For Remodelers, Recovery Won’t Mean Business as Usual
With a recovery in the residential remodeling industry slowly moving into view, speakers at the Remodeling Show in Indianapolis on Oct. 27-30 warned that those who expect a return to business as usual are likely to miss out on the opportunities afforded by a marketplace that has been transformed by one of the most bruising U.S. recessions in generations — advice that is also applicable to many small home builders.
“The idea is that we don’t have to think about just surviving,” said columnist and remodeler Shawn McCadden, owner of Custom Contracting Inc. in Arlington, Mass. “There’s a lot of opportunity out there, but things won’t come back to normal.”
Marketing is paramount, speakers advised, not just to get telephones ringing again but to establish a customer base that will provide jobs as conditions improve. Remodelers will be battling for clients, and those who succeed will be running their operations according to standard business practices, they said.
“You don’t need to reinvent the remodeling business,” McCadden said. “Instead, you should adopt the standard way of doing things. How long am I going to continue doing things as I always have before I realize it’s not working?”
In an educational session on getting rid of callers who aren’t likely to become customers and on how to avoid free job estimates, Paul Winans, who ran a successful remodeling business, Winans Construction Inc., in the San Francisco Bay Area for 29 years before selling it in 2007, said that remodelers need to establish systems for running their businesses “that will work even when times are tough.” (For a related story in this issue of NBN, click here.)
“A system-oriented process is something that can operate independently of your day-to-day involvement,” Winans said.
A key challenge for remodelers, the speakers added, will be differentiating themselves from the competition. Emphasizing the quality and value of workmanship isn’t good enough, but marketing experts provided plenty of information on how remodelers can take simple steps to stand out from the pack.
“Why are you different?” Winans asked. “Why should somebody want to buy from your remodeling company? Work on refining your message. If you don’t know it, you can’t expect your customers to know it.”
Presentations at the show also stressed the importance of finding ways to increase profits at a time when consumers are reluctant to spend. In a general session at the conference, speaker Robert Langdon showed how remodelers can increase their profits five-fold by increasing their sales, reducing their expenses and increasing their gross margins. (For a related story, click here.)
Positive Signs Emerging
With the remodeling market expected to remain fairly quiet into the first half of next year as it turns the corner on the current downturn, remodelers should be focusing their time and energy on preparing their businesses for what lies further ahead, speakers said.
According to the latest findings of the Leading Indicator of Remodeling Activity, which was released late last month by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, spending on home improvements should begin rising early next year. Spending will, however, still have ample ground to recover, remaining 8.9% below its year-over-year level in the second quarter of 2010.
“Remodeling spending by home owners shows early signs of stabilization,” said Nicolas P. Retsinas, director of the Joint Center for Housing Studies. “While the housing recovery has been erratic, a strengthening economy could produce spending increases on home improvement projects by the second quarter of next year.”
“Favorable financing costs — for those households with access to credit — and a pickup in home sales are producing more opportunities for home improvement projects,” said Kermit Baker, director of the Remodeling Futures Program.
Several factors, however, are still impeding remodeling growth, he said.
“A generally weak housing market with unstable prices, near record levels of foreclosures and other distressed sales are discouraging households from undertaking nonessential remodeling projects,”
Businesses Prone to Failure
Attendees at the Remodeling Show had the opportunity to hear from several representatives from Case Design/Remodeling on how to change various business practices in order to get the most mileage from the new marketplace emerging from the downturn and target their efforts to the altered mindset of potential clients.
Among them was Mark Richardson, co-chairman of the Washington, D.C. area-based company, who observed that remodelers are up against difficult odds even in good times and prone to failure, largely because of the shortcomings inherent in small businesses that haven’t properly positioned themselves to survive.
Sixty percent of remodeling businesses never make a profit, said Richardson; 81% of them don’t track their profits by market and 64% don’t track profit by product. Most businesses don’t have a written business plan. Sixty-two percent of remodelers don’t track client retention and 64% don’t know their sales conversion rates.
Consequently, roughly two-thirds of remodeling companies fail in their first five years, he said, roughly the same as the 60% failure rate experienced by small businesses overall. However, about 90% of remodelers perish before celebrating their 10th anniversary.
Leveraging the company’s historic data, as Case has done, is a tool that can boost a company’s sales, he said. “Make history an integral part of your business decisions,” he said. “It doesn’t lie, it happened.”
For example, a Harvard study tracing the steady rise of the bathroom from just after World War II, when only half of U.S. homes had an indoor bathroom, to an average of two bathrooms per home in the 1980s, suggested a remodeling opportunity for Case. In the mid 1990s, the company’s gross profits from bathrooms were lagging behind those for other projects, Richardson said.
A group of Case employees was assembled to reinvent its approach to bathrooms, and within 10 years the company's bathroom division was ringing up $10 million in annual sales. Client satisfaction rates were higher for bathrooms than other projects and profits on bathrooms climbed 8%.
Today, American homes have an average of three bathrooms, and the 20-to-30-year lifecycle of the bathroom has declined to 10-to-20 years “because they have become fashion remodeling, not functional remodeling,” he said.
Three years ago, Case was able to devise a significant new sales strategy based on an examination of its repeat business. The company found that after contracting an initial job, largely a smaller project coming in through its handyman division, 18% of its clients went on to a second job within 18 months. Of that 18%, 72% went on to a third project.
The value of inducing its customers to retain Case for a second remodeling job became apparent as a result of this study. “Figure out a way to get clients to do project #2,” said Richardson, “even if you have to start giving away some of your services.”
Richardson added that historical data can be indispensable in setting sales goals. Looking at the actual historical sales data of specific sales persons can help put projections for the coming year on a sounder footing and yield more realistic expectations for revenue.
“By analyzing this historical data, it tells you where to put your spotlight,” he said.
“You have to know where your profit comes from in order to know the right client for your business,” Richardson added, “and you have to know the right size of projects. You can target that client and say no to people who don’t meet the criteria.”
Historical data are also needed to gauge changes in the market. “You have to have the data to know how things have changed,” he said.
Then and Now
Five years ago, for instance, Case was seeing a 1.5% to 2% return rate on direct marketing; today, that figure has dwindled to 0.4%. Looking at the sources of closings, 70% have come from previous clients versus 5% from radio advertising. “Drill more deeply,” he said. “Look at the close rate for different kinds of clients. You might want to look at the sales process a little differently, keeping more in touch with previous clients.”
It would be a mistake, he added, to presume that clients will remember a remodeler for a job well done. “They forget about you,” he said. “You assume they’re your client because they paid you something, but they have no problem hiring someone else” the next time they need some work done in their home. “Let’s keep in touch with clients; it’s probably what works today.”
Another significant statistic for Case derived from historical data: its average sized project this year will be $100,000, down from $200,000 in 2007. “Considering the new world order we’re in, are you looking at strategies differently now?” Richardson asked.
“Marketing and sales approaches are cyclical,” he said. For instance, solar and energy, popular items in the 1980s, are making a comeback. “Some things look like they don’t work at certain times,” he said, “but they can come back to life.”
To determine what sales and marketing strategies will work currently and in the healthier market that is shaping up, Richardson compared remodeling conditions three to five years ago with those of today:
- In better times, home owners were confident, using other people’s money, eager to just get things done, focused on large projects, interested in keeping up with the Joneses and willing to take risks, he said. Today, they are nervous, using their own money, willing to discuss possible jobs, pursuing smaller projects, proud to conserve and more comfortable with less risk.
Remodelers need to understand these changes as they approach prospective customers. “The future looks quite strong,” he said. Home owners aren’t willing to stay in a holding pattern for ever, and “they can’t let their house die.” The mood is already beginning to turn in favor of consumption and prospects are researching possible projects. Remodelers should suggest opening up that discussion. In their initial meeting with the client, remodelers should emphasize how they will “reduce risk” for the home owner. “Use positive messaging and sales strategies for who the client is today,” he said.
- A few years ago, remodelers had abundant leads and didn’t mind leaving things on the plate. Today, leads are scarce and direct marketing is not as effective as it was. “Get out there and help the client,” he said, “supporting their causes — what they care about, not what you care about.” Case used to hold open houses, he added. “Now we do celebrations, inviting clients’ kids to come to see the work being done, or we have wine tastings.” Today, “you don’t have the license and permission to sell your services and products; you need to establish a dialogue to get permission.”
Offers used to work, but “the mailbox is full of offers today” so it is better to give things away. A suitable gift might be a certificate for two hours of handyman services or a 45-minute energy audit. Either will enable a company representative to get their foot in the door, tell the company’s story and open up a conversation about what the home will need in the future.
Today, the best marketing doesn’t dwell on market projects, but drives prospects to the Web. “You have to have a Web site,” he said, and figure out how to get clients to go to that site. Case browsers will typically go to the site to find 25 ways to ensure a successful kitchen project.
Sales teams today should be spending a full 20% to 30% of their time on marketing, Richardson said, and they will say that is what they are doing, when they are probably averaging only 5% to 10%, not much more than when times were golden. “They think they’re spending more time than they actually are,” he said. “Most are not spending enough time.”
- Sales strategies in today’s tougher times have to be more flexible and creative, he said, such as setting up five closings on a Saturday.
Three to five years ago, with time on their side, remodelers could take seven to 10 days to return with a proposal. Today, the exact same client should receive the proposal in no more than two to four days. “If you’ve got a client who seems motivated and you had a good first meeting,” move as fast as possible,” Richardson advised.
Gone are the days when the remodeler can suggest more work and watch a $50,000 project evolve into one costing $120,000. “Today, that same project won’t work,” he said. “You are part of their fantasy, but when you sit down at the end be that voice of reason, be their planner.” Remodelers should delineate the things that need to be done now and then lay out future opportunities for improving the home.
Team selling is the way to go today, he said, and “have another person go with you on the initial call.” That second person could be a manufacturer's representative or even a spouse or someone from outside the company. A second person makes the other person accountable, he said, and can provide another point of view.
In the sales process, the sense of urgency has shifted away from the client, who in the recent past was advised about rising prices and scheduling concerns, to the urgency of taking care of their home, which is likely their greatest financial asset. “It will die if you don’t take care of it,” is what prospective clients need to be told. Upon their visit, remodelers should examine the exterior of the home to find possible peeling paint, flashing issues or other items that need to be corrected. Once inside, they should take a similar look around to identify opportunities for maintenance and improvements. Then they can tell the owner, “I happened to notice a few things you may think of tackling.”
Upselling used to work best; today, it’s downselling. Also, clients should be given the choice of a fixed-price contract or design as you go on a time and materials basis. “We can work it a lot of different ways. Clients today need to do it their way,” he said.
Richardson noted that applying these sales and marketing strategies is “all about getting one out of 10, not 10 out of 10.”
“History does not lie,” he concluded. “In the times we’re in, it’s not the judge and jury. But if you don’t use it, you’re flying blind.”
For information on remodeling resources available from NAHB, e-mail Kelly Mack at NAHB, or call her at 800-368-5242 x8451.