2022: A Year of Challenge for the Home Improvement Industry

by Kyle Clapham

The home improvement industry may exceed $400 billion dollars when year-end 2021 is fully calculated. If a retail home improvement company did not have great sales last year, they missed an outstanding opportunity.

Early 2022 is a time for all levels of the industry to reflect on what is happening and what is needed to prepare for the dynamic changes that are taking place.

Rising Inflation

Reality: In 2022, home improvement contractors will pay more for the labor to install the products they sell. This will be abetted by increases in the cost of transportation, fuel, maintenance, local taxes, and permitting costs, plus a higher degree of difficulty in procuring permits.

These and similar costs are already occurring. Inflation is having a domino effect on every segment of the industry. If nothing else, it affects the net profitability on those jobs in backlog.

Labor Shortage

According to reliable sources, the industry has lost over 1 million workers. Many moved to other industries, some to jobs with less industrious labor requirements, while others found the government support programs had a “fantasy appeal.” Why work if you will be paid not to?

This labor challenge is not new in the industry; however, it is continually worsening, and dire consequences are on the horizon. In many companies, there is almost euphoria over the new sales being made, which creates illusions about the company’s success.

Another reality: Your sales are in fact “orders” on which you cannot inure a profit until they are installed.

Material Shortages, Price Increases

Compounding general inflation and the labor issues of home improvement companies is the rising cost of materials that go into the products being sold. Manufacturers also have to deal with labor shortages, and the shortage of trucks and drivers to deliver their materials; once they complete the manufacturing process, the finished product has to be delivered in the proper quantities to the home improvement retailers.

Manufacturers are also dealing with labor and tax increases, ergo costs and delivery times will continue to increase. By necessity, increased costs of running their business needs to be recovered.

Again, a reality: Home improvement companies will be paying more for materials to complete the jobs in backlog. The business needs a plan to deal with what is said when the job is sold and what is documented in the contract.

The Backlog Issue

Most home improvement companies that experienced a sizeable increase in sales were not prepared for all the consequences. A major issue is the contracts sold that are not yet installed, along with increased cycle time. Both contributed to significant “backlog.”

For example, a company that once experienced 6 to 8 weeks from the time a contract was sold until it was completed has seen that “cycle” double (or more) and often has no plan in place to maintain pace with new sales while reducing the backlog on a systematic basis. Many issues such as customer satisfaction, customers rights, local reputation, brand reputation and more are being raised already.

Other Compounding Issues

Advanced marketing techniques continue to produce high quantities of leads that (hopefully) produce profitable sales. However, some companies do not require deposits on contracts, and even those who do are experiencing significant challenges. A deposit is an advance on performance (completion of contract) that raises the question: Does a customer waiting three months (or more) for completion have the right to cancel and demand their deposit be returned? Beyond “my lawyer said,” think of issues such as consumer protection laws and whom these favor.

Cash Flow

Companies that don’t require deposits or progressive payments will eventually experience cash flow issues. Well-run companies require deposits. Those who have extensive budgets for lead development (10 to 15 percent or more) and provide advances to their salespeople for half the eventual commission need to measure backlog against a combination of marketing and sales advances (often totaling in excess of 20 percent) to determine how much money is tied up in the backlog.

Examining What Is and What Will Happen in 2022

Examine your pricing formula: Does it provide you with an appropriate net (pretax) profit on every job? Most pricing formulas are out of date. Price adjustments can be factored into pricing formulas (and software solutions). Inordinately high sales and marketing costs should be examined independently, not as a part of G&A. (This should not be an accounting procedure but rather in-house record-keeping exercise.)

Examining Sales and Marketing Efficiencies

Take your total marketing costs and divide this figure by the number of issued leads that become appointments, along with the number that receive a complete presentation, and leads sold (at which price). Determine what is your real cost for an issued lead. After this, evaluate the efficiency of each salesperson (easier than it sounds).

Examine your sales compensation system: Salespeople who require (use) more leads then standard/average should not receive the same compensation as those who are more efficient. This will be a must for 2022. Much will depend on the size of your salesforce; however, a plan is needed, and our most successful clients make it work. Examine your fully loaded marketing versus your cost per lead issued.

Focus on increasing referrals by creating scripts and a program for contacting past customers for referrals, add-ons and interest in other products you offer.

Rehash all old leads with systematic scripting by reissuing them to a different salesperson. A price cut is not the answer. There are lead-revival companies that do this effectively. They do not compete with your call center. They represent the last step in lead-cost recovery. If you don’t know how to find such a company, call us and we will advise you of sources.

Review and Upgrade Your Recruiting Methods for Installers

Consider hiring a recruiting specialist and create new and modern postings. Don’t rely solely on paying more than your competition. Create new retention methods that focus on adding value to the position.

Create New Goals to Improve Profitability

Start by examining your pricing method. It probably needs review and restructure. Create more effective ways to retain what you earn. You are in a specialty business. Profits less than 10 percent (pretax net) are not in your best interest, and most companies have to look more realistically at what that means.

Remember, the profit shown by public corporations is after taxes and “set asides” for various contingencies. If you desire to be a larger, more profitable company, act like it.
Sigmund Freud defined insanity as “doing the same thing repeatedly and anticipating a different outcome.” QR

Dave Yoho Associates is the oldest (1962), largest and highly successful consultancy representing remodelers and home improvement pros. The company maintains a group of account executives and advisers who develop plans, training and execution for large and small home improvement companies, manufacturers and other service providers. They offer a no-charge 30-minute confidential consultation. Contact Dave at (703) 591-2490 or dave@daveyoho.com.

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