Only about 4 percent of all small businesses survive more than 10 years. On top of that, you don't have to be an OSHA official to know roofing is one the riskiest occupations out there. It is hard enough to just run the business. Ensuring its profitable future is even more challenging. If your company makes more money than it knows what to do with, don't bother reading any further. But if you are not commanding premium pricing that covers your ever-escalating operating costs; offering your employees an attractive compensation package; replenishing your equipment from retained earnings, or delivering annual profits to the company, then read on.
Risk vs. RewardThe basic tenet of all businesses and financial ventures dictates a direct relationship between risk and reward. Simply stated, higher risks yield greater rewards and vice versa. Unfortunately, this principle is overlooked by many roofing companies. Roofing is difficult work; it deserves profits commensurate with its risk. Contractors face the financial risks of entrepreneurship along with other risks associated with the job. Never mind that most small business ventures fail. Never mind that a man's knees and back fail. Never mind the occupational hazards. Does the reward cover the risk? Is it worth risking all that for a minuscule profit? Why should any roofing company take these chances and work for a cheap price?
Costs Going through the RoofWhen was the last time your costs of doing business went down? Priced a new truck lately? Noticed the cost of a gallon of gas? What is today's rate for a sheet of OSB and how much did your liability insurance premiums increase? With prices going up, have you adjusted your numbers accordingly? If not, your margins will quickly erode. The price tag for most goods and services escalates annually to keep up with inflation. When was the last time you increased your employee pay scale? Don't be stagnate, have a COLA (cost of living adjustment) and a smile (smiles are still free)!
Volume vs. MarginUnlike risk and reward, volume and margin don't always have a direct relationship. In fact contractors who have been caught in the "volume trap" and survive to tell the tale will warn you that an inverse relationship exists where higher volumes dealt them lower profits. Combine the competitive nature of selling with the entrepreneurial mind and you get a strong dislike for losing a sale. It's not easy to walk away from work, but sometimes it's best to just say no. Every company needs a certain amount of volume to survive, however bigger is not always better. Losing low-margin work can be the best medicine for your fiscal health!
Sharp Pencils Dull ProfitsThe roofing industry is rather unique in its sensitivity to price, and in large part is driven by a commodity mentality. Unfortunately some contractors get swept up into this line of thinking, trying to compete on price despite the connection between operating costs, job-costing and profit. It seems an invisible yet artificial ceiling exists that effectively suppresses the amount of money charged to install a roof.
When profit is discussed, why do some contractors say they simply can't raise their prices? There are all kinds of reasons given: This is a cheap market; there is too much low-ball competition; and the universal demon known as the "going rate" restricts my pricing. How can you expect me to charge more than that and still get customers? The fact is, some can't, some could and others just aren't sure of their costs or sales abilities.
In every market you'll find the full price spectrum. There are contractors whose prices are inexpensive, mid-range and sky-high. At each price point there can be varying degrees of profitability depending on their business model and overhead. Where does your company fall on this scale? Most contractors say they fall in the mid-to-high category; very few stand up to brag that they're the cheapest! So where are all the low numbers coming from? Could it be that collectively we are our own worst enemies?
You should consider benchmarking your competitors' pricing and surveying lost customers to determine if it truly was price that beat you or some other reason. Most likely you'll find a competitor or two who wins work with higher prices than yours. How does he do it? Read on!
It's You, Not Your PriceCountless survey results cite the number one reason consumers will select one contractor over another is TRUST. Price is always a factor, but it is their third decision criterion; the products and services offered are second on their list. Granted this decision process is not the same for the die-hard price shopper and customers with budget limitations. That aside, the customers take a leap of faith when hiring a contractor and will buy from the contractor they have the most confidence in. If they are not comfortable with your company for any reason, price becomes irrelevant. When a buyer doesn't have trust in you or doubts the competencies of your company, you couldn't give them a free roof!
What consumer would knowingly hire a substandard roofing company to install their roof? Therein lays the difficulty, for both you and them. Consumers struggle to sort out superior contractors from the second-rate. You must educate the buyer, win his/her trust and prove you're the best choice.
Remember, customers are not buying a roof; they are buying the roofing experience, from start to finish. You are not selling a roof; the roof is the end result. You're selling the notion that your company can be trusted to deliver a positive roofing experience. Consider people's other buying habits for a moment. Consumers don't go to Starbucks just for a cup of coffee. Starbucks customers are buying the Double Mocha Chocolate Chip Grande experience at $4.50 a cup! People don't buy a plasma TV simply to watch television, they do so to enhance their television watching experience and make their buddies envious! Who buys a Lexus merely for transportation purposes? These same people buy roofs from you.
We could ramble on about consumer psychology and what motivates their purchase decisions, but suffice it to say in order to justify premium pricing you must sell your prospects on why your company is different and better than the rest. You must give the prospect reasons to pick you other than price or they will default to the lower number. If your competitor looks equivalent to your company and you do not persuade your prospects otherwise, than they will not pay you more money.
Why are You Worth More?Your sales presentation must demonstrate your company not only has the expertise to install a roof system, but that it focuses on the homeowner's needs throughout the roofing experience. Adjust your sales mix to offer more products than the meat and potatoes that every Tom, Dick and Harry offer at lower prices. Provide material options from the good, better and best categories and let the customer choose which grade of product to install.
Typically, in-home selling delivers higher profits than simply dropping off a proposal. You have a better chance of establishing rapport with the customer and demonstrating your professionalism selling face-to-face. Without this personal interaction the customer is forced to select a contractor merely on the basis of comparing different proposals, which makes it tougher for you to stand out from the competition. With either approach, your sales presentation or proposal must prove that you're worth a premium.
Most buyers are willing to pay more money when there is a perceived value difference. When it comes to roofing, many homeowners will pay extra for the peace of mind of putting their "roofing experience" into the hands of a higher caliber company entrusted to get the job done professionally. Convince your prospects of this and your higher price becomes less of an issue.
Financial Impact from Premium PricingLet's think about the brave contractor who takes the leap and adds a 5 percent premium to his current pricing. For simplicity, let's assume the following: Say our guy currently sells 100 identical roof jobs per year at $9,000, for annual gross sales of $900,000. Now assume he raises his price by 5 percent and sells the jobs at $9,450. His gross sales increase to $945,000. The additional $45,000 goes to the profit line. Even after Uncle Sam gets his cut, what's left of the extra $45,000 per year can be thrown into the cookie jar or plunked down on a new truck! Not that easy, right? It's fuzzy-math because if you raise your price you'll lose sales, right? OK, let's explore that possibility.
How many customers will our brave contractor lose when his proposals increase from $9,000 per job to $9,450? Probably not many, but let's assume he loses 10 percent or in this case 10 jobs per year. Now the contractor's annual gross sales drop to $850,500 (90 jobs at $9,450). He is down $49,500 from his original $900,000 in volume. However, his unit sale price is up 5 percent and he decreased his volume, headaches and risks by 10 percent. So, on a unit-basis he earns a higher profit on less work. Is he better off? Volume-driven contractors may not find this attractive, but if profit is your goal then volume loss is less frightening.
The Future is Now and the Choice is YoursIn summary, think about your future, as well as that of your company and its employees. Do you have a retirement plan or exit strategy? Do you have retained earnings for growth or emergencies? Can your employees live well on their wages? Does your company offer health benefits and paid vacations? Your company competes with other business employers who offer competitive wages and benefits as standard fare. Hiring and retaining good people is a perpetual challenge. To make it an attractive proposition for employees, your company has to offer a viable future and as many perks as it can afford.
In fact, many of your prospects who expect your pencil to be sharp get these types of fringe benefits themselves from their employers yet overlook the fact that independent contractors deserve the same. Why should roofing companies settle for less?
Roofing is a risky business with low-entry barriers. Any jack-leg with a truck and tools can beat your price, but as professionals you must command a premium reward to ensure your future. Let the low-price operators bang their brains out until their bodies or bank accounts fail them. He who competes on price, will live and die on price. Don't sharpen your pencil, sharpen your sales sword. Sell the difference and be profitable!