I ride both sides of this fence....
I started out leasing all of my CPE in March 2004 and for the next 24
months did more leases when we needed more CPE, buying 100 at a time.
We reached a point where it looked like it didn't make a lot of sense to
continue the leasing. The rates were getting a little ridiculous and
the credit report looked terrible because the leases were with so many
different companies. The main benefit of leasing is that you can
spread out your "growth penalty" (the up front loss when adding a new
customer) and offer more competitive installation plans. The catch is
that you have the interest tacked on top and it costs you more money in
the long run.
I did several things after we stopped leasing to maintain our cash flow
and growth. The first was to raise install prices to $250 from $150.
This was enough to cash flow all costs of installation, but we were
losing a few customers to competitors because of the higher install
rate. To help counteract that, we offered $100 off installation (and a
free month of service) for customers who paid for the installation and
six months of service up front. This amounted to a $150 discount for
folks who signed up for a $50/month plan, and although we took that hit
over the next six months, we had the money to cover installation costs
up front. This method worked because we had enough established cash
flow to cover other expenses during that first six months - it would not
work for a startup very well.
What really got us over the hump was the purchase of 375 used CPE radios
from an operator who switched away from Tranzeo. Getting a bunch of
radios at 1/3 the cost of new ones was huge. We ran some installation
specials at $150 and then settled in at $200 as being the optimal
installation charge for our area - balancing the need for growth with
the need for cash flow up front.
Another item that helped - after two years of pretty rapid expansion, we
have not expanded geographically and have focused on adding more high
capacity 5ghz gear on existing locations. By "taking a breath" we have
been able to fill in a lot of our existing access points that were
relatively sparse and migrate heavier users to 5ghz radios.
This month, we paid off the first of our leases after three years, and
every two months or so, we will lose $500-$1000 a month in expenses as
the leases drop off. With our current rate structure and the cash flow
of our customer base, we can buy radios out of cash flow and still
maintain a nice growth rate.
Leasing has its uses, but in my experience there is a point where it
makes sense to grow out of cash flow. I'm glad that it is an available
tool.
Matt Larsen
Vistabeam.com
Travis Johnson wrote:
Mac,
The big thing everyone forgets about the leases... you can buy in much
higher quantities, thus cancelling out all the interest.
We now buy CPE 250 at a time. So, even after 3 years of interest, I am
paying the same as the guy buying them 10 at a time. :)
Travis
Microserv
Mac Dearman wrote:
I guess my thoughts are - -well - - my own. I did one lease deal
years ago
and have never been so proud to finally get it paid off. We always
pay for
our CPE as we order them. I could be wrong about all of this, but I like
being debt free and yes we suffer cash flow problems from time to
time, but
we have never been to a point that we couldn't buy the CPE we needed.
One of the bad things about the lease deal is not just interest, but
you
can't pay them off early and save any interest if you choose to do so.
Mac Dearman
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