In so many magazines and email blasts, concrete contractors are taught small tips and tricks that hopefully one day will help them out in specific situations. Very rarely does anyone talk about business or industry growth as it relates to your specific company. I am going to attempt to do just that in this article.
I am a consultant. A vast majority of my time is spent reviewing slabs, mainly to ensure that the end user gets a beautiful and easily maintainable floor. But I spend a portion of my time working with contractors to shape and grow their businesses.
I understand that the concrete business is hard (pun intended). The product is not exact. This industry will never become commodified to the point where all or even most projects are equal. There will always be variable conditions that multiply as projects progress. There will always be new things to learn, and there will always be good and bad competition. I know all of these things from my personal experience. I started as a contractor and learned from the ground up. I have lived through the customers with unrealistic expectations, the manufacturer that has a bad batch of product, and all the various employee issues that come along with being a contractor.
When I sit with contractors, whether I am their consultant or not, I find out almost every time that they want to grow their business. I think that this is a universal desire. The big question that is rarely asked or analyzed correctly is, “How can I grow my business and stay healthy and solvent?”
There are many different answers to this question, but my goal is to discuss some of the fundamental ideas that should be considered.
1. Identify a realistic goal for growth
First, you need to consider your market. Ask yourself, “How many direct competitors do I have in my market?” Once you have that answer, which I bet most of you know off the top of your heads, you can move to the next step. “How many projects did my company do in this market last year, and how many did we bid on and lose?” Add up the ones you did. You may also know how many you bid on, but if not, guess. Be realistic, because this is important. Once you have these questions answered, you can get a general idea of your market size. There will always be a few projects that you didn’t know about, just like there will be some projects that you did know about that were done by out-of-town contractors that are not your direct competitors. Do not put too much emphasis on these, as they will generally even out.
The jobs available divided by the competitors in the market gives you a fair goal to shoot for. If there were 100 projects with three direct competitors in a given market, for example, with all things being equal there would be a 33 percent split. If you won only 20 projects, or 20 percent, then you know that you should target 13 percent of the market, as that should be the easiest pickup for you to make.
2. Don’t simply be the cheapest
My second thought is that by far the biggest mistake I see contractors make — and this is not limited to new or smaller contractors — is pricing themselves below the competition. This will garner you a few more projects, but in order to keep the edge that you pick up, you will have to continually lower the price of your work while keeping the same level of quality.
This is a diminishing-returns scenario that will eventually force you out of business. Remember that every time you lower your price by 10 cents, that lowered price becomes the new market standard. It is very hard to go up in price.
Rather than constantly lowering the price of work, you will find that good competitors work on developing relationships using the foundation of good quality work. Figure your pricing on a model that makes you money.
Every contractor is different. If you don’t know what your price point is, an easy way to determine it is to take the cost of all your labor and materials, add 10 percent (for rework and unusual items that come up) and double that figure. This will allow a portion for overhead while still keeping a healthy profit. Don’t bid so low on a project that you are not able to make your margin.
A good friend of mine was in the meat business. We were talking about one of his competitors that went bankrupt. The company needed revenue to cover overhead, he said, and they were struggling to stay solvent. What did they do to combat this problem? They sold their meat at a loss. I believe the exact quote was, “They were losing a penny a pound but were making it up by selling product by the truckload.” They eventually sold themselves right into bankruptcy! The market bought their cheap product because of the price, but in the end there was no profit left.
Dropping the price is a short-term solution that leads to a “rob Peter to pay Paul” scenario. You spend more than you make on the projects, but you use cash flow to offset the loss. This allows you to think for a while that everything will be great because you are billing more each month. This is a dead-end thought all around.
Focus on tightening your operations doing the work that you get for the right price. Go after the work that you want. Some companies are better at retail stores, some at manufacturing facilities and some at schools. Once you figure out what you do well, target those projects at a price point that you can actually clear a profit on.
3. Improve your company’s infrastructure
The third major consideration is infrastructure. I have an analogy that I use regularly when talking about this. Think of your company like a city. With any city, there is an established area with all utilities in place. When the city wants to grow, before it can build houses for people to move into, it need to have power, water, telephone lines and streets in place. Only then can the builders start on the neighborhoods.
You will always be limited by your infrastructure development. If you are strong in sales, that is like having water, and that’s great. But you also need to make sure you are strong in administration, operations, and field personnel and equipment, which is like also having phone service, power and sewer. Without these pieces in place, you can end up building out farther than you can effectively support or manage.
Sure, you believe that you can build out one or maybe two of these pieces as you go. This is when companies make the biggest mistakes. Pieces fall through the cracks, project quality suffers, or manufacturers aren’t paid on time and start to cut off supply lines. There is a host of problems with trying to grow too fast. I see these mistakes happen daily. Grow steadily and you will be strong and profitable. You will be respected by your customers, suppliers and competitors, and I promise (again from experience) that you will have a lot less stress in your life.
4. Identify your true competitors
My fourth and final point is to know your real competition. In the decorative concrete industry, I see contractors competing against other decorative flooring contractors just as hard as they compete against other flooring types. The analogy here is a basketball team where all the players are out for themselves and are competing daily with their own teammates without even realizing that the true opponent is the other team. The real competition is the floor coverings industry.
The tile and carpet guys have to be loving it that decorative (especially polished concrete) contractors are providing a high-overhead, high-skill-level flooring option for a fraction of what the competing flooring options charge for an easily installed, mass-produced floor. My recommendation is that you lift up the industry, and in doing so, create more work for everyone, which will in turn mean more work for you.
I see contractors cut down other contractors and try to sell the customer on the idea that their company does a better job more cheaply. This isn’t realistic, because if you are cheaper, you have to lower your costs somewhere. The three areas that can give are labor (lower-skilled labor costs less), supplies (lower-quality materials also cost less) or processes (cutting a step here or there). The end result of cutting costs in these areas is lowering the quality. Every time that you lower the quality, the perception of the industry is lowered in the eyes of the consumer.
Every great job you do gets one or two more jobs for the industry. Every bad job that you do will lose 10. As the industry has competed with itself, prices have continued to drop. As prices drop there is less margin in the business. As the margin goes, the only companies that are able to compete are the larger installers because of their purchasing power and operational infrastructure. The larger companies tend to be less creative, which eventually leads to very bland, watered-down product. This will turn designers and architects away, further lowering the number of projects in the market. I think you can follow where I am going with this.
The best thing that can happen for the decorative concrete industry is for contractors to understand the market that they are serving, learn to respect their own price point and hold firm on profitable projects, grow strong and well-run companies that are balanced (somewhat), and compete against floor coverings to create a larger market overall.
I hope this article helps you. If you do even one of these things, you will find yourself in a better position. I have a motto that I try to live my life by that is very applicable here. “Play chess, not checkers!” To me this means that you should look out in front of you and play several moves ahead. Checkers players generally move one step at a time with very little strategy or forethought. Chess players sit back and run through potential moves with a thought of how each potential move can affect them. If you will run your business like a chess match you will find you are positioned correctly most of the time.