The Startup Fee

The best price conversation I ever watched took about a minute. The CEO of an industrial services business was raising price on a large account by 30%, and the customer did what customers do. He pushed back, called the number unreasonable, and said he would cancel and take the work elsewhere.

The CEO did not argue the 30%. He agreed the customer was free to cancel. Then he said, calmly, “If you cancel, when you come back, I'm going to charge you a startup fee, because I have to move the trucks and the people.”

The conversation changed on that sentence. Until then the customer had been negotiating against the invoice, the one number he could see. The CEO had put a second number on the table that the customer had never considered: the cost of leaving, and the cost of coming back when the replacement did not work out. Nobody had ever priced that for him. Once someone did, the 30% looked different.

What the Line Did

The sentence worked because every word of it was true. In a route-based or field services business, an account is a physical commitment. Trucks get assigned to a territory, crews get hired and trained to the customer's sites and safety rules, routes get built around the work, and equipment gets staged where the work is. Pulling all of that out has a cost, and rebuilding it has a larger one, because the people you released have gone to work somewhere else and the new crew has to learn the sites again.

Customers almost never see that cost, because the supplier has always absorbed it. It sits inside the price as an invisible subsidy. The CEO simply made it visible. He told the customer what the relationship actually cost to run and what it would cost to restart, and he let the customer do the arithmetic on the alternative: a new provider learning the sites from zero, the service gaps while they did, and a restart fee if it went badly.

There is a version of this that is a bluff, and customers can smell it. What made his line land was that he meant it. He was prepared to lose the account, he knew what it cost him to serve, and he knew that at the old price the account was not paying its way.

A customer who has never priced leaving will always negotiate on the invoice.

Paul W. Swaney III

Why Owners Underprice

Most of the businesses I look at are priced below what their customers would pay, and the reason is rarely the market. Owners carry prices for years out of loyalty to customers they have known for decades, out of fear that a single letter will trigger a bid, and because the price has simply never been tested. Costs rise every year. Labor, fuel, insurance and equipment all move. The price moves when someone remembers to ask, and the request is usually a few points, apologetic, and easy to refuse.

Gross margin tells you whether the customer values the work. Price realization tells you whether anyone has ever collected on it. A business whose customers stay year after year through every competitor's pitch is showing a propensity to pay that its pricing has never touched. That gap is one of the most common sources of value in the lower middle market, and it requires no capital, no new plant and no new customer.

Willing to Walk

A price increase only holds if the company is genuinely prepared to lose some of the accounts it applies to. That willingness has to be earned with data before the first letter goes out. It starts with cost to serve by account: the crew hours, drive time, equipment, supervision, rework and administrative load each customer actually consumes, set against what each one pays. Every time I have seen that analysis done honestly, a set of long-standing accounts turned out to be losing money once the true cost was counted. Usually they were the oldest relationships and the ones nobody wanted to discuss.

Those accounts are where the walk-away becomes real. If a customer leaves rather than pay a price that covers the work, the business loses revenue it was subsidizing and gets crews, trucks and supervision back to put on work that pays. The CEO who said the startup fee line had done that math. He was describing 2 outcomes he could live with, and the customer could hear it in his voice.

The rest of the book needs a different conversation, because most customers are not unprofitable. They are underpriced, and for them the increase is a correction that the service has already earned.

What It Is Worth

The arithmetic explains why lenders and capital partners pay close attention to pricing. Take a business with 40m USD of revenue and 5m USD of EBITDA. A 5% price increase that holds across the book, with no change in volume, adds roughly 2m USD of EBITDA, because the cost of doing the work does not change when the price does. That is a 40% increase in earnings. At a 7x multiple it is 14m USD of enterprise value, created without a new customer, a new truck or a dollar of capex.

Getting the same 2m USD from volume would take far more revenue, because every new account brings its own crews, fuel and equipment. Price is the only lever that falls almost entirely to the bottom line. It is also the lever owners pull least often, because it is the one that requires an uncomfortable conversation.

Writing the Letter

The mechanics matter as much as the number. The best increases I have seen started with segmentation, so that unprofitable accounts, underpriced accounts and fairly priced accounts each got a different ask instead of one flat percentage that is too much for some and too little for others. The reason given was the real one, stated plainly: labor, fleet, insurance, the cost of keeping trained crews on the customer's work. Nobody apologized, and nobody pretended the increase was something other than what it was.

Timing followed the contract. Increases landed at renewal with enough notice that the customer could plan for it, which makes the ask look like a professional business managing its costs and keeps it from reading as an ambush. The largest accounts heard it in person, from the CEO, before any letter arrived, because a customer who learns about a 30% increase from a form letter will treat it as an opening offer.

Service came first throughout. A price increase delivered in a quarter when on-time performance is slipping is an invitation to leave, so the operating side has to be performing before the commercial side asks for more. The safety record, the response times and the quality of the work are what the customer is paying for, and they are what make the startup fee credible.

The company also decided in advance what it would do if a customer said no: which accounts it would let go, which it would negotiate, and where the freed capacity would go. The CEO in that meeting was calm because that decision had already been made.

Every business that serves customers in the field carries a startup fee it has never charged. Most never need to send the invoice. They only need the customer to know it exists, and they need to price the work as if they mean it.

I am the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.