As you develop your laundry pickup and delivery business, it is important to keep track of your costs. The largest expense in this business is labor, more specifically, production labor. We define this as the labor necessary to get the laundry washed, dried, folded and packaged.
Based upon our experience, keeping track of the production labor is key to running a profitable delivery business. The faster you grow, the harder it can become to keep this cost under control.
When we started our own laundry pickup and delivery service HappyNest (the catalyst for the development of Springboard) five years ago, we found our production labor skyrocket as the business and new customer growth accelerated. Some days our labor accounted for 25% of sales (good days) and other days it accounted for as much as 45% of sales (bad days).
After Examining Our Financials, We Discovered Two Things:
- We noticed not all employees work at the same pace. As an example, assume you charged $1.50 per pound and one employee produces 40lbs of laundry an hour while another produces 30lbs of laundry per hour. The first employee generates $60.00 of revenue per hour and the other employee only creates $45.00 of revenue per hour. Based on this example, the first employee is worth more to your business than the second employee.
- If your employees are paid relatively the same rate (+/- $2.00 per hour), the more productive employee is subsidizing the pay of the less productive employee. This is not a good model and does not properly reward or incentivize employees to work efficiently. It also can breed resentment among your staff.
Our solution had to reward efficient employees and provide us with a consistent margin of production labor. After much thought and discussion with our employees, we came up with our current pay per pound model. While very straightforward and easy to understand, it aligns our incentives (consistent labor margin) with our employees’ incentives (maximizing pay) and rewards the effort of the more efficient employees.
Today, HappyNest pays its staff the greater of minimum wage or their production rate. Since we charge $1.60 per pound we can pay up to $0.40 per pound to our staff and still maintain a 25% margin on our production payroll. In addition, using the example above, the employee producing 40 pounds per hour of laundry is averaging $16.00 per hour of pay. The less efficient employee doing only 30 pounds per hour is averaging only $12.00 per hour of pay. In both examples our production cost margin stays constant at 25%. By paying the greater of minimum wage or production wage we are satisfying all payroll tax requirements in our state. I am happy and proud that some of our employees earn close to $20.00 per hour doing laundry!
Finally, this pay per pound model has some indirect benefits as well. Employees quickly realize they can make more money if they work harder or eliminate distractions. Additionally, since high valued employees are no longer subsidizing inefficient employees you attract a different type of employee, one who is motivated by pay and not afraid of hard work. This pay structure is not attractive to the low production yielding employee. HappyNest employee turnover has dropped dramatically and our quality improved due to our pay incentives. Finally, and maybe the most important benefit, is our employees are partners in the business success. As the business grows, the employees see more opportunity to make more money.
Do the positive results this compensation model has on HappyNest, we include it in the Springboard platform. Springboard software keeps track of all your employee production statistics. Springboard also allows you to set up a fair price per pound per employee depending on their skill and experience. We have even added a Supervisor bonus concept. The Supervisor bonus allows your shift leader earn a small amount (usually a couple cents/lbs.) overage on the entire team production for the given shift. At the end of a shift, Springboard employees have access to money they make/or made per shift based upon the hours worked and the number of pounds processed. If you would like to learn more about Springboard or other cost-saving strategies, please feel free to call me at 401-829-0052 or email me at firstname.lastname@example.org.