wire services

[lori042499]

In my quest to learn more about how the wire service model works, I have a few questions that some may be able to satisfy my inquiring mind, so here goes....

Where does the money come from to pay out big rebates for sending??? Does it come from the membership fees that everyone pays, the 7% on the sending that is supposedly slated for "marketing" or from the product/ad sales?


Now this is where I get so confused with WS...If they get membership from all and 7% on all received orders, why is it that they reward the sending shops is it to capture the most of the possible 7% on the recieving as they could send it out by another WS or a CC?

Now a third, what department is the most lucrative for WS?? The membership dept(this would include membership/7% of recieving), technology, ads or product???

I know that some of these questions are probably rudimentary to some..however, since owning my own shop I do realize how to run my business and I know how to make money with my flowers, but I am trying very hard to understand big business. I have found that the day to day running of a business is fascinating and I am learning so much by making every and all decisions that I want to know more about the businesses that I have blindly just dealt with all my life...I am now learning that in order to negotiate well you need to understand how other businesses make their money. Slowly learning and I can fully understand why so many florists out there are in business 20-25 years before they realize that they will never make money in this field....

 

[master J]

I thought about this too Lori, good question, I heard that some big senders get like $7 or more rebate on each order! So if they send a $29.99 total outgoing, they get $7 rebate from WS??!! How does the Ws make money on that? It must be all the membership fees and all other fees they throw out at ya!:hammer:

 

[lori042499]

I thought about this too Lori, good question, I heard that some big senders get like $7 or more rebate on each order! So if they send a $29.99 total outgoing, they get $7 rebate from WS??!! How does the Ws make money on that? It must be all the membership fees and all other fees they throw out at ya!:hammer:

Right because their portion of that 29.99 is only 2.09 so in essence they lose money on every order sent below 100.00 with a 7.00 rebate...Which makes me wonder why they would promise the rebates at all.

 

[theRKF]

In my quest to learn more about how the wire service model works, I have a few questions that some may be able to satisfy my inquiring mind, so here goes....

Where does the money come from to pay out big rebates for sending??? Does it come from the membership fees that everyone pays, the 7% on the sending that is supposedly slated for "marketing" or from the product/ad sales?


Now this is where I get so confused with WS...If they get membership from all and 7% on all received orders, why is it that they reward the sending shops is it to capture the most of the possible 7% on the recieving as they could send it out by another WS or a CC?

Now a third, what department is the most lucrative for WS?? The membership dept(this would include membership/7% of recieving), technology, ads or product???

I know that some of these questions are probably rudimentary to some..however, since owning my own shop I do realize how to run my business and I know how to make money with my flowers, but I am trying very hard to understand big business. I have found that the day to day running of a business is fascinating and I am learning so much by making every and all decisions that I want to know more about the businesses that I have blindly just dealt with all my life...I am now learning that in order to negotiate well you need to understand how other businesses make their money. Slowly learning and I can fully understand why so many florists out there are in business 20-25 years before they realize that they will never make money in this field....

1) The rebate money comes from the Advertising Budget. When a WS tells you they are spending $40 mil / yr on advertising a portion of that is spent to subsidize the advertising efforts of the sending florists. (Disclaimer: Our shop was a big sender B&M - and I didn't mind those rebates one bit! Used them to find and keep new customers. Right PrestonWay?)

2) They reward the senders because the WS needs to keep the fillers happy. Most florists join a WS to get orders. The biggest complaint a WS gets is: "I don't get enough orders." The first question a florist will ask when deciding which WS to drop is: "Which gives me the most business?" To keep the masses happy the WS needs to attract order flow. Senders provide orders to the WS who provides orders to the florist who pays their dues.

3) CHR and a few others review the WS financials more than I, but recollection is that membership (dues, mostly) is the most lucrative.

Hope that helps!

Ryan

 

[lori042499]

1) The rebate money comes from the Advertising Budget. When a WS tells you they are spending $40 mil / yr on advertising a portion of that is spent to subsidize the advertising efforts of the sending florists. (Disclaimer: Our shop was a big sender B&M - and I didn't mind those rebates one bit! Used them to find and keep new customers. Right PrestonWay?)

2) They reward the senders because the WS needs to keep the fillers happy. Most florists join a WS to get orders. The biggest complaint a WS gets is: "I don't get enough orders." The first question a florist will ask when deciding which WS to drop is: "Which gives me the most business?" To keep the masses happy the WS needs to attract order flow. Senders provide orders to the WS who provides orders to the florist who pays their dues.

3) CHR and a few others review the WS financials more than I, but recollection is that membership (dues, mostly) is the most lucrative.

Hope that helps!

Ryan

Thanks, Ryan it does help...and I am glad to say that it was along the lines of what I thought. You know how sometimes when you are a little fish in a little pond, you sometimes think you know alot, but then you join a big pond and you need to reevaluate what you thought you knew...This is what I am finding by hanging out here at flowerchat. I am constantly trying to find out if my thinking is flawed in some way and trying to correct it before I get too deep into just following the school of fish infront of me...

 

[bloomz]

Ryan is spot on. I once asked a wire service bigwig how they can afford to pay more than the 7% they make and he said - every 100 orders you send keeps at least 4 shops bills paid.

Most shops pay their wire bills by filling orders and without those - guess what?

The floral industry I read somewhere the other day is an example of the 80/20 rule - 20% of the shops do 80% of the business. (I actually would have guessed 90/10)

And I remember Mike Soenen saying that 35% of their florists were where the money was for them, 35% do pretty much - not much, and 35% what's left.

I too lack the mental ability to zoom out and see the big picture, so don't feel bad - I only know what others have taught me.

 

[lori042499]

Ryan is spot on. I once asked a wire service bigwig how they can afford to pay more than the 7% they make and he said - every 100 orders you send keeps at least 4 shops bills paid.

Most shops pay their wire bills by filling orders and without those - guess what?

The floral industry I read somewhere the other day is an example of the 80/20 rule - 20% of the shops do 80% of the business. (I actually would have guessed 90/10)

And I remember Mike Soenen saying that 35% of their florists were where the money was for them, 35% do pretty much - not much, and 35% what's left.

I too lack the mental ability to zoom out and see the big picture, so don't feel bad - I only know what others have taught me.

So they use the big senders to finance the fillers so that the fillers break even and don't leave them high and dry for payment...OK, I can understand that...it's a business strategy...I am new to the strategy thing..I am learning alot about strategy from my husband(he's a Dungeons and dragons gamer geek) So I bounce how things work in the flower world and he teaches me to see how it can work to my favor...

 

[goldfish]

Where does the money come from to pay out big rebates for sending??? Does it come from the membership fees that everyone pays, the 7% on the sending that is supposedly slated for "marketing" or from the product/ad sales?

The rebate program is financed by filling florists: (1) "reciprocity" fee paid by the filling florists and (2) their monthly membership are probably the major source.

(1) If your in-out ratio is >5:1, 4% "Reciprocity fee" kicks in; if my recollection is correct, the fee stays effective in any future amonths where the in-out ratio stays >3:1. In other words, heavily filling florists pay, not 7%, but 11% to the WS. For each $100 order, that's $4 more rip-off, which partly finances the rebate program.

(2) Let's say, some filling florist is paying $400 a month membership fee. If this shop is getting 30 orders incoming orders a month (one a day), this shop is actually paying a whopping $13.33 (=400/30) for each incoming order. Assuming the average order is $50, that's almost 27% comission.

Now this is where I get so confused with WS...If they get membership from all and 7% on all received orders, why is it that they reward the sending shops is it to capture the most of the possible 7% on the recieving as they could send it out by another WS or a CC?

Because of the competition between FTD and TF. Each WS wants more orders than the other.

 

[RC in Dayton and Cincinnati]

goldfish has it right.

Simply put, the filling florists pay for the rebates.

And, I'm sure all the OGers thank you.










RC

 

[Joe Mioux]

The rebate program is financed by filling florists: (1) "reciprocity" fee paid by the filling florists and (2) their monthly membership are probably the major source.

(1) If your in-out ratio is >5:1, 4% "Reciprocity fee" kicks in; if my recollection is correct, the fee stays effective in any future amonths where the in-out ratio stays >3:1. In other words, heavily filling florists pay, not 7%, but 11% to the WS. For each $100 order, that's $4 more rip-off, which partly finances the rebate program.

(2) Let's say, some filling florist is paying $400 a month membership fee. If this shop is getting 30 orders incoming orders a month (one a day), this shop is actually paying a whopping $13.33 (=400/30) for each incoming order. Assuming the average order is $50, that's almost 27% comission.



Because of the competition between FTD and TF. Each WS wants more orders than the other.

And low sending fees.....

I asked this of an AFS customer service rep way back in the early '90's.

Before Reciprocity, there were low sending fees. I think Reciprocity Fees were created by FTD. I maybe wrong.

I do remember being assessed both fees by FTD which in turn was another reason for me leave FTD. (Oh how I would love to turn this issue into a political debate on taxes, but I won't.)

The AFS CR flat out told me that low sending fees were in place to pay rebates.

Good post Goldfish!

Joe

 

[goldfish]

And low sending fees.....

AND, Mercury FTO and Dove "Orders received fee": $1.25/order...

In summary, here's what a heavily filling florist would pay to FTD/TF

- Clearing house fee, 7%
- Reciprocity fee, 4%
- Low-sending fee (FTD) or "Optional" Sending fee (TF), $19.95/mo
- FTO transmission fee (FTD) or "Orders received fee" (TF), $1.25/order

1) If you receive 100 orders x $50 per month,
the effective rate of WS fees would be (350+200+19.95+125)/5000 = 13.9%

2) If your receive 20 orders x $40 per month,
the rate would be (56+32+19.95+25)/800 = 16.6%

It's a total myth that we pay "only" 7% to WS for every incoming order we receive. For a filling florist, the real rate is actually somewhere around 14-15%.

So here's where the money typically goes when a filling florist receives a $50 incoming order.

$10.00 (20%) -> Sending florist
$ 7.50 (15%) -> WS (remember, not 7%)
$17.50 (35%) -> COGS
$ 7.50 -> Delivery

I didn't consider the labor here, because in a typical micro florist, the labor is a fixed expense.​

So after all those costs and fees, only $7.50 remains as your "profit" in this example. That's a profit margin of 15%. For a local order, we expect the margin to be >60%.

 

[Mark Anderson]

Hey Goldfish,

Thanks for the breakdown! I always wondered exactly how it shakes out.

With your numbers it looks like the wire service takes (on average) about 15% of every order. When you add that to the 20% that goes to the sender it would seem to mean that that the filling florist is discounting the typical incoming wire order about 35%.

Given that huge discount it surprises me how many shops - even ones that say they hate wire services and want an alternative - get irate if another florist tries to send an order directly (bypassing any wire service) and asks for a 10% - 20% discount. I hear all the time that asking for a "professional" or "florist to florist" discount on direct sends is like taking your life in your hands - you are likely to get yelled and cursed at.

There are different reasons I hear from the florists who don't like to discount. I respect the opinions but I don't always understand them. To me (and I admit I don't own a shop) it still seems better to fill an order for 80% than 65%.

The part that really makes me sad is that many shops - even those that don't like the wire services and say they want an alternative - seem almost angry at the shops that don't belong to a service and feel they have to punish them. The attitude sometimes seems to be "if you don't belong to wire service you don't get a discount" even though the direct order probably would probably end up being 15%-25% more profitable for them.

It seems like the ultimate victory for the wire services when they are able to get the florists themselves to enforce membership.

 

[lori042499]

Hey Goldfish,

Thanks for the breakdown! I always wondered exactly how it shakes out.

With your numbers it looks like the wire service takes (on average) about 15% of every order. When you add that to the 20% that goes to the sender it would seem to mean that that the filling florist is discounting the typical incoming wire order about 35%.

Given that huge discount it surprises me how many shops - even ones that say they hate wire services and want an alternative - get irate if another florist tries to send an order directly (bypassing any wire service) and asks for a 10% - 20% discount. I hear all the time that asking for a "professional" or "florist to florist" discount on direct sends is like taking your life in your hands - you are likely to get yelled and cursed at.

There are different reasons I hear from the florists who don't like to discount. I respect the opinions but I don't always understand them. To me (and I admit I don't own a shop) it still seems better to fill an order for 80% than 65%.

The part that really makes me sad is that many shops - even those that don't like the wire services and say they want an alternative - seem almost angry at the shops that don't belong to a service and feel they have to punish them. The attitude sometimes seems to be "if you don't belong to wire service you don't get a discount" even though the direct order probably would probably end up being 15%-25% more profitable for them.

It seems like the ultimate victory for the wire services when they are able to get the florists themselves to enforce membership.

You are right and you are wrong...The reason most shops will not discount a direct order is because of reciprocity. We pay big bucks to belong to a club to send and recieve orders. We do not have to take orders from the OGs whom we cannot send to nor any shop that will not take incoming orders. The second reason for shops to not accept direct orders is scum bags. We have no protection against charge backs on direct cc charges. We pay big bucks to have a middleman to handle disputes. All the risk is on the recieving florist, why should we also give a 20% discount, also. I hope this makes sense to you. By the way I do take direct orders from many florists, I look at them as a unique customer just like my web orders. I do give a discount if they ask, but only then and i will tell them I don't like it..I do not charge tax if they have charged tax on their end and I get their tax number just in case I get audited.

 

[bloomz]

Lori is right on about the reciprocity - and since I qualify as not giving discounts, but to clarify - no way I am anything close to "irate" or "angry" at them for not belonging to a wire service.

I do think it takes a bit of cheek tho to ask for a discount, and tho I don't punish them, I certainly don't reward them for saving already about 5 grand a year.

But I've never told one to fuk off yet. I just gently say "sorry we don't discount".

 

[Joe Mioux]

just remember the low sending fees and reciprocity may or may not always apply to every business AND every month.

Lori, good post re: some of the added legal benefits of WS membership.

Joe

 

[Rhonda]

Small Town America speaking here: Reciprocity doesn't work for lots of small mom & pops...............
In the past (so many years of experience here :spin )....we have called, merced, doved, so many orders out before our largest employer went kaputz. I believe I can count on one hand the actual return calls, merc orders, dove orders returned from any of those shops we sent to. I know of one in Brooklyn NY that having sent them orders each Valentine's, Easter, Mother's, Thanksgiving, and Christmas for over 12 years, returned ONE order to us. And I do know for a fact that they sent through the other shop in our town because the customer called me to complain about the other shop's flowers. And yes, I was both wire services at the time.
There have been many such as the above, repeatedly sent to a specific person or area - utilizing the same florist because sender was told the "flowers were beautiful".
I was never a real fan of the reciprocity arguement because of our situation.

 

[RC in Dayton and Cincinnati]

AND, Mercury FTO and Dove "Orders received fee": $1.25/order...

In summary, here's what a heavily filling florist would pay to FTD/TF

- Clearing house fee, 7%
- Reciprocity fee, 4%
- Low-sending fee (FTD) or "Optional" Sending fee (TF), $19.95/mo
- FTO transmission fee (FTD) or "Orders received fee" (TF), $1.25/order

1) If you receive 100 orders x $50 per month,
the effective rate of WS fees would be (350+200+19.95+125)/5000 = 13.9%

2) If your receive 20 orders x $40 per month,
the rate would be (56+32+19.95+25)/800 = 16.6%

It's a total myth that we pay "only" 7% to WS for every incoming order we receive. For a filling florist, the real rate is actually somewhere around 14-15%.

So here's where the money typically goes when a filling florist receives a $50 incoming order.

$10.00 (20%) -> Sending florist
$ 7.50 (15%) -> WS (remember, not 7%)
$17.50 (35%) -> COGS
$ 7.50 -> Delivery

I didn't consider the labor here, because in a typical micro florist, the labor is a fixed expense.​

So after all those costs and fees, only $7.50 remains as your "profit" in this example. That's a profit margin of 15%. For a local order, we expect the margin to be >60%.

goldfish,

Why are you happy with a 15% profit margin on incoming wire orders, and expect a 60% margin on local orders?

and how low of a profit margin would you be willing to accept on an incoming wire order before you decided it was no longer worth it?


RC

 

[goldfish]

Given that huge discount it surprises me how many shops - even ones that say they hate wire services and want an alternative - get irate if another florist tries to send an order directly (bypassing any wire service) and asks for a 10% - 20% discount. I hear all the time that asking for a "professional" or "florist to florist" discount on direct sends is like taking your life in your hands - you are likely to get yelled and cursed at.

Strange. We always give 20% discounts if they ask. Win-win situation, as far as I'm concerned.

 

[RC in Dayton and Cincinnati]

as a follow up, I think it's dangerous to look at percentages when certain segments of the business are required to pay for fixed expenses, while other segments are not.

Using an exaggerated example to make my point, suppose local business is expected to cover fixed expenses fully, while incoming wire orders (incremental sales) are only expected to contribute minimally. If you had 11 orders for the day, 10 were $50 incoming wire orders and one was a local order for a dozen roses, how much would you have to charge for that dozen roses, and with what margin?

This example may not be as far fetched as many would like to believe. CHR posted in another thread 3/2 of all florists with a payroll have sales of about $120,000. Most of these florists are members of at least two, and maybe three wire services. If they are getting a total of 6 incoming wire orders a day (2 from each service) for an average of $60 each, they have $131,000 in revenue a year from incoming wire orders alone. That doesn't leave much in the way of local business. What kind of margin does their local business have to pay?


RC

 

[goldfish]

Why are you happy with a 15% profit margin on incoming wire orders, and expect a 60% margin on local orders?

I'm not sure I understood your question correctly, but let me try to answer anyway.

First, I am not happy with the low margin on incoming orders at all. But I will keep it for the time being. Here's why.

The reality of a micro shop like ours is that we always have excess production capacity; we have only one designer working and her hours cannot be reduced. This is a common problem for a micro florist.

If you have excess production capacity, any order with even the slimmest margin is better than nothing. In other words, even if I eliminated all the discount orders, I would still have to pay the same labor cost.

I also note here that the situation is different for a florist with multiple designers. In that case, eliminating discount orders as well as the associated labor should increase the bottom line.

Another reason that I would stick with incoming orders is to gain a little more flower purchasing power. The big problem of a micro florist is that the sales fluctuate too much, which leads to a higher flower spoilage rate, resulting in even lower margin.

Discount orders at least help stabilize the sales fluctuation. For the same reason, especially during the summer, we do a lot of local discount sales too. The idea is to keep the volume as steady as possible.

By the way, we shut off merc/dove during holiday seasons. Once the number of incoming orders exceeds our production capacity, all the "benefits" I mentioned above disappear. There's a quality problem in hiring temp workers, too. I am much more into having steady sales year-round, as opposed to having a huge holiday sales.

As to the >60% margin on local orders. To keep eye on WS sales, I've set up our accounting, as if we had two "sales departments"; one for local sales and the other for WS sales. I do the two accounting separately, thus two numbers.

This way, I can keep track of how each of virtual "department" is doing. I can make sure that "WS department" at least isn't losing money.

For the last two years, local sales have been increasing with the rate of 20-30%; the wire-ins sales have been decreasing. In the first year of operation, 50% of our sales was wire-ins (we lost tons of money as the result). Right now (2nd yr), it's about 25%. Next year, I hope it's going to be 10-15%. Once it becomes less than 10%, I will probably get rid of it.