3 Major Issues Facing the Home Improvement Industry

by Kacey Larsen

Issue No. 1

Greatest “skilled labor” shortage in the history of the industry!

Many companies had a banner year in 2017. The revenue increases are continuing for most companies in 2018. However, business backlogs (uninstalled or unstarted home improvement projects) have increased dramatically.

The home improvement industry is now facing the greatest shortage of highly skilled labor, ever. The inability to crack the code for labor will limit growth, profit and cash flow. Some companies may not survive as a result of their inability to address this crisis. The other possibility is “surviving” as opposed to “thriving” with a profit that is inconsistent with the risk and the effort required to make a small net pre-tax profit. Thus, these companies are sacrificing the potential profits to which they are entitled to expand and solidify their business, while creating security for themselves and their families.

Most companies didn’t plan in advance for the increase in sales.

Nor did these companies create and follow a cycle time (the time measured from the day the company received the contract to the job’s completion). The backlog of uncompleted work causes a cash drain—products such as roofing, windows, bath replacement, HVAC and similar. Successful companies have a max cycle time of five to six weeks. Marketing costs and the advance of partial commissions for the salesperson during this cycle-time may represent 20 percent or more of the backlog revenue. Do the arithmetic with your own backlog. Every $100,000 contains $20,000 to $25,000 of your company’s capital. On a larger scale, every million dollars in backlog may contain $200,000 to $250,000 of your capital.

Often companies unwisely respond with temporary measures.

They recruit skilled labor by offering higher wages/rates to those employed by their competitors. This creates a sad cycle of “others” reacting in the same manner—until increased labor costs wipe out the net profitability of the transaction.

Has your company examined the use of a 401(k) (for W-2 employees) or a SEP IRA (for 1099 labor) as a bonus arrangement? Consider other benefits or “perks,” which might attract and hold the labor provider, taking care in the case of “independent contractors” to stay within the provisions of various laws. (There are lots more.)

Issue No. 2

Marketing costs continue to skyrocket.

The world of marketing for home improvement companies has changed dramatically in the last 10 years. The advent of many methods for obtaining leads, processing them and distributing them in a logical manner to the salesforce, all while recognizing the need to constantly view the metrics which determine the number of leads that turn into presentations and the number of presentations that turn into sales. These metrics will even uncover “customer satisfaction” issues whether you make a sale or not.

Costs for lead development have escalated—for advertising, internet, shows, events, and self-developed leads, including canvassing. Couple this with the backlog and cash flow problems—all are issues—which reduce profits and stymie growth.

A well-developed plan to deal with these issues is critical.

It also needs to be consistent with a plan to make your company stable and capable of weathering unanticipated changes, which can come from many sources: reduced availability of financing, changes in the current economy, unemployment remaining as low as it is, the sources you use for lead development increasing in cost or decreasing in effectiveness, etc.

In a survey taken earlier this year, the average cost of an issued lead (fully loaded marketing costs to date divided by the number of leads issued as appointments) hit an all-time high of over $375 average. Some companies only “guess” at these true costs—some with an issued lead cost of $500 or more take a “so what” attitude because business has been so good.

Examine this example:

Suppose a company has an issued lead cost of $400 (not uncommon) and issues a salesperson an average of seven leads per week. Do the arithmetic: that’s $2,800 for those seven leads. In a month, that’s $11,200. That’s over $134,000 annually. Now examine, how much profitable business did that salesperson provide for your investment? This may require, at the very least, an adjustment in the sales compensation.

When business is good and leads are abundant, issues such as “presentation rate” for the company and the individual salesperson plus the “close rate” (the number of contracts received measured against the number of leads issued) are ignored or accepted as revenues increase.

For small, moderate and even large size home improvement companies the cost is “obscene,” even when it is profitable.

Issue No. 3

The cost of hiring, training and maintaining personnel for small business is increasing.

Unemployment is at an all-time low. The ease of getting a job, even for those with low skills or limited experience creates workforce turnover, borderline mediocrity and increased personnel costs. In the throes of this great economy, these three issues can become quicksand for small, closely held companies.

This country’s rising economy, increase in consumer confidence and disposable income creates a two-edged sword; the glow of increased revenue clouds the judgement and reduces the caution necessary in issues such as lack of staffing, mis-hires and/or mismanaged personnel.

In our most recent survey on hiring sales personnel, we have numerous case studies of successful and profitable companies, which create this concern.

An example: Case Study H-593 (18)

A successful contractor of roofing, windows and re-bath products with annual revenue in excess of $10 million. They employ nine salespeople, plus a sales manager and are considered a well-run, successful business with high revenue and above-average profitability. Their owner was astonished with the outcome of the “audit” for hiring, training, managing and turnover (for 12 months).

Costs for the first 30 days (A & B)

A. Basic recruiting costs, job posting, phone interviews, in-person interviews (including management time),
total costs (1 year):
Average $917 each new sales hire

B. Training (managers, trainers, time),
plus “two weeks in training” salary
or advance for trainee:
Average $912 each

Total at 60 Days

C. Costs of leads issued: 50 at $470 each Net good business sold: $131,300
Commission at 10 percent: $13,130

Total costs, including (A) & (B) = $38,459
Represents 29.3 percent of revenue. |QR

[Note: For a “condensed” printout of this survey at no cost or obligation, email admin@daveyoho.com with subject “Request Case Study H-593(18)”.]

Joe Talmon is a senior account executive with Dave Yoho Associates with over 30 years’ experience with “in-home” sales and sales management. He has developed programs for many of the largest and successful home improvement companies. He is featured in the popular video training series, Super Sales Training, supersalestraining.com. Talmon is considered a leading expert on the management of successful home improvement companies. 

1 comment

Mukesh Panda
Mukesh Panda March 3, 2020 - 2:00 am

Great article.

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