Dealing With a Slowing Market
Answer: Lots of thoughts. First, truthfully, your business has never faced tough times. If you have only been in business since 1995, things have been pretty darn good, so being a little uneasy is natural.
Don’t panic! Also, don’t go into denial. Success lies somewhere in between. Panic can cause you to make stupid decisions, scare the heck out of your employees, cut prices and lose even more money. Denial can cause you to bury your head in the sand and react too late.
Don’t try to solve the problem by cutting prices and getting more volume. The natural instinct for contractors who do not have any work is to lower their prices to try to stay busy. This can be very dangerous. With fewer jobs you are going to have less work to quote. The trick is to do a much better job of selling the jobs where you believe you have a legitimate chance to get the job. In other words, work each and every lead harder. If an estimate normally requires 30 minutes, maybe now you should plan for an hour or two. Remember: You have won the hearts of many a past customer when you were not the low bid. Focus on selling the leads you have and make do with what you have.
Why is cutting price so dangerous? It quickly creates a mathematical equation that is impossible to reach. For example, suppose your bare minimum overhead without any profit is $200,000. If you did $1,000,000 in sales, at 20 percent you would break even. These numbers are purely fictional and many contractors have overhead in excess of 20 percent. Make a budget and use your real numbers.
So let’s get back to the numbers, $200,000 at 20 percent requires a million to recover your cost at 20 percent, but what if you cut your price 10 percent, which really does not seem like that much. On a $5,000 job, this is only $500. Well, a 10 percent reduction in prices cuts your gross profit by 50 percent! Now you must do $2,000,000 in sales to break even and recover your $200,000 in overhead.
Again, these numbers are fictional but the math formulas are the same. Margins are low for most contractors and arbitrary price-cutting can send you over the top and create a mathematical example where you work yourself to death and do not make any money. Even in a recession, I would rather go broke playing golf or fishing than working for prices where I am not making money.
The first contractors to go out of business are almost always the folks who do not know their numbers. They start cutting prices and very quickly commit suicide.
Question: How can I cut costs as business slows? I have to have trucks. I have to have a phone. I have to eat. I don’t waste money now. Seems hopeless to me.
Answer: It is not hopeless at all, but you will have to change the structure of your business. We have contractors in our networking groups who are two-man bands that earn $100,000 a year in income — not sales but real take-home income, and people with 200 employees that make a million in profits. Both are successful in their own right and both have very different companies and structures.
In 1990, the Northeast construction economy was devastated. New England was in a construction depression. We were hired by a manufacturer to help one of its customers. Today that contractor and I are still friends. In one year, his business went from 450 employees to 51. This was an extremely successful family business with loyal management employees who counted on the company for earning their livelihood. The contractor’s original budget showed that he would lose over $3 million that year. After a bottle of Jack Daniels and a lot of hard decisions, we got it down to $2 million. With even more work, we got it closer to a million. We did this all in one night of hard work, lots of discussions, arguments and a lot of number crunching. One of my fondest memories of a meal is the great breakfast we had the next morning celebrating the fact we would lose only a million or so dollars.
Did we make some tough decisions? You bet, but we did not lay off a single management person. So how did we do it? We used backward delegation. We gave project managers the job of superintendents. We put superintendents back on the tools. We parked trucks. We did estimates at night and every person in the company worked in the field during the day. Some amazing things happened. Some of those jobs that we bid for low prices actually turned a profit.
My experience is that when an owner steps off the job, production costs can go up 20 percent or more. With the owner getting back in the field, the company begins to shake, rattle and roll. Instead of sitting around the office and bitching, they are working on making it happen.
If you are a million-dollar company, consider that there are people out there who do $500,000 that make good money. If you do $500,000, we can make $250,000 work. Being realistic and reorganizing is the answer.
Question: I have worked hard at creating a name brand for my company. I have company trucks, t-shirts, hats, and good phone practices. Now I am feeling like that was a waste of money, because prices are getting cheaper and I need to be more competitive.
Answer: In the big picture, those costs are peanuts. You are a name brand. You have marketplace recognition. If you cut your price, you become a good deal. If they cut their price, they still are not the contractor of choice. So don’t kick yourself for being first class.
If you are a premium contractor, how do you cut your price? Very carefully, because the customer has to see a reason why you are a good deal. A perfect situation is when you do not have a lot of backlog. You simply say, “Mrs. Jones, I have an opening in my schedule next week and if you could book this job now, we can give you 5 percent off. It seems like everyone wants us at once or not at all and we have a gap. How does that sound to you?”
If you cut your price, there has to be a reason why: You are slow in the winter, schedule issue, you bought some material at a special deal, or your foreman just finished a big project. Without this logic, your original price looks like a rip off.
Car dealers complain that people lie and beat them up on price. They started the game by making the sticker price not the real price. Your original estimate needs to be a real price but this does not mean there are not situations where a lower price allows both of you to win.