The current recession has shaken some longstanding beliefs among many contractors, chief among them is, “The Price is the Price.” That is a mantra I have heard hundreds of times from our founder, Frank Blau. It is a founding principle of Nexstar. It is Frank’s way of saying, numbers don’t lie. If your costs equal X, your selling price has to equal X plus your desired profit percentage. Stick to your guns and charge the price you need.
Another founding principle of Nexstar is to set up a business built around quality and value, not trying to be the low-price leader. One-truck, barnyard operators, will never go anyway, so stay above it. Offer quality service and products in a professional manner. These two founding principles are the foundation Nexstar used to build a professional organization of member contractors who combined quality and value with a selling price high enough to cover costs.
Then, along came 2009. “Long-time customers, who always bought from me, are now getting three or four quotes. All they want is lowest price. Loyalty means nothing anymore.” Does that quote sound familiar? Have you thought that? Overheard employees say it? Perhaps even uttered it yourself? Hold that thought for a moment.
Just the day before writing this article, I fielded a well-intended question from a member company. It had to do with tankless water heaters. His company was having a hard time selling these products. He felt the problem was his price was too high. So his question was, if he dropped his price, should he still give his technicians five sold hours for doing the job (he pays using a sold hour incentive plan) even though his selling price does not include five sold hours? Yikes! (The answer is no, by the way.) He essentially asked the wrong question.
So we went back to the root of the question which had nothing to do with sold hours but everything to do with value. Further probing revealed that his technicians were not familiar with tax rebate incentives that apply to tankless water heaters. The technicians did not perform a “cost of ownership” analysis for the customer where the cost of tankless should be compared to traditional water heaters. The analysis should have included; the purchase price, energy usage, repair costs, savings from potential damages and the life comparison of the two water heaters over a ten year period.
His technicians are great. They look the part, wear foot covers, use floor mats, ask if the truck is parked OK; much of the Nexstar Service System process. I’m sure they were selling emergency repairs, but when it comes to more discretionary, bigger ticket products, they were quoting a price saying a few cool things about “all work is done to code,” or “we are insured,” and other stuff; then leaving with an estimate only.
There had been no training around fully describing the features and benefits of a tankless water heater. No wonder their conversion rate was so low! No wonder their price so high.
Now, I gave the example above on a particular product because I think it speaks to the larger issue every member is facing today, which is creating enough value in the minds of customers to get them to part with their hard-earned money. The brutal reality is, meeting customer service expectations today is harder to do than it was two years ago. Because of a general decline in call counts, meeting every customer’s expectations has never been more important.
Wouldn’t It Be Easier to Just Cut Prices, Than Train?
I know it’s tempting to take a more common path, which is to just cut expenses and selling price so you can sell more jobs. In theory it works. But let’s get real. What would you have to do to significantly cut expenses in order to allow your company to dramatically cut selling prices 25% or more? There are five key expense categories in any service company that comprise 85% or more of all expenses. Those top five are; direct labor, materials, office wages, advertising and vehicle expenses. Forget about; cell phones, landscaping fees or office supplies. Those top five are major thoroughfares where the big money flows and from where your savings would have to come.
Material expenses are a function of two components—stuff you buy and how you manage it after the purchase. Contractors are good at shopping wholesalers for deals – especially in the last couple of years. If you haven’t looked for savings here – get after it. You likely already have. The next area is the management of what you’ve bought. There is always waste, shrinkage, etc. To gain savings here you normally have to throw people (office salaries) at the problem. Essentially, you raise costs to save money. Unless you are a very large company, it may cost more to manage your inventory than you are losing in waste. You may find, “The juice may not be worth the squeeze.”
Let’s look at vehicle expense next. Well run companies have total vehicle expense around 5% of sales. Expenses for companies with saving opportunities may run 7%. So by tightening that expense, you could drop it by 2%, tops. Not exactly a huge cost-cutting opportunity.
Let’s look at advertising next. There has been a tectonic shift in advertising spending habits in the last few years. It has walked away from strictly yellow pages to an advertising mix, with internet marketing catching most of the shifting dollars. So you may have some savings opportunities if you have not been actively managing this expense. Get it in line. Advertising should run 5-11% of sales, depending on your business mix. Purely plumbing and electrical service companies lean toward the higher end of the scale, HVAC shops should be on the lower quartile of the spectrum. One important point to remember is cuts in advertising, just to save overhead, could easily result in reduced revenue.
Now let’s look at the biggest bucket – direct labor and office wages. Here is your greatest opportunity for expense reduction. These two categories combined represent a total of 50%, or more, of sales in the average service company—a little less if strictly HVAC or construction. Sure, you can carve out 3-4% and go from 50% to 46% in total payroll. But cut overall company expenses by 25%, as an example, you would have to get the bulk of the savings from here, which means cutting half your payroll. Have fun with that one.
What is the Point?
Here is where I am going. It is not easier to sell on price. Gouging enough expenses for a meaningful reduction in selling price is painful, and in many cases, just not possible. Job-one should be a commitment to train all service and sales personnel to deliver top value. It’s easier, as you can see, than the alternative. And training is more than wearing foot covers and a clean uniform.
Creating value in your selling price is harder today that it was two years ago. Each customer must be thoroughly educated and impressed before they will part with their hard-earned money. Remember, when you walk in the door, the customer, has no idea what the job is going to cost. All they want to know is that they are getting good value for their money. To expand on this point, ask yourself a few questions:
· What training and customer service processes have you introduced in your company to create more value with customers? (Hint: Nexstar has tremendous resources—ask us!)
· If you are training, are you, as the owner, 100% sure your employees are using those trained skills in the field with every customer? Are you inspecting what you expect?
· Have you upgraded company employees who are unwilling or unable to provide value in excess of price?
· In short, are you doing all you can as a company to create value far in excess of your selling prices?
If you answered “No” to any of the above, start there before you print new price sheets, flat rate books and succumb to the siren call of “a price cut.”
Jack Tester is Coaching Manager for Nexstar Network®, a world class business development and best practices organization that provides business training, systems and support to independent home service providers in the plumbing, electrical and HVAC trades. Nexstar members get rapid results, guided by experienced coaches, surefire systems and incredible peer connections. For more information, visit www.nexstarnetwork.com