantage?
3. If I stop will they stop?
4. Do consumers really care?
5. Will I be able to keep my sales people or will sales drop off?
The answers to these and other questions are obviously situational. For instance, at first blush, if I have no competition then it might make sense for me to not offer a guarantee. But if my sales average is declining and guaranteeing offers a strong buying incentive maybe I want to keep on doing it. For Example, an increasing number of practitioners are telling me that families in their areas are buying cremation because they can’t afford burial. I wonder if these same practitioners aren’t wishing they had been more aggressive in preneed ten years ago. Here’s another thought: “what if I want to make my monopoly more secure by tying up as much business as I can thus discouraging anyone who might want to come into my market?”
What if I have competitors? Right now there is at least one practitioner loudly and proudly telling practitioners that they quit guaranteeing and it has had no effect on their business. Because this issue is so situational, I think they do a disservice.
People hire me to help them develop transitional and strategic market strategies. If the competitors to the afore-mentioned practitioners were to hire me here is what I would do: I would be quiet long enough for them to take enough rope and solidly position themselves in the “We don’t guarantee” niche. Then I would hire an aggressive advertising company and a successful third party marketer even if I had to borrow the money. I would tell them both that they had one mission: My firm must OWN the guarantee concept. I would want consumers to think guarantee every time they thought about prearrangement. More than that, I would want them to think of me as the inventor and owner of the concept. Then, I would want families that had prearranged at my friend’s firm to wonder if maybe he hadn’t taken advantage of them. Would I do this because I wanted more guaranteed funerals? No, I would do it because I want the 83% margin on each incremental call I take from him. If that sounds ruthless I wish I could say I am sorry but people pay me to help them win.
Preneed sales are typically lower
This is an argument that simply doesn’t hold water. There are only two reasons someone might have a preneed sales average lower than the current at need average:
• They don’t believe in funerals
o There is no cure for this. You need to help them find an alternative future.
• They are improperly trained
o This is an easy cure. The best and fastest way is for an experienced agent to go out with them, find the issues and retrain them.
Typically, Preneed averages can and should run several hundred dollars (excluding cash advances) higher than at need.
Baby Boomers
I am going out on a limb here because I know some pundits are telling you differently. But I strongly believe Boomers (I am one myself) are into planning and, therefore, attracted to preplanning and prepaying. What I don’t believe is that we have our message right. Selling features and benefits is out. Threats of unpleasant consequences for not planning are particularly rejected. In my opinion Boomers represent the single greatest opportunity for prearrangement and prepayment we have ever been presented. I just hope we figure it out before others do.
A Compromise
Hopefully, I have given you some good food for thought on the subject. Again, I think you see that the final answer for each of you “Depends” on your situation.
Here is a compromise that may help some of you who feel caught “betwixt and between”. A friend of mine made this suggestion:
“Why don’t we guarantee only those services (burial and cremation) that are at or above our targeted average? This would give people a value reason to buy in that range and it would also create a value perception to the guarantee. If families at the lower end still want to hedge the future price we could sell them a separate policy to cover, but not guarantee, anticipated inflation.”
I like this idea. It makes sense.
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Respectfully Submitted
Alan Creedy
Alan;
Indiana’s pre-need law requires “that the seller of pre-need services or merchandise must provide those services or merchandise regardless of the sufficiency of funds in trust or escrow which is to serve as a resource to compensate the seller for those services or merchandise.” There are only 5 instances in which the seller is allowed to charge “extra”, dealing with mileage, transportation, installment funded contracts. etc. For the purposes of this discussion I would toss in the following statement; Probably 90% of pre-need contracts we service have some form of shortfall to a greater or lesser degree based on variable factors; however, in most instances I choose to not pursue additional compensation from the family (even when justified) because of weighing out the risk of negative publicity in the community from their discussion in the marketplace. Right or wrong, we have marketed the “guaranteed” aspect of pre-need, I think this is an uncomfortable bed that we made and within now must lie…to quote my swamp friend Pogo, “we have met the enemy, and it are us!”
Alan,
We are having the same debate in Ontario. The government has proposed legislation that would mandate a guaranteed contract. The industry is split in this discussion.
I remember discussing with you, about 15 years ago (have we gotten that old), the concept of 100 pennies in a dollar. Funeral homes are receiving marketing allowances, rebates, casket price protection, commissions, sale’s trips etc from the sale of that prefunded contract. Have we forgotten that someone has to pay? If we were to forgo all of the above and direct the funds into growth, would shortfalls be an issue?
“100 pennies in a dollar, that’s all. How do you want to cut it up?” I have quoted that line many times and have always attributed it to you.
Good article, great blog. See you at NFDA.
John
Alan,
Great article which should enliven the debate across the spectrum.
However, I would like to know how many states require the surviving family members to honor the preneed client’s wishes especially when a traditional funeral has been selected i.e. current financial pressures may be cause for them to choose a lesser selection even cremation.
Also, I wonder how many firms track the preneed fulfillment rates and bottom-line impact on a per call basis?
I really like Alan’s suggestion as a possible “win-win” solution.
Russ
To John Ward’s suggestion of eliminating commissions, sales trips, etc., the key operative word for preneed is “sales.” The heretofore mentioned components is what “drives” or motivates sales personnel to achieve predetermined preneed “sales” goals.
From my experience in preneed sales management and consulting arenas one of the most overlooked aspects of funeral home management is the “inspection” of each preneed contract prior to sending it to the preneed insurance company; the purpose being to track preneed contract averages compared to current at-need averages within predetermined objectives. The goal being to have preneed sales averages in excess of current at-need averages as Alan mentioned.
Also, it is very important in the selection of a preneed funding company to conduct a “follow-through” financial analysis to accurately forecast the future impact of preneed sales on at-need profitability.
Another topic for another time would be how to structure preneed sales personnel compensation to achieve mutually beneficial results.
Proper execution of the above suggestions will help minimize preneed to at-need contract short-falls.
Russ, my post wasn’t clear. Compensation is here to stay and we need it to fund our efforts. We just need to keep it in mind when a $8,000 preneed comes up $300 short.