As you face the end of one year and plan for the next, it might be wise to examine what it takes to run a profitable (or more profitable) home improvement business. In the past two years, many companies have experienced tremendous growth, often referring to it as increased sales, which is often seen as the route to greater profitability.
But in most cases, that is not true. Let’s examine some issues, and you determine whether they are factual, whether they are fantasies, or whether they are fallacies.
Two questions: What is a realistic profit for a specialty or home improvement company? And what is the appropriate amount for general remodelers and design-build companies?
When we examine this for our clients, we take a close look at the business they are in, their market, their brand, their products, how they get leads, and how they sell a contract. (Actually, it’s not a sale because you can only recognize this as revenue after the work is completed.) It becomes imperative to have a pricing formula that takes into consideration all the imponderable factors that control whether you will really make a specific net pre-tax profit.
The very nature of your business can create conditions that reduce or eliminate your profitability goal. As an example, the weather, the economy, the supply chain, the labor market and, moreover, the attitude, habits and practices of your customer. Finally, include the attitude, habits and practices of those whom you employ.
It’s not about how much business you do; it’s about how much you earn.
All of which has become more complicated in the past year. We are now in severe inflationary times, and a recession has already begun. The cost of living and the cost of running a business are constantly rising. Marketing costs are increasing dramatically, and in most segments of the industry, sales practices and compensation methods need upgrading. And have you noticed our government is virtually dedicated to eliminating the status of independent contractors?
Despite all this, let’s establish a basic fact. If you’re in the home improvement business, you need to have a pricing structure that ensures a specific net pre-tax profit on each job. This means having a pricing formula that is not left in the hands of the salesperson or project manager. Unfortunately, most of the pricing methods utilized in the industry today do not meet this standard.
What is net pre-tax profit?
Pre-tax net profit is the amount of money left after all sales-and-marketing expenses, labor-and-material costs and general-and-administrative expenses are met. If this is applied to the accumulated revenue that you are reporting, did your company earn 10 percent net profit on the revenue you have installed? If so, and you are an S Corp or an LLC, this profit becomes a pass through to your individual taxes. What occurs next is a diminution of your net profitability by the federal, state and local taxes that you pay.
Therefore, if your pricing formula is not correct, or you don’t manage it correctly, you’re not making the profit to which you are entitled. If you are the sole owner of the business, that net balance is yours, subject to taxes. Obviously, it will vary if you have partners. Many of our more successful clients report earnings in excess of 15 percent pre-tax net. In most cases, the owner(s) may also be drawing a salary as an employee (manager, general manager, etc.) plus perks. Each business plan may vary; however, net pre-tax profits are built into each company’s plan.
Other conditions that might affect profitability
In the current marketplace, many companies are experiencing excessive backlog because of longer cycle times. This is measured from the time you get the contract to the time the job is completed, which is two or three times longer than in the past. These are factors over which you may seem to have little or no control, i.e., the manufacturer’s ability to ship products, insufficient crews to keep pace with new orders, escalating labor costs, and escalating permitting and cartage costs.
While many of the large successful companies we represent have addressed this in the preparation of their contracts, we find that most have not, the consequence of which will be reduced profitability. Despite all these issues, home improvements continue to be the best bang for the buck. However, it requires a plan, controlled execution and the discipline to take a close look at the analytics of your business and make those changes that ensure profitability and ongoing success.
Those who own, manage or direct companies all need to consider how to be more efficient in the operation of that business. Major corporations large and small and public and private companies who intend to thrive not just survive in 2023 are already doing this.
How do increasing sales/marketing costs play a role?
The cost of acquiring new business has increased. Most sources of lead-getting are producing fewer leads than before at the same or more cost, thus increasing the cost of an issued lead.
Whether it is a media lead, online, shows/events, direct mail, etc., the average company is getting fewer leads for the same investment. The process calls for setting an appointment with the prospect at their home or place of business, then issuing that lead to a salesperson/project manager. There is often some diminishment from the number of leads taken to the number of appointments issued.
Recent studies indicate when the lead is issued, its costs may vary from $200 to more than $700. In today’s world, the successful company measures each salesperson on the marketing costs advanced by virtue of the number of leads issued. Example: In a company where the issued lead is approximately $500 and the salesperson gets eight of them per week, that equals $4,000. This means that it is costing an average of $200,000 annually to keep that salesperson supplied with leads. Obviously, the salesperson who brings in $2 million in sales costs 10 percent, but what about those who sell less?
The next measurement is what percentage of those leads get a total presentation and how many leads are sold. What is the total revenue produced from those sales?
Changing your thinking will affect your planning and execution.
Unquestionably, marketing costs relative to lead issuance and resulting revenue play a major role in profitability. Marketing and sales should be separated for evaluation from general operating expenses. The efficiencies of the lead intake as well as the individual salesperson’s efficiency in selling the leads are major factors in maintaining profitability as described earlier.
Beyond these, there are unknown or non-factored costs that we often refer to as GOK (God Only Knows).
- Salespeople who unconsciously or consciously give additional discounts.
- Specialty companies compensating salespeople in what is usually referred to as “par” or “paying for overages.”
- Weak/poor training of salespeople, i.e., failure to understand and teach the understanding of customer attitudes during periods of inflation and recession.
- Required modern sales training on how to create and utilize nebulous (less definite) leads, shows, events, canvassing, referrals, self-generated add-ons, etc.
- Failure to utilize “ride-along” analytics of the true costs of lead development and the individual salesperson’s actual use and cost of leads issued.
- Failure to teach selling value vs. succumbing to what is perceived as price objection.
Finally, in this time of great change and challenge, success will come to those who respond to the market as it exists and revise the game plan to fit these times. QR
Dave Yoho Associates (www.daveyoho.com) is the oldest (since 1962), largest, and most successful consulting company representing the remodeling and home improvement industries. Their mantra is, “Helping your company to become more profitable is our business!” They maintain 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. You can contact Dave directly at 703.591.2490 or email@example.com.