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Remodelers Need to Focus Harder on Boosting Profits
In a rapid-fire presentation lasting well under an hour, Robert Langdon, a certified public accountant and author of “Managing Your Business for Profit,” provided attendees at the Oct. 27-30 Remodeling Show in Indianapolis with a few specific pointers they can use to give a sizable boost to their bottom line.
One of the top priorities for remodelers and other small businesses, Langdon said, should be devising ways to differentiate themselves from the competition and appeal to the emotions of their customers so they can sell their goods and services at a healthy price.
In today’s harsh economy, price has become a central concern for consumers, and too many remodelers are willing to bid low for jobs, often failing to consider the toll these projects can take on their business. Remodelers can extricate themselves from this situation, he suggested, by adopting a new approach to their customers that will pay even bigger dividends as the industry recovers.
“We don’t want to be the lowest bid when we get the job,” he said. “We want to be profitable.”
Turning Needs Into Wants
Customers will pay more for something they want than for something they need, he said, and the whole point of the sales process is to turn need buyers into want buyers and move price down as a factor on the decision ladder. “The stronger the emotion, the less price is a factor,” he said.
Langdon recounted how one remodeler was able to sell him on emotion and not price when he was in the market for steel security doors for his home. Like consumers in general, he started off shopping for price and was in the process of lining up the recommended three bids, when he encountered a remodeler who provided him with the two most important factors in making his buying decision: these doors would protect his family and the doors would protect the investment he had in his home.
He ended up choosing the contractor who had tapped into his emotional concerns and paid $4,200 for a job that he could have had done for $4,000 from another bidder. “I bought from him because he appealed to me emotionally,” said Langdon, “and he increased his profit by 5%.”
This approach “won’t work all the time, you have to figure out what are the things that will move this person beyond price, but just a 2% increase in margin has the same impact as increasing your sales by 15%.”
Setting Yourself Apart
“Sales is about telling people about what’s more important than price,” he said. And he cautioned remodelers never to quote a price to an unsold buyer. At that point, “you’re done selling and you’re now negotiating.”
Contractors who haven’t figured out their marketing advantages, he said, need to sit down with their staff members and list five ways their company is different from the competition. Like other speakers at the show, Langdon said that superior quality and excellent service, while highly desirable in any remodeling job, are worthless in distinguishing one contractor from another. “You must be specific about how you are different,” he added.
Remodelers need to take charge of the sales discussion, he said, and that means they should be the ones asking the questions, not answering them. “Take control of the conversation by following up with your own question,” he advised. “Is it important to you that this happens?”
Direct the purchase decision toward your contracting services, he said. “Ask the right questions” and let them know that you’re the solution. “If they say this and this isn’t important, they’re saying price is important. If you get the wrong answers, you don’t need us because what’s important to us is not important to you.”
Increasing Profits Five-Fold
Using the example of a hypothetical company starting out with $600,000 in annual net sales, $400,000 in construction costs, a $200,000 gross margin, $75,200 in variable expenses, $112,800 in fixed expenses and $12,000 in net income before taxes, Langdon next demonstrated how remodelers can increase their profits five-fold by increasing their sales, reducing their expenses and increasing their gross margins.
Increasing sales by 15% the next year to $690,000 results in $30,720 in net pre-tax income. Increasing the margin just over 2% by selling the same amount of work for a slightly higher price, with sales totaling $618,720, results in the same profitability. And reducing variable expenses by 3% produces the same net income.
Of the these three alternatives for increasing profits, the 2% margin increase is the best, but truly superior results can be had by achieving all three simultaneously, he said.
Cutting Expenses
Remodelers will be pretty much locked in on their fixed expenses, which can be defined as costs that don’t vary with volume within a relevant range of activity, such as rent and equipment depreciation. They need to be watched, because once they go higher, it’s difficult to make them drop lower.
On the expense side, when the market turns soft, the first thing remodelers should do is stop adding to their infrastructure, he said. Once market conditions begin to improve, as they generally appear to be doing now, “raise your prices when demand gets stronger. If that works, raise them again.”
Remodelers should have their eye on reducing their labor costs, which are likely to be their largest controllable expense. The aim should be to boost worker productivity, which can be accomplished by restructuring to more efficiently utilize employees, by observing and training and by better managing.
When examining their profit and loss statements, most businesses, Langdon added, will find that 20% of their expense categories account for 80% of their business, and their efforts to cut costs should be trained on these major expense categories.’
Remodelers should set their sights on working “for the discriminating home owner who understands why your product is worth more,” Langdon said, and their message to prospective customers should be, “‘I’m doing this project at a fair price, but I’m expecting to make a reasonable profit.’ Search for customers who understand that for relations to work, both parties must get something.”
For information on remodeling resources available from NAHB, e-mail Kelly Mack, or call her at 800-368-5242 x8451.
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