Latest / Scaling Up with Fexingo: How Small Businesses Become Mid-Market Companies / How a Cleaning Supply Company Scaled Past 30 Million by Fixing Its Pricing
Transcript
- Lucas: So there's this cleaning supply company in Ohio that spent a decade stuck right around twelve million dollars in revenue. Then they re-did their entire pricing model and hit thirty million in under three years. Luna: Twelve to thirty million just from pricing? That seems like a huge jump. What were they doing wrong? Lucas: The founder told me their price list was essentially a blunt instrument. Every customer got the same per-gallon price, whether they bought ten gallons a month or ten thousand. So their biggest accounts were actually the least profitable—they were paying less per gallon than the small guys, but they were also demanding way more in support. Luna: That's the classic 'big customers cost more' problem. But how do you tell a client who's giving you two million dollars a year that their price is going up? Lucas: That's exactly the question. And before we get into that, I want to mention something that's been on my mind. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds us making this many episodes ad-free. Luna: Yeah, that's right. We don't run ads, so that support is what keeps the lights on. It's a small group, but it genuinely makes this possible. Lucas: If these conversations have nudged your thinking in some way, that link is there if you want it. Anyway, back to the price list problem. Luna: Alright, so they had a single price list. What did they do instead? Lucas: They built a cost to serve model. For each of their top two hundred accounts, they calculated the actual cost of servicing them—deliveries, sales visits, tech support, even the extra invoicing when a customer pays net sixty. That gave them a number they could compare against gross margin. Luna: So some accounts were actually losing money after you factor in service costs? Lucas: Exactly. One of their biggest clients, a regional janitorial firm, took up about fifteen percent of their sales rep's time. When they ran the numbers, that account was barely breaking even on a fully loaded basis. The founder said it was like looking at a termite-infested house—looked fine from the outside, but the structure was rotting. Luna: So what did they do with that insight? Just raise prices? Lucas: They moved to tiered pricing. Instead of one price per gallon, they set three tiers based on annual volume and service intensity. The bronze tier was for small accounts that bought online and rarely called. Silver was for medium accounts with quarterly check-ins. And gold was for the big strategic accounts that got quarterly reviews and a dedicated rep. Luna: And gold paid the highest unit price, right? Because they're costing more to serve. Lucas: Right. And the founder was terrified he'd lose his top accounts. So he rolled it out over eighteen months, account by account, with a script. He told each client: 'We've done a cost analysis, and here's what it actually costs us to serve you. We want to keep doing that, but we need to adjust the price. Here's what the new tier looks like, and here's what you get for it.' Luna: And they just accepted it? I'd expect some pushback. Lucas: There was some. But the founder said the key was that he went in with data, not as a request. It wasn't 'we'd like to raise prices,' it was 'here's the real cost of the service you're getting, and we need to align.' He also made it easy for them to downgrade to a lower tier if they wanted to use less support. That gave them a sense of control. Luna: So it's like a menu. You want the gold service, you pay gold prices. You want to cut back, you can drop to silver. Lucas: Exactly. And the surprising thing was how many of their biggest accounts actually upgraded their service level once they understood the trade-off. They didn't want to lose the dedicated rep or the quarterly reviews, so they accepted a price increase that averaged around eleven percent on those gold accounts. Luna: Eleven percent on your biggest accounts—that would move the needle a lot on gross margin. Lucas: It did. Their gross margin went from about twenty-eight percent to thirty-five percent over two years. And that extra cash flow funded something they'd been putting off: a small R&D lab where they could blend and test their own proprietary formulations for specific industries like food processing and healthcare. Luna: The private label move—so they weren't just a reseller anymore. Lucas: Right. They'd been reselling somebody else's chemicals for years. Now they're making their own, which gives them better margins and a way to differentiate beyond price. And because they know the cost per formula, they can price each product intelligently instead of by guesswork. Luna: That's the really interesting part to me. They didn't just tweak the price list; they built an actual pricing capability. How do you think other businesses can start doing this without hiring a consultant? Lucas: The founder's advice is pretty simple. Start with your top twenty accounts and ask: 'What does it really cost us to keep this customer happy?' That includes the sales calls, the support tickets, the rush deliveries, the custom invoices. Write it down, even if it's rough. You'll quickly see patterns—like the ten accounts that generate sixty percent of your headaches. Luna: Then what? Do you have to go straight to raising prices? Lucas: Not necessarily. One thing they did early on was set a minimum order value for the bronze tier. They had a whole bunch of small accounts that were ordering fifty dollars' worth of product and expecting free shipping. They changed it to a two hundred dollar minimum, and they lost a few of those accounts—but the ones who stayed actually became profitable. Luna: So it's not just about raising prices on your biggest customers, but also about pruning the ones that are costing you money. Lucas: Exactly. And that's what allowed them to scale from twelve to thirty million without adding a ton of overhead. Their revenue went up, but their cost base didn't grow at the same rate, because they were no longer subsidizing unprofitable service. Luna: I want to come back to the psychology of it. How did the founder handle the emotional side of telling a client you've worked with for years that their price is going up? Lucas: He said it was brutal at first. He lost one major account early on, and he panicked. But then he realized that account was actually one of the ones that was losing money. The month after they left, his profit actually went up. That reframed the whole thing for him—it wasn't about revenue, it was about profit. Luna: That's such a powerful lesson. Losing a big client can feel like a failure, but if they were unprofitable, it's actually a win. Lucas: Right. And the founder said that after that first loss, he got more confident in the process. He started looking at every account through the lens of 'does this deal make us money after service costs?' And that shifted how he chased new business too. Luna: How so? Lucas: He used to just chase any big contract that came across his desk. Now, before he even quotes a job, he asks about the service expectations. If a prospect wants weekly deliveries and a dedicated rep but is balking at a ten percent premium over the market, he walks away. He said he's turned down two million dollars in revenue in the last year, and his business is healthier for it. Luna: That's a tough pill to swallow for a founder who's used to saying yes to everything. But it's the right call if you want to scale profitably. Lucas: And that's really the theme of this episode—scaling isn't just about doing more of what you're doing. It's about understanding your true costs and being willing to make some uncomfortable decisions. This company did that, and they went from twelve to thirty million in three years. Their EBITDA also went from around nine percent to sixteen percent, which is a massive jump for a distributor. Luna: Sixteen percent EBITDA in distribution is fantastic. Most distributors are happy to hit double digits. Lucas: Exactly. And the founder told me that the pricing model didn't just affect his bottom line—it changed the whole way his company talks to customers. Instead of having salespeople who are always discounting to close the deal, they now have a value-based conversation where they explain what they do and why it costs what it costs. Luna: That's a great place to leave it. If you're a business owner listening and you feel like your pricing is just a number you picked years ago, maybe it's time to look at it again. Lucas: Yeah, I think that's the takeaway. Pricing is not static. It should be a living part of your strategy, and it can be the key that unlocks your next stage of growth.