Transcription
Before you spend a single dollar on your first vending machine, you need to watch this video. I've helped hundreds of people start successful vending businesses, but I've also seen countless others fail because they didn't understand these crucial pitfalls. I made these same mistakes when I started, buying my first machine off Craigslist, thinking I got a steal, only to watch it break down six months later. Today, I'm going to share the five biggest mistakes that kill vending machine businesses before they even get started. My name is Mike Hoffman, and this is what I wish people would have told me before I got started.
This is mistake number one: buying the wrong machine. Let me be clear: these are not the type of vending machines we like to place. My first ever vending machine I bought was off of Craigslist because I wanted to save $2,000. Well, guess what? When I did that, that machine actually broke down six months later. Used machines are money pits because these things take a beating, and you don't know the history of the machine you're buying off of Craigslist. Similar to a used car, when you buy a new car, you know exactly how many miles the gas, how the engine's operating, because it's brand new. Same thing with a vending machine; if you buy a used machine, you don't know if they've been maintaining it every year, keeping the coolant up to date, or any of the items to keep that thing a well-oiled machine, literally. When you get a used machine, there are so many hidden costs you don't know about. If you have to replace the refrigeration components of this thing, you're going to be sucked into thousands of dollars of this money pit that you could avoid by buying a brand new machine with a 5-year warranty. One of my students didn't listen to this advice and went down the route of buying a used machine to save a buck. Well, guess what? Now his garage has turned into a machine mechanic warehouse with a ton of parts because he's had to update these used machines with a ton of hidden sunken costs. If he would have just listened to what we said, of buying a new machine, he would have been under warranty and free and clear. The reason I'm so big on smart machines and not these machines is the product flexibility. These machines, I'm limited to what fits in the motors of the machine. Think about it: I can't put a 12 oz can that only holds 20 oz Gatorades; I can't put Lunchables; I can't put salads or sandwiches like we can with the modern smart machines that we recommend, which ultimately, these machines, you're capped at the amount of money you can make each month. So, not only do the used machines end up being a maintenance nightmare, that also limits you to the amount of money you can make. One thing we prioritize in our community is warranties and all about customer service, so you'll have direct access to every machine manufacturer and a representative for vending preneurs.
Mistake number two: choosing the wrong location. When you pick a location, you always try to quantify if it's a good location or not. So we started with an apartment complex that had over 700 units, and we thought it was going to be a slam dunk location. Little did we know, because the apartment complex was garden style with 17 buildings across the campus, it did not have the foot traffic we were looking for. This 700-unit property had over a thousand residents in it, and we thought if we put this machine in the clubhouse, the foot traffic would crush. Little did we know, all of the mail and Amazon packages these residents would order got shipped directly to their door, so they never came to the clubhouse. In comparison, this machine and this apartment complex crushes it because it's only one main building where people come in and out the main entrance at all times. There's not separate buildings like a garden-style apartment; it's all through the central entrance. And with this location, it's all about the centralization; we got the pool table, the printers, the TVs—everyone wants to come hang out here, and also when they do, they come see this machine to grab all of their items. Here are a couple of red flags you should look for to see if it's the wrong location: number one, how many buildings is the apartment complex have? Is it one main building with 700 units, or is it 700 units across 16 buildings? Number two, is it an office where most of the employees work from home? They don't come in to buy snacks because they're literally working from home all day. And number three, is the parking lot always empty? If the parking lot's empty, then no one's there, and it's going to have no foot traffic to buy the snacks and drinks that you need to hit your revenue numbers. The other mistake I see is people always lead with revenue share, assuming the decision-makers want revenue—wrong. Decision-makers want an amenity that's going to make their residents or employees happy. Usually, instead of revenue share, their main concern is you keeping that machine stocked and maintaining it in a working manner. Here are three steps on how you can evaluate a property's vending potential: number one, how often are people there? Is it an apartment where people live there and are there 24/7? Is it a business that has manufacturing shifts overnight, and so people are there through the night working? Or is it also places where many of the employees work from home or don't show up on Monday or Friday?
Mistake number three: misunderstanding the financials. Now we're going to go over a real breakdown of revenue versus the actual expenses when talking about vending machines in revenue. It's also really important to factor in all of the expenses. When we talk about a revenue of a machine, let's do simple math here: a machine does $5,000 a month. Obviously, that Celsius that sold for $4 costs you something, so let's factor in the cost of goods sold. Typically, cost of goods sold is 35%, so when we look at that $5,000 a month, the 50%, $2,500, let's just say $1,800 in cost of goods sold. The other thing to factor in here is also if you're doing a revenue share with a property; the industry average of a revenue share is 5%. So if we're doing $5,000, that's going to be $250 revenue share. Okay, we got the $1,800 cost of goods, and then to take it another step further, we typically got around 8 to 9% in merchant services in transaction fees. So if we're looking at $5,000, let's do simple math and say 10%; we got $500 in machine SaaS fees and merchant. And then the next step is, will we hire someone or not hire someone? A lot of people, like me, love to try to make it passive, so we hire someone. That machine probably going to require about two hours a week of effort; let's say it's 30 minutes every other day or 45 minutes twice a week. But at that two hours, including inventory management, let's say they're making $25 an hour; that's $50 a week, so we're going to say $200 in labor. And so when we factor the pure expenses associated with that machine, how much do we profit? Well, pretty simple here: we got 1,800, 250, let's just say 250, 3, 3,50, 3,000, and 3,250. So you're profiting right around, let's say $2,000, let's just say $1,800, because of the revenue share—need a calculator—but that's the true breakdown of financials associated with that math. So some of the hidden expenses that people really don't realize and factor in are going to be the things like the revenue share right here, the SaaS and merchant fees, and then the labor. If folks don't want to hire and make it passive like I do, they're going to want to stock the machines themselves. You can bang this out. If folks don't want to do a revenue share like I always talk about, lead with an amenity, revenue share second; you can bang this out, and then you're, you're sitting pretty with some of those margins when it comes to profitability and getting to a point that you would want with that revenue stream. When thinking about the vending machines and if it's really passive income, the thing you got to keep in mind is you got to build the systems to make it passive. Where I see people fail over and over again is right here: they do not want to hire people because they want to pocket those margins, or they love to micromanage folks, and then they are actually the bottleneck of the route. And as a result, they can't get out of the business; they're so far in the business they can't get out; they don't see the forest from the trees. And as a result, their route is not passive at all, where with me, it's all about systemizing things so you can figure out what you can delegate, what you can eliminate, and ultimately what that route needs to run on its own without you being in the business.
Now we're going to dive into the truth behind the margins. When we look at margins, we like to look at a couple of different things: one is, is it something that's essential that they're willing to pay for? And then also, what type of product is it? So when we talk about essential items, like think about when you're in a hotel and you're looking at those items that you need on a business trip that you forgot at home. An example of that could literally be phone chargers. When you need a phone charger and you're on a work trip, do you really care if it's $20 versus $15? No, you want that phone charged yesterday. The next thing to think about when we're talking about essentials is drinks versus snacks. Okay, this is going to be more common in the vending space. When we look at margins with drinks, the reason we're so bullish on drinks obviously is because of the shelf life being way longer than a bag of chips or a salad, but also because of the margins. You can get away with charging 2 1/2 to 4X, even sometimes 5 or 6X what you bought that for. A lot of times you'll see SmartWaters at a hotel or an apartment complex that are $4-$4.50, and those things you can get at Walmart or VendHub for 75 cents. Okay, when we talk about snacks and fresh food, typically those margins are going to be closer to 2 to 2 1/2X. All right, if it's a bigger bag of something, like a big bag of chips or even a big bag of candy, like a movie theater-size bag, you know, instead of the the bag of trolleys that's small, you get the bigger bag, you can charge more. A simple trick to that is if it weighs more, you can charge more. So we're big into the bigger bags because we traditionally don't use vending machines with motors; we just have these smart machines and micromarkets where just shelf space—you just hang it up. So we like to do the bigger bags and really push that revenue value with our margins because it's just going to make us more profitable with higher revenue. The great thing about vending routes, when we talk about profitability, when we talk about margins and how much money you actually can make, is going to be how well you keep track of all of your expenses. Because if you think about all of the deductions related to a vending route, you can really have good record-keeping and good books with an accountant at the end of the year when it comes to filing your taxes. A great example of this is we've constantly scaled our route year over year with more locations. Well, guess what? When we buy new locations or when we get new locations, we get new machines. Those machines can go through an accelerated depreciation just like some other asset. And so for us, that accelerated depreciation alongside all the record-keeping of all of our expenses, the cost of goods, all of the mileage, all of the cars, anything associated to running that business, now we have deductions to really, with our record-keeping, show those deductions to make ourselves very healthy when it comes to a tax record-keeping perspective.
Mistake number four: wrong product selection. I had a $1,000 loss over my time with a vending route because I stocked the wrong products. You want to know why? When I stocked my first machines, I waited months and months and months to change out products because I always thought, "Oh, they just need time to come by the machines, see the products, and gravitate towards what we had in those machines." Boy, was I wrong. I didn't understand you need to tailor your products to your demographics, and this is ultimately where you can 10X your sales by doubling down on what works. One thing people don't understand is not all premium products create premium profits. Let me explain: you look at this Rockstar versus a ZOA. We work with a roofing company where we have a bunch of roofers show up to a job site or show up to a warehouse before they go to the job site. And at the warehouse, we have a micromarket. Well, these roofers love the bigger energy drinks that are 16 oz or bigger, like the Rockstars and the Monsters. They don't want the 12 oz healthy energy drink; they want to be all jacked up while they're on that roof for 10 hours a day. This is important because I would always think, "Why don't I want anything with any sugar in it? So I'm going to drink the ZOA." Well, guess what? These aren't for me; this is for the roofers, and they ultimately want the cheaper option, which is the cheaper Rockstar. But because they sell so much at the roofing company, we actually have higher profits with this cheaper product than the premium one. Ultimately, with the Rockstar and the ZOA, you're trying to understand your demographic, and that's where I think it's huge. You look at these protein bars that literally have 22 grams of protein but only 2 grams of sugar versus your Snickers, which is basically all sugar. Well, these bars, these protein bars with 20 grams of protein and only two grams of sugar, they crush it at our gym, but the Snickers we don't even put in the gym because when people go to the gym, they're not buying Snickers out of our vending machines; they're buying the protein shakes and the protein bars. The thing that's crazy about vending machines and micromarkets is the psychology of impulse purchases. Think about it: when I was in an airport, what got me into vending was because I realized when I went to buy a bottle of water out of that vending machine, I paid $3 for a bottle of water that I knew cost less than 20 cents at Costco. Literally, this Arrowhead bottle of water that we put in our machines costs us 17 cents, and we can sell these for $1.50 or two bucks. And when people want a bottle of water, they're going to impulse buy that water no matter what it costs because they're thirsty. The most profitable product categories that we see are obviously waters with those high margins—a 17-cent water you can sell for two bucks—but also things that you don't even think about getting at a smart vending machine or a micromarket. Think about that DayQuil or that NyQuil, the four-pack of ibuprofen when you're hung over at the hotel and you just need something. You can literally buy that ibuprofen for $6, and it'll cost us 50 cents on the cost of goods side. Those margins are wild because, at the end of the day, it's that impulse buy, whether you're thirsty with the water or you're sick or hung over and you need that ibuprofen. The other thing to think about with inventory is when it weighs more, you can charge way more, and that is where we learn some of our best lessons. Like think about these Pop-Tarts: we used to have the little two packs of s'mores that we could charge maybe 75 cents for, and sure they cost us 25 cents, so we were getting a 2X margin, but now we can charge these eight packs for $3-$4.50, and that they might only cost us a dollar, and people will buy them because ultimately there's more opportunity for them to have eight versus one. Same thing with these Skittles gummies bags: we got rid of the normal Skittles candy because these people, they'll literally pay $7 for a Skittles gummies bag just because it literally weighs 4X more than a normal Skittles candy bag that people are used to. One of the things we love to do is ultimately A/B test products, just like if you're running an ad and trying to figure out or sending out an email campaign, which email is getting the best result responses. We literally do the same thing with our vending machines. Often times, we'll put two to three protein shake flavors right next to each other and see which shakes ultimately sell and then double down on what's working. An example of this is Muscle Milk: we'll put Muscle Milk next to Fairlife or Core Power, and a lot of times that Muscle Milk will sell faster, so we'll actually double down on that Muscle Milk and even add more rows of that just because we love to double down on what's selling.
Mistake number five: trying to do everything alone. The lone wolf approach of trying to do everything yourself always fails because you're not surrounding yourself by people that have been there and went through those potholes that you're currently headed to. This is ultimately why I started the coaching community because if you can help people avoid the potholes, you can go from A to Z 3X quicker. And so for me, when I got into vending, it was very imperative for me to find a mentor that was two to three steps ahead of me so I could learn the journey while also taking advantage of their mistakes without needing to go through those same mistakes myself. At the end of the day, mentorship is all about getting you to think bigger and get to places quicker because now you're being held to a whole another standard of accountability that you would never have being by yourself. This is why it's so important to find those people that are going to make you and challenge you to think bigger than just what you're doing right now. When I got into this in 2018, I was thinking about one or two vending machines because it was a side hustle that would help us pay for our nanny once we found out our wife was pregnant. Fast forward, and now you see the future of unattended retail being a $40 billion industry in the next two years. I would have never thought of that when I was looking at my one vending machine that was doing a thousand bucks a month. At the end of the day, what got me to think bigger was finding and surrounding myself with mentors in a community of like-minded peers that held me accountable to ultimately challenge and get to places bigger and faster than I would have ever gotten. I was too stubborn when I got started; I wanted to stock the machines; I wanted to go to Costco and get all of the product; I literally didn't even want to buy this warehouse because I thought we could just keep everything in our garage. 'Cause I was cheap and was always looking at the margins, when in reality what was holding me back was I wasn't investing in these things that ultimately accelerated the growth to get where we needed to go. And that's the whole idea about thinking bigger. Some of the most common scaling mistakes I see with our vending preneurs and operators out there is they love to do things themselves; they do not quantify the value of their time; they're doing $20-an-hour tasks by stocking a machine when they should be doing the $100-an-hour tasks of closing new locations because ultimately when they get new locations, they're able to scale that much quicker. Networking really matters in this business because you can get places a lot faster as a whole, and this is why I'm so passionate about our venpreneur community because we can get places way quicker on the shoulders of others than we can by ourselves. And ultimately, that is like anything in life: the community you're around is ultimately your network, and your network is your net worth. The other thing of being in a community is you can learn their mistakes and ultimately go past and miss the roadblocks that they already went through, and that is where the huge value is: others' mistakes are ultimately going to accelerate you faster by avoiding those same mistakes. The biggest and most important part of you scaling your business is finding the right teammates to get you from good to great. And those teammates you need to find, looking at character first, skill set second. You can teach anyone that applies to one of your job ads to stock a machine, but you can't teach anyone the power of integrity and having high-quality character, and those are the things as you surround yourself with the right teammates. You need a lot of Tom Bradys with skill sets and the right character, and not just a quarterback. And then once you get that right team in place, that's when the systems and processes will ultimately help you go that much faster because literally it's plug-and-play, and it helps you.
Focus on the business, and not being trapped being in the business.
Look, I'm sharing all of this because I genuinely care about your success. I was once in your shoes, making these exact same mistakes and learning these lessons the hard way. But the good news is you don't have to.
I created VenPreneurs, a community where we help people avoid these costly mistakes and build successful vending machine businesses the right way. Inside, you'll get access to our proven systems, location-finding teams, and a community of operators that are actively building successful vending machine businesses.
If you're serious about starting a vending machine business and want to do it the right way, click the link in the description to book a call with our team. We'll show you exactly how you can build a profitable vending machine business while avoiding all of these common pitfalls. The opportunity in this space is massive right now, but only if you do it right. Don't make the same mistakes I did. Let us help you build this the right way from day one.
Thank you for watching. Mr. Passive signing off.