How Dial A Nerd Managed To Dial Up Profits

How Dial A Nerd Managed To Dial Up Profits


Vital stats

  • Players: Aaron Thornton and Colin Thornton
  • Company: Dial a Nerd
  • EST: 1998
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What is success?

It’s a question that the founders of Dial a Nerd, brothers Colin and Aaron Thornton, have often thought about and debated with their fellow directors, Roberto Caprio and Phil Case. Is it massive top-line growth? Check.

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Growing from one retail store in Joburg to 14 nationwide, with another 26 on the cards? Check. Drawing the attention of a large ISP who wants to acquire you, and then signing a three-year structured buy-out deal? Check.

By 2008 it seemed like nothing could go wrong, and the brothers would be in their 30s and retired by 2011. And then the wheels fell off.

“In hindsight, the writing was on the wall,” says Colin.

“At the time, we felt like we were flying. We were signing expensive leases, chasing top-line growth and focusing on getting bigger and bigger and bigger. We were no longer just Dial a Nerd either. A few years into the business we formed Nerdworks as a holding company for Dial a Nerd and Network Nerds. We had home, software development and website divisions. We were doing a lot — and fast.”

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What they didn’t see was how the buy-out would negatively impact their business, the effects of a global recession on the horizon, and how the home IT market was about to radically shift.

Growing pains


The ISP’s interest and the buy-out deal just accelerated Dial a Nerd’s growth, which meant 100% of Aaron and Colin’s focus was on the top line, instead of paying careful attention to the market. Before long, the cracks started to show.

“It was a perfect storm,” says Aaron. “We were chasing turnover growth without properly considering what it was costing us, or if there was a smarter way to be making better margins and higher profits. We were blinded by the beautiful retail stores we were opening and the brag factor of the growth we were experiencing.” It soon became apparent that there were some fundamental flaws in the buy-out deal.

“The ISP that we’d signed the deal with was aggressively gaining market share, and wanted to partner with a support company. They also wanted to break into the SME space. They saw us as the ideal partner for this. One of their goals was for us to grow to 40 branches nationwide. We were all for it, and used their cash for aggressive expansion,” explains Colin.

Unfortunately, the reality of the deal was quite different to how it looked on paper.

“We’ve learnt that in a successful partnership, 1 + 1 = 3,” says Aaron. “Then it’s worth it, and you have real, sustainable growth that everyone benefits from. This just wasn’t the case for us. The synergy wasn’t right.”

“We all got carried away with the value of our organisation, and when we joined the ISP, we didn’t do enough homework on the market, what they were purchasing, where the gaps lay, and who our competitors in the space were,” adds Colin. As it turned out, a lot of those competitors were actually resellers for the ISP.

”By marketing ourselves to their end-users we would’ve alienated the resellers who, as you can imagine, weren’t happy. Once they got wind of our plan they threatened to stop selling the ISP’s services – and that obviously wasn’t acceptable. A major ‘synergy’ we had identified just evaporated.

“To make matters worse, the ISP’s board wanted us to cover South Africa as fast as possible to help accelerate their own growth. We were trying to grow too quickly, which was putting enormous pressure on the business’s sustainability,” says Colin.

Finding an exit and facing new challenges

“We stood back, took stock, and realised the whole deal wasn’t working out the way we’d planned,” says Colin. It’s never easy to admit that you’ve made a mistake, let alone face the fact that the deal you thought would make you rich just isn’t delivering on its promise.

Colin and Aaron could have ignored this realisation and kept pushing, hoping they could turn it around or that they could still make it work. Instead, they decided to take their company back and build it on their terms, at their pace.

“We were lucky. The ISP’s focus was shifting, and we no longer represented the core market they wanted to concentrate on. Roberto approached the board and asked them if we could take ownership off the table, walk away and pay back the money they’d already given us,” says Aaron.

“They were happy with the proposed deal. We agreed on a payment structure, and it took us three years to pay them back.”

Not only were the brothers now free and clear to rework their entire business strategy, but they managed to salvage a good relationship with the ISP, which remains to this day.

They might have extricated themselves from a poor partnership, but the business’s problems were far from over.

“Our relief at ending the partnership was short-lived,” says Colin. By 2011 the market started to shift rapidly. First, operating systems were getting much better.

Second, while the 2008 crash took a while to get to South Africa, by 2011 it was starting to impact consumer buying trends. Both would have a significant impact on Dial a Nerd’s business model.

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Shifting markets


“IT costs were dropping and the home consumer market was becoming incredibly competitive,” says Colin.

“Consumer electronics were becoming commoditised, and large retail chains were squeezing suppliers for better prices.”

What did this mean for the business? When Dial a Nerd had first launched 11 years earlier, Colin made the decision to focus on the home user market, which needed assistance, but wasn’t being serviced. Desktop computers couldn’t just be bought out the box.

They were custom-made from specific components based on the customer’s needs. There were only a handful of computer brands on the market, and these were high-end products.

“It was actually worth personally spending an hour or two with each customer who wanted a laptop or desktop to find out exactly what their needs were at their homes or offices,” says Aaron, who would then take the specs back to a technician who would build it from components and then set it up for the customer — again at their homes.

“Everything was complicated. We had a document a page and a half long with instructions on how to connect to the Internet.”

Fast forward a decade and things were very different. Laptops were standard, and could be bought out the box.

Apple had launched the iPad, and suddenly consumers didn’t need desktops at home anymore — they had laptops at work and tablets at home. Nothing needed to be custom-made, and there was a range of out-the-box products to choose from.

Large retailers bought and sold on price, and Dial a Nerd, which had retail stores and sold products, but at a much smaller scale, just couldn’t compete on price.

Disappearing margins

“At this stage around 50% of our revenue was hardware sales, and we had all these fancy retail stores,” says Aaron.

“However, our FD Phil, kept warning us that margins were disappearing. We began to seriously question not only our original strategy of opening 40 stores nationwide, but even keeping the existing 14 stores.”

“It’s amazing how you can be blinded by the trappings of looking successful,” says Colin.

“We loved opening stores — they were beautiful, and you’ve got this showcase that you feel incredibly proud of. Of course, there was a reason behind them. We needed a way to present the hardware on offer, and it meant that technicians had a base to work from.

“They’d waste so much time travelling from Bryanston to the East or West Rand, so it made sense to open offices in each major area. But as the market changed, rents were going up, and margins were shrinking. What’s the point of a high turnover if you’re working so hard for small margins? The model just wasn’t making sense anymore.”

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Start-up story


“Launch is the wrong word. We fizzled into existence,” is how Colin Thornton describes Dial a Nerd’s beginnings. It was August 1998, and Colin was 19 years old. He’d just dropped out of his first year of university — an interesting choice, considering his father was a professor and his mother was a teacher — and he needed to make an income. His dad had been clear: If he wasn’t studying, he needed to pay rent.

“I had always been interested in computers. In 1984, when I was six years old, we got our first computer. It was one of the first private computers of anyone we knew, and I was always fiddling with it — playing games, breaking it, fixing it. I loved it. From a young age, friends and family asked me to look at their PCs when they broke, and to train them.

“By the time I was in high school I was charging R50 an hour for my services. When I realised that I didn’t want to study, this was the natural place to turn to. I had some clients, I had skills and most importantly, I had a passion for technology. What I didn’t have was a business — or enough clients.”

Colin’s solution was simple. He paid his rent, and every cent he made above that he spent on flyers.

“They were cheap flyers that I printed in bulk, and I handed them out everywhere – at robots, in car parks, at malls. We got chased out of more car parks in Joburg than I can count. We paid car guards to put them under people’s windscreens, and students did mailbox drops for us. If I could have hired a helicopter to blanket them over the city I would have.”

Gaining customers

It worked. Home users needed help, and Colin was affordable. Word started spreading, and as the business grew, three other friends who knew PCs came on board.

By 2000, Dial a Nerd had offices and a receptionist, and then Aaron, who had made it to his second year in varisty, decided to drop out as well.

“I knew tech, but we needed someone who could focus on marketing, business growth and clients. Aaron was a perfect fit, and I asked him to join us.”

Eight years later, the business had grown substantially and the brothers attracted the interest of a large ISP. A deal was signed. By 2010 that deal was reversed. By 2014 the debt to the ISP was settled, and consolidation began. Today, Dial a Nerd is a smaller business, but a far more profitable one. And growth is more on the cards than ever.

Time for a new strategy


The brothers took stock yet again. Turnover was good, but profits were not. Because they couldn’t compete with large retail chains on price, the validity of the retail stores was called into question.

They were still helping clients set up their home tech systems, even if the tech was being purchased elsewhere, but this side of the business didn’t require a showroom.

“In addition, even the home user market was shrinking — operating systems were getting better and much simpler to use. People with very little tech-savvy were able to plug and play without technical assistance. Tech was also getting cheaper, which meant in most cases hardware would be replaced instead of fixed.

“Instead of lamenting how tech developments had harmed the business, we decided to focus on how they could help us instead,” says Colin.

“We’d built a great brand over the years. It was well known, respected and trusted. That was a really excellent base to start from. We just needed to accept that we could no longer do what we’d always done if we wanted to continue to grow the business.

“In terms of the retail side, our options were to enter into a pricing war or start importing ourselves. We didn’t want to do either. Tech support was what we were good at, and that’s where we needed to focus. We made the decision to close the retail stores and stop actively selling products. We also made the decision to shift from home users to businesses.”

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A revenue problem

2012 became Dial a Nerd’s first year of consolidation. “Over the past three years we’ve wrapped up a branch every six months,” says Aaron, who spearheaded this side of the business.

“We were watching our revenue evaporate, and as a branch stopped making cash completely, we shut it down.”

“We also started focusing on the business sector,” adds Colin.

“We tried to ramp it up at the same pace that the consumer side was dropping. It took longer than we thought it would, as it so often does, but we were on the path. Corporate has a much longer sales cycle, and you need to take the time to really build trust and put proper service level agreements in place. There’s a lot more at stake in corporate IT support, because downtime costs money — sometimes millions per day in lost revenue and productivity.”

The fact that things were moving more slowly than planned was alright, though. “We knew that this was where we had real scope to grow, unlike the consumer side, which was the exact opposite,” says Colin.

At the same time, business support was getting exciting. “Servers, networks, security, the cloud — there’s so much happening in the tech space; so much scope. Business is now impossible without IT. It’s one of the most important functions of any business.”

Balancing costs with growth


The past three years have been a balancing act for Colin and Aaron. They split their roles: Aaron would wind down the consumer side of the business while Colin concentrated on building the business side.

“It’s a strange position to be in, because you still have to give good support, watch the bottom line, and make profits while decreasing the size of the business and closing branches,” explains Aaron.

“As we shut branches the best operators stayed and became ‘mobile’ operators. They were on the road anyway; now it was just official. To manage technicians who were always on the road, we needed different systems and support to control and get live reporting from. We bought off-the-shelf, yet specialised software to do this. We needed to keep our best operators and the highest billers, but we didn’t need to keep the offices and branches.”

As a result, although the business continued to focus on home users for the next three years, it got rid of overheads.

“We had no company cars, offices or scattered administrators. We focused on creating a mobile workforce with all admin consolidated in one central office with robust systems to support the shift.

A shrinking market

“The market was shrinking, and we shrank with it, keeping only the higher LSM. Today our home users account for 30% to 40% of our turnover, but without the overheads of rent and admin it’s become a very profitable revenue stream.”

An additional revenue generator has been the direct result of technological advancements.

“Robust systems have allowed us to create a low-cost mobile workforce, but on the business side, technology has allowed us to offer off-site support. Our business technicians can monitor our clients’ servers and systems from our offices, without getting in their cars and driving to the client. This means we can spot and solve problems before the client even realises they are there, but it also means technicians can now offer eight hours of support in one day instead of four,” says Colin.

“It’s been amazing for our profit margins. The costs associated with time on the road have just evaporated. The advances of tech meant we had to shift our business model, but the benefits of those same changes have been immense. We just needed to recognise them and make the best use of them.”

Reaping the rewards

Ultimately, while the last few years have been tough, and radically changing a business model can be daunting, for Dial a Nerd, the rewards have been well worth it.

“With the home division we’ve always waited for the phone to ring. Business customers are different. We’ve put contracts in place, which has created an annuity income. This means we know how much revenue is coming in each month, and can plan (and spend) accordingly,” says Colin.

“While getting here has been scary as hell, our lives are simpler as a result and we’ve substantially grown our profits. Our turnover might be down by 35%, but our year-on-year profit growth over the past three years has been 100%.”

Nadine Todd
Nadine Todd is the Managing Editor of Entrepreneur Magazine, the How-To guide for growing businesses. Find her on Google+.

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