It's a Race to the Bottom - ( Part 1, Auto-clubs and Contracts )
By Doug Nelson

The towing industry in Ontario is in a state of chaos and little is going to change until we collectively assume responsibility for the mess it is in and start resisting those that have far too great an influence over us. This industry is slowly being destroyed by the auto-clubs, indifferent police department policies, the lack of interest from the government and our own stupidity and unless we fight back we are doomed. It is time to work smarter not harder! It is time for our voices to be heard!

Let’s take a good look at one of the most serious issues being revenue and the ability to sustain the business! Back many years ago the goal from a tow operator’s point of view in taking on an auto-club as a service provider was to simply add some profitable back-hauls to their existing work load. For obvious reasons there were benefits to this type of situation. The auto-club gets the benefit of a lower rate to service their members and the service contractor gets the benefit of additional income at little extra cost. This type of situation worked to everyone’s benefit many years ago after all, 75 to 90 percent of ones work was priced at the retail level. The customers were yours because you advertised for them; you provided superior service to satisfy them and you treated them fairly to keep them as a customer. The objective was to sustain a good reputation and repeat business. Auto clubs such as CAA or the OML used to be the few options available to the Ontario drivers. But these days a multitude of other businesses are offering roadside assistance plans including insurance companies, car makers, oil companies, cell phone service providers and even credit card issuers. It’s obvious to me that the average motorist is simply not your customer anymore! The majority of your old customers are likely members of one of the multitude of auto-clubs. Don’t believe me! Go ask them!

Again, let me take you back 15 – 20 years when most tow companies enjoyed the 75 to 90 percent ratio of retail sales verses auto-club sales. The profits in this industry were never anything to write home about but they did provide a bit of profit and a reasonable living for most. Pricing back then ranged from $40.00 to $65.00 retail for around a ten kilometer tow to the local dealership and the cost of a modern tow truck and the related expenses were much lower; MUCH, MUCH lower. In 1996 at my previous business we charged $65.00 for a local dealership tow during business hours and our customers were happy. My how things have changed!

So what’s changed? Now what we have today is the sales mix (retail verses auto-club) that is almost the exact opposite for most tow companies. It can be said that in many cases the 75 – 90 percent is now in the hands of the auto-clubs which in many cases reflects lower pricing than 20 years ago. We won’t even go into the increase in the price of towing equipment or the expenses related to the cost of a tow call such as fuel and labour. There is absolutely no doubt in my mind that the rates seldom cover the expenses or provide for a profit. I warned everyone about this back in the 90’s when the auto-clubs took over the warranty towing for the car manufacturers and unfortunately for you I was right. I even got sued for trying to stop it!

So what do we do now!

First, wake-up, get-up and smarten-up!!!! Get the lead out and go to your accountants and have them calculate the true cost of a tow call based on your cost of sales, your expenses and cash flow requirements. I have always said pricing must be a calculation of one’s own overheads and expenses and not that of someone else (the auto-club). Only once you and your accountant have clearly defined your actual cost and cash flow requirements and the profit you require to cover your obligations will you then and only then have a clear picture of where your rates need to be. I actually wrote a small computer program to help me calculate the cost. Letting your competition, an auto-club or anyone else decide on the rates you will be paid and the terms of payment is a recipe for disaster. If you are going to let an outside entity make these decisions for you then my advice to you is get the hell out of the business and go work for someone else. At least that way you will collect a pay cheque each week from the person making the decisions for you.

Now, let’s move on to even more of the problems “towing for the wrong rates” will cause. I truly believe desperate people will resort to desperate measures to earn enough money to eat and this is where it gets tricky. Working for inadequate rates, which are controlled by an auto-club because you neglected to negotiate the rates you need, will put you behind the eight ball. So, out of the 20 or 25 percent of your remaining calls “the majority of which are likely your remaining customers and police calls” you must screw your customer to make up for your losses. This in my opinion is a travesty; this is the RACE TO THE BOTTOM! I know this is happening because I hear the complaints on a very regular basis from consumers, the police, the insurance companies and even other honest hard working tow operators.

Think about this! You accept an auto-club call to tow a vehicle from point “A” to point “B” and the charge at the auto-club rate is approximately $30.00. Then you get a police call to tow the same vehicle to the same location under the exact same conditions and the invoice is $350.00 dollars or even $1,500.00 dollars. Make no mistake about it, I do believe police calls are worth a premium rate BUT it must be reasonable, consistent and explainable. The question is WHY is this happening? I believe the answer is pretty simple, we are being underpaid for the auto-club calls which creates a desperate situation so we are trying to make up for it with the balance of cash calls we do. We are truly alienating our customers, destroying the reputation of the industry and sending our customers to the auto clubs in droves. Can you blame them? I have seen hundreds upon hundreds of invoices. In many of these invoices I see incompetence, greed, desperation and fraud and some of the collection methods are tantamount to extortion. Some make me mad, some make me sad and some make me sick. When will we ever wake-up! Why are we allowing people to do this to us? Why are we doing this to ourselves?

Take a moment and look around and consider all of the tow companies you knew of in the past. Tow companies who were tied to auto-club towing. Ask yourself how many are still in business? How many are successful, truly successful? Are they gone? Did they close down? Why did they close down? Now take a look around at the tow companies that DO NOT sign service contracts with auto-clubs and you will likely find a successful tow company. I wonder why this is!

Auto-clubs, Service Contracts and Pricing

Signing a contract with anyone is a serious commitment that should not be taken lightly. Signing a contract without negotiating the right price (the price you need to sustain a profit) is plain stupid. Many auto-clubs will simply tell you this is the rate we pay so take it or leave it. This will commit you to rates that are seldom consistent to your needs and will include some serious contractual obligations that cannot be ignored. Signing a contract like this without the advice of a lawyer and an accountant when it’s your money and your livelihood at stake is suicidal.
What is it that would motivate anyone to sign a road service contract in the first place? Is it necessary to grow a business? Is it to keep the competition at bay? Does it bring in new business you would not normally have had? Is it the prestige of being the area service provider? Is it sustainable? Is it profitable? Does it expose you to liabilities you wouldn’t otherwise be exposed too? I expect in most cases it is the need for business and keeping it away from your competition, BUT At what cost?
Remember most auto-club contracts carry essentially the same objectives but many will be worded slightly different. I recently forwarded an auto-club contract to a very good lawyer to review and his conclusions were very similar to mine. I will lay out a few hot spots for you to watch for:

1. There is no guarantee of any work and no guarantee of revenue
2. There may be an obligation to invest and/or increase expenses
3. It is likely a one sided contract in favour of the party with the perceived superior bargaining position (the auto-club)
4. It may require you to ask each customer if they are a member of the said auto-club and if so you are stuck with the auto-club rates
5. Contracts are generally "non exclusive" meaning that the auto-club can sign every tow truck operator in your area or even in the province to the same agreement
6. You may be terminated on 1 day's notice for a "material breach" (i.e. failure to maintain "minimum standards")
7. The auto-club customers are required to be serviced first, even if a full paying or regular customer is waiting
8. The standard of service is governed by an auto-club employee (likely a district rep) and customer opinions and is unrelated to the price paid for the service so in the event of a dispute they get the last word.
9. The service provider agrees to insure and indemnify the auto-club for many forms of liability
10. Arguably, the auto-club retains the customer's membership or service fee and the service provider takes all the responsibilities and liability without any guarantee of business
11. The service provider can't sell his or her business without disclosing the terms to the auto-club
12. The contract requires the service provider to provide among other services:

A	"properly" trained staff
B	all required equipment
C	24/7 phone service
D	accounting reports
E	customer relations
F	best efforts to respond promptly to calls within an estimated time of arrival
G	insurance
H	complaints resolution and contractual indemnity under which you have little control

So what to do!

The very first thing you should do (if you haven’t already done it) is to meet with your accountant and calculate the right price, one you can live with and one you can support your family with. Then, prepare a properly drafted budget using the historical data you have accumulated and calculate the results using the right price. Now that you know your pricing requirements you can negotiate your contract from a position of strength to make sure there is something in it for you. Before you go any further go visit some tow companies that tow for the subject auto club and find out how they are treated. You should even contact some that terminated a contract with the auto club in question and ask them about their experiences. This will give you good insight into what to expect.

Here’s the next warning, take a copy of the contract to a lawyer to read and explain to you your rights and obligations very, very clearly and make damn sure you understand your obligations. If there are clauses in the contract that you don’t like or want changed have your lawyer negotiate the contract for you. If a contract is not negotiable then you should consider this as a serious warning sign. If the pricing is inadequate based on your needs don’t sign it, negotiate for the right price and if you can’t get the contract written in a way that is clearly acceptable and profitable to you then walk away from it. It may be the best walk you ever took. There is no point in signing a contract with anyone if it benefits one party only. Use caution and be prepared to reap what you sew and the consequences thereof.

In conclusion, a contract is a joint venture, a partnership and it commits both parties to certain responsibilities, service requirements and many legal obligations but most importantly there must be quantifiable benefits to both parties. Auto-clubs must stop using strong arm tactics to keep the rates artificially low. Fair is fair and it is time for the industry to stand up and be counted. It is time for you to stand up and be counted. In my opinion the industry cannot continue to work for sub-standard rates and then turn around and abuse the rest of their customers with rates that are undeniably atrocious.

On the human side of things remember the towing industry is hard enough on family life to begin with but nothing will destroy a family faster than money trouble. Ask yourself what is more important “getting the next tow call at a below-cost rate” or “a happy family”.