Which Customers Do I Want to Keep?
Gustavo "Gus" Bessalel was working as a management consultant in Washington, D.C., when a colleague mentioned that his uncle's company was looking for someone to establish a local franchise for its discount dining-card business. Seven years later, Bessalel's Transmedia franchise (#410), which is in the Baltimore/Washington, D.C., market, has 350 participating restaurants, 50,000 cardholders, and more than $6 million in annual revenues.
Early on, in 1994, Bessalel learned what can happen when he is less than discerning in selecting the restaurants that will be participants. He nearly ran out of money. Back then, he says, "we used to take almost any restaurant that wanted in." In the past few years, he's become more selective about which restaurants come on board and has developed a system to judge those that will be his best and most reliable customers.
The Transmedia concept is fairly simple. Restaurants "never have any cash," says Bessalel, but they do have food and drink to trade and can use some free publicity. Bessalel offers to pay a restaurant cash up front and to provide a free mention on Transmedia's Web site and a listing in the bimonthly publication of participating restaurants in return for a 50% discount on future purchases of food and beverages. A typical deal would involve an exchange of $5,000 in cash for $10,000 worth of food and beverage "inventory." Holders of the Transmedia discount-dining card get 20% to 25% off the menu price. When a member purchases a meal, Bessalel gets his investment back plus the difference between the 50% restaurant discount and the 20% to 25% discount he gives his cardholders--less the royalty deducted by the franchisor.
Since the 1994 near disaster, Bessalel has kept a close watch on the delicate balance between the number and popularity of restaurants, the number of cardholders, and the cash tied up in inventory. If he and his staff sign up unpopular restaurants, cardholders avoid the places, the inventory sits, and no cash comes back. If they sign up too many restaurants, all the company's cash is tied up. And yet if they don't sign up enough new restaurants, cardholders will get bored and won't choose participating restaurants as often when they eat out.
But there's more to the decision about dropping a restaurant than just dollars and cents. Bessalel must also consider whether the restaurant owner is influential within the local restaurant association. How will terminating that restaurant affect other relationships? Does the owner run other, more successful restaurants in the area?
Knowing which restaurants to "fire"--and when--is key. One restaurant went out of business holding $35,000 of Bessalel's money. That hurt. Occasionally, some restaurants take Bessalel's money but then turn around and won't honor the Transmedia discount card when a diner presents it. That makes for irate cardholders--and it now results in a guaranteed lawsuit. Six months ago the franchisor started putting a provision in every contract that entitles franchisees to get a legal injunction to force a restaurant to take the card if it has accepted Transmedia's cash. Bessalel recently successfully exercised the clause for the first time.
To minimize risk, Bessalel designed a scoring system by which he evaluates every contract his sales staff brings him. Half of the score is based on the proposed deal with the particular restaurant, including such factors as the restaurant's location, atmosphere, and pricing; the other half of the score is based on the restaurant owner's creditworthiness. Bessalel also minimizes his risk by making sure his salespeople share the pain as well as the gain. If a restaurant goes out of business holding any of Transmedia's money, the salesperson on that deal eats 10% to 30% of the loss.
"Restaurants are not populated with M.B.A.'s," Bessalel says. "There are many talented and capable people running restaurants, but their business decisions tend to be based on emotion and relationships. But we have to think like bankers. After all, we're giving these guys our money up front, and we're going to have to live with them until we get our money back."