Yoho: The True Cost of COVID-19
authors Dave Yoho | October 14, 2020
Each day, news outlets point their fingers at the sad effects of the COVID-19 pandemic. They then speculate on how it started and how we are responding to it—and then they continually speculate on how and when it will end.
But what about your business? What about our industry? What is the effect on those who sell and install home improvement products, as well as those who manufacture/distribute and finance those products?
Let’s Look at Some Realities
For most retail companies, 2019 was a record setter. More leads, more sales, more businesses expanded or were acquired. Employment for sales, marketing and installation personnel rose to the highest level ever. However, some of the problems that we see today were already beginning to appear in many home-improvement companies.
So, when COVID-19 began having a dramatic impact in early March, it began to take a serious toll on home improvement companies. In the months that followed, shows and events, a major source of prospects for many companies, were shut down.
Those who canvassed for new business were eliminated by social distancing and “a consumer need for isolation.” Some companies were permitted to install, others were not considered as a necessity. The overall outcome for most companies was many employees being laid off or furloughed, and an increase in backlog.
If abundant backlog is the problem, what is the overall effect on the business?
Abundant backlog virtually destroys cycle time, which describes the amount of time it takes from the actual sale to the completion of the project. As an example, if your cycle time was between 45 and 50 days, you could effectively deal with most cash flow issues and be able to compensate the salesperson/project manager for their sales effort.
Many organizations already have a system where once a contract is sold, the person selling it gets half their commission, and the balance is paid after job completion. Set aside the fact that extending the work 5 to 14 weeks has an effect on the morale of the salespeople and others who might benefit from a “bonus” based on completion.
Add to this that national “fully loaded marketing costs” range from a low of 12 percent to a high of 22 percent, and of course, there are some exceptions in this area. However, if the average owner of a home improvement business multiplies the total revenue waiting for installation by their cost of marketing, you begin to see the problematic picture (see below).
- Marketing Costs: 15% vs Backlog of $1,000,000 = $150,000
- Add to this an average 5% advance to the salesperson/project manager, and that increases the cash in advance from $150,000 to $200,000.
If you apply this formula to your business, you will immediately see why cash flow problems exist.
Unintended, Unexamined Consequences
But there is more. If your company does not ask for and receive deposits (despite the fact that your finance source doesn’t require them), your company will take an even greater financial hit when your cycle time is extended.
All of this is further complicated by the fact that you are asking your customer who signed the contract to be patient while fulfillment is badly delayed. This is further complicated by the impatient customer who may cancel despite your contract and despite the intent of rescission (three days, 72 hrs. etc.).
If you are a manufacturer/distributor selling to home improvement companies, you may be unintentionally contributing to the problem. For the record, many manufacturers had to shut down for two, three or four months and/or work with a limited labor force. Typically, the product that is sold to the home improvement company is put together by the manufacturer using 12 to 15 other suppliers who contribute to the production of a finished product.
The manufacturer’s sources (vendors) also have the same problem, being forced to shut down, having reduced labor forces and an almost worldwide shortage of some base materials used in manufacturing. Yes, all of this contributes to a factual understanding of COVID-19 and its serious effect on your business.
Is there a solution to this and similar issues for your company?
My company is besieged each day by requests to speak to this subject. As always, the first challenge is to clearly define the issues, which we have described here. And since COVID-19 isn’t going away anytime soon, individual companies who do not address and work towards correcting some of these issues will be looking at the same situation being intensified for the next six months or more.
Like everything else, these challenges require a plan. The question is, how do you get your cycle time back to 45 or 50 days (or something that is workable with your budget)? Whether you do $1 million a year or $100 million, you’re still recognized as a small business, and current history should tell you that many businesses inside or outside of this industry are failing because they didn’t have alternative plans. They didn’t seek out consulting or specialized business advice to aid in constructing, then introducing, a plan that is workable in every size and type of organization.
Examining connected issues that are byproducts of this situation.
As an immediate effect of rising marketing costs, examine the good, the bad and the unintended consequences. Despite the fact that the quantity of leads has increased for most businesses, the cost of issued leads has also increased dramatically.
Average costs range from $250 to almost $600. There is a laudable response from many companies when they say, “Yes, but we are selling a lot more.” The truth is that higher marketing costs are workable in a rising market and can be maintained only when balanced against a high “closing rate versus leads issued” and where the product sold contains high margins.
When we examine companies today, we ask them to use an “analytic,” which measures the individual cost of maintaining a salesperson calculated by taking the following data:
- Total cost of all leads issued to each individual salesperson versus the total net revenue from their sales
- Do this and you will arrive at the cost of maintaining that salesperson, and this figure when related to the overall cost of acquiring the business may be frightening.
Are you managing a plan that benefits your company and those you employ?
When we are called upon to examine this latter set of circumstances, we relate it to a better informed, higher level of management. Is your organization capable of retraining, re-instructing or coaching that salesperson to get alignment with the cost-versus-sales revenue?
This may call for a revision in your compensation system, which grades your salespeople against the norm and a standard. You also have to have better means of reactivating old, unsold leads, whether within your own organization or having call center specialists perform this task.
In short, compensation methods for salespeople (including management) are frequently not tied to the proper analytics. A proper plan benefits all parties. We are currently working with numerous companies, by aiding them and attempting to maintain their profitability through 2020 and revising their business model for 2021.
Re-planning and redesigning a business plan calls for a well-thought-out revision of your sales model. For most companies, this is not a matter of ‘if’ but ‘when.’ The effects of the COVID-19 pandemic are not going to disappear anytime soon.
The companies who find success will develop and implement a systematic approach and, when challenged they will stick to the system and ultimately find success. QR
Dave Yoho Associates is the oldest (since 1962, largest and most successful consulting company representing the remodeling and home improvement industry. They are credited with the introduction of Step Selling, Post Negative Suggestion, The Total Offer Concept and Right-vs-Left Brain Selling to the home improvement industry.
The company has a staff of Account Executives who consult for large and small retailers, manufacturers and service providers. For more information about their services, email firstname.lastname@example.org or visit www.daveyoho.com.