Read the complete discussion below or link to the podcast to listen to the conversation.
With the housing market in the midst of an extended down cycle, it's a good time to evaluate the way you do things within your company. With leads and sales down in many markets across the country, you may want to consider altering your sales strategies to make sure the company survives.
Tom Swartz talks with Dave Bryan of Blackdog Builders and Mat Vivona of Father & Son Construction to get their perspective on this changing market.
Tom: Dave, let's start with you. Tell us a little about Blackdog Builders; type of company, volume, how long you've been in business, number of employees and number of people that you have doing sales and remodeling.
Dave: We're a full-service design/build company and we've been in business 18 years. We'll finish this year at about $5.6 million. We have a total of 37 employees, six of whom are full-time sales people and then we have another manager who is a part-time salesperson.
Tom: Dave, do you still sell?
Dave: I don't.
Tom: Mat, your company is Father & Son Construction. Tell us about where you're from, your sales volume, how long you've been in business, how many employees and how many salesmen.
Mat: Dad took the company name from a friend back in 1979. The company is 42 years old but it's been family owned since 1979. The best year we ever had was 2004 where we did roughly $12 million that year. We're a full-service remodeling company as well. This year we're hoping to do at least $7 million sold, out of which we'll probably end up building $4 million to 4.5 million. We have 10 full-time employees that are strictly administration and then we are down to roughly 8 sales people which are independent subcontractors and we farm 100 percent of our field work to subcontractors. So we don't have any carpenters, tile people or drywallers on staff.
Tom: Good, this is going to be diverse. Dave, we're a little bit like you in volume. We've been around for four generations, since 1921. Our number of employees is about the same. You have your own carpenters and craft crews don't you?
Dave: We do. We self-produce.
Tom: You sub some of them, maybe the systems or something of that nature?
Dave: It depends on the project. We sub a lot of our work. We're almost always the lead carpenter on the project. We may sub the frame; we may sub finish components, etc. We look at our manpower and workload and allocate resources that way.
Tom: To get a view of this, Mat, in '04 you did $12 million, and in '07 you're going to do maybe $5 million to 6 million. Tell us about your economy and what's happened in the last few years in the Detroit area.
Mat: Michigan leads the nation in foreclosures. The statistic I heard the other day was 1 in 33 homes in our area is in foreclosure. We've seen home values dip at least 10 percent over the last year. And that's being conservative. When you're talking about the higher-end home, you can see a 20, 30 or 40 percent drop in a year.
Tom: That's more painful than I thought. Dave, what about your market?
Dave: We work in two states, Massachusetts and New Hampshire, and I know that our clientele has experienced a reduction in home values and, consequently, a reduction in equity. I would agree that we're looking at a 10 percent drop for most of our clientele.
Tom: Dave, talk about leads, especially on '04 and '05 and then we get into '06 and '07. At what pace are the leads coming in now?
Dave: Our situation has been unique to the extent that even when business was generally better — whether a function of marketing or whatever the issue was — for the last four years in a row we saw a 10 percent lead decline year after year. This year, starting in January of 2007, we've experienced, year to date, a 13 percent lead increase. So, that's a 22 percent swing for us.
Dave: We let go of our in-house marketing coordinator. We started reallocating responsibilities and did some things differently. We moved outside my comfort zone in the way we market our company. We've always taken a pretty conservative button-down approach. I've got a designer on staff who had some outside-of-the-box ideas. We tried some new looks, and some new ideas for a couple of different vehicles to get the message out there. It's paid off.
Tom: Name two of those vehicles that you used.
Dave: We found that we could put a four-color insert into multiple local newspapers. This was targeted by specific areas for less money than we could have a black and white ad printed in the papers. We started experimenting with that. We've received good positive feedback from the inserts as opposed to the basic black and white ads. We've been doing a lot of consumer seminars, about one every other month. Those have brought in not only a reasonable number of attendees but a very good conversion on attendees to leads.
Tom: At your office?
Dave: Yes, at our showroom. We started using the four-color inserts to get attendance, which worked well. We started using the inserts in our general advertising. We've also been very strategic about picking specific marketplaces that we haven't tapped into that had good demographic information that fit our particular client base. We pursued those markets where we haven't in the past. We've been a little more rifle in our marketing to those areas instead of a shotgun approach.
Tom: That's great. Mat, talk about your leads over the past two years compared to now.
Mat: They're probably down, I don't have the exact figure, but I would say 10 percent. The difference is that back in 2004 everyone wanted extra living space, either a second story or room addition. Now, we've moved into a more repair/maintenance type organization. We replace driveways. Roofing has been huge for us, and window replacement has done OK. But the size of the jobs has gone down dramatically.
Tom: Where you might have done room additions and major alterations of the house, now, you've gotten away from room additions, second stories and things like that?
Mat: We're happy to do them. However, between the equity going down and the banks' tightening up their restrictions on their loans, it's incredible. We had one homeowner who wanted a second-story built — $55,000. He was late with his mortgage payment one time, three years ago, and no bank would touch him. The feds can hype these new lower interest rate, but if their not going to loan out the money, it really won't do the consumers much good.
Tom: Mat, sometimes it seems that the media can be brutal. I've seen headlines from some of the Detroit papers. They can be brutal both local and national in reporting on housing news, including remodeling. What do you tell your clients, as far as good reasons to remodel now?
Mat: I tell everyone that it's the way you live in your home. Do you want to continue to look at an old kitchen? That bathroom is so outdated. Treat yourself; you only go around once. You know it's not forever.
Tom: What you're also saying is that interest is still low, there are some price considerations. We might talk about that and maybe some incentives. Dave, what's your response to the media? Sometimes you look at it and everyone's talking about the housing issues and sub-primes. What are the reasons to remodel now? What's your take on that?
Dave: I agree with Mat. The media can be so frustrating. In some respects, it becomes a self-fulfilling prophecy. Whether the underlying issues are real or not, the media keeps on hammering away on home values. Suddenly, people start questioning, too, in terms of what the motivations are and why people should remodel. Certainly, like Mat said, lifestyle is a big thing. But nothing is getting cheaper. We just got a 5 percent increase from our concrete supplier. I remember when concrete was $40 a yard. Today concrete is $112 a yard for us.
Mat: Just to show my age, yes, I do remember that!
Dave: It's easy to make the argument that even in a challenging economy, Pella Windows isn't reducing their costs; our concrete supplier's not reducing their costs. We have a fuel increases that continue to mount. We try to crease some urgency by saying that the odds are good that it's not going to get less expensive. On a personal level, I'm in agreement with Mat by saying if you have the option of doing something that's going to give you enjoyment within your home and add value to the way you're living in your home, why postpone that for three to five years, when you can enjoy it for those three to five years.
Tom: Dave, at this particular time, do you maintain your normal gross margins and markups or do you have a tendency to look and give price considerations in down times?
Dave: On Jan. 1, we're having a price increase. I'm a big believer in the fact that you can sell. The only issue with your markups or your margins is in your head. If you've presented your product properly and have done a good job building your company, you could sell the margin you need to sell. For certain specific projects that we perceive to be especially desirable and if the volume merits it and we can look at the duration of the project and see that on a time-frame perspective, we can make the kind of gross profit we need to make because of the volume of the project, we will consider some concessions on a job by job basis. By and large, with our sales people, a commission driven sales force based on gross profit and there is not upside to them reducing the gross profit of a project. It hurts them and it hurts the company. We're pushing forward with the price increase. In addition, we've adjusted our labor rates to more in keeping with what actual hard costs are as a function of the increases we've seen. We're not backing off.
Tom: Your advice is to do a lot of alternative things before you just start dropping price, thinking price is going to solve everything.
Dave: Our mantra is, "We can all stay home and make no money!" If we're going to go to work we might as well make money doing it!
Tom: Mat, what are your thoughts and what do you see going on when times get tough. Do you make price considerations and look at offering price incentives?
Mat: One of the things I did at the very beginning of the year was to see what overhead costs I could cut at our office. We cut the cleaning people to three days a week instead of five. I took a look at healthcare. We offer full healthcare for our employees. Some were covered under their wife's policy and Blue Cross picks that up and you get a full charge. I offered them a semi-buyout to stay off the policy and have our premium reduced. I took a look at all of our insurance and upped the deductibles. I sat down with the crew and said, "There are people out there just shopping for price. What is the best you'll do this for?" Whether it be square foot or what have you. We're in a little different position than Dave. We farm everything out. I'll take three bids on a dormer. How much should the labor be just for that?
Tom: You really look to your trade contractors to sharpen the pencil and get more competitive as well.
Mat: Yes. There are other companies out there willing to do it for less. I'm not saying cut your price dramatically. I think that sends a mixed signal to the public. But, if you can do it for 5 percent less than you did it for last year and still maintain quality, I believe that's important.
Tom: That in itself is a question. Price is one thing, but the cost of that quality is another. Sometimes you can get a cheaper price but you may get what you pay for and lose a little quality. You've got to watch that. Is that correct?
Mat: That's huge. What we've done is position ourselves with the local media to be the experts. Some time when another company's messed up a job, they have us go out and see what we can do. Fortunately, we have real good relations with two television stations. They actually recommend us to a lot of homeowners as well as building inspectors. When someone gets in trouble with their remodeling contractor, the building inspector will say, "You should call Father & Son." Sometimes there's nothing you can do if people took all their money, which unfortunately happens out here. They sign a contract, put a huge sum of money down thinking they're going to get a new bathroom for $8,000 and suddenly the contractor is moving to Arizona.
Tom: Dave, Mat brings up one of the questions I had for down the line, and I'll just address it now. In down times, some remodelers look at their expenses and make some cuts. In your case, you've got to pay your guys. You're not going to ask your guys in the field to take a pay cut, I don't think. Sometimes you have to take a look at costs in subcontracting and also expenses. What are the top three expenses that you look at that you either have cut or you're looking at an monitoring very closely? A remodeling person reading this or listening to it would say, "Hey, where can I start? Let's ask someone who has done it."
Dave: We are looking at solutions both on the income side by way of our present price increase and on the expense side. We have not been bringing in the money that we wanted to the bottom line. We just went through an aggressive cost-cutting process. We looked at it in different parts of the business. In most cases, there were a lot of small incremental changes that would bring money to the bottom line. One example was we had our payroll outsourced. We had to do almost all the same amount of work for job-costing purposes that we would had we done our own payroll. We're no longer going to outsource that. On Jan. 1, we're doing payroll in-house. Overall, that will be about $20,000 in savings.
Tom: Making payroll and doing payroll in-house.
Dave: We're doing payroll in-house. Today, with the technology now, we do almost all direct deposit and everything is electronic. We found out that the software company we used for accounting for a very low fee interfaces with their software and will do all the direct deposit and deductions, etc., for us for pennies compared to what we were paying before. This was an opportunity where we're leveraging technology that we did not realize existed.
Tom: Give another example.
Dave: Another example is we are looking more closely at our fuel reimbursement policy. We had a very liberal fuel reimbursement policy for the people in the field driving vehicles, both company vehicles and personal vehicles. Quite honestly, we're shifting some of that burden to our people. For a long time, we were probably overpaying. I would be lying to you if I told you it was popular. It's not popular, but I think our people understand that we've go to be a viable company for their job to be around in the long run. So, we're shifting some of those costs. There are other examples in areas where we found savings. We had some departments within our company that were not effectively profitable. We had in-house plumbing. We had three full-time plumbers. We closed that part of our business entirely. We are now outsourcing plumbing entirely. The same thing is true of our home services. We had a home services department doing handyman work that was not operating efficiently and effectively as it could have. We scaled that back to allow us to put some better controls in place before we regrow that department. Anything that we perceived as being inefficient or dead weight we tried to pare down and clean up. Like Mat, we also looked at our insurance. We've been careful and as aggressive as possible about our audits to make sure we're saving every penny. We have a reduced roster of employees this year. Rather than wait until our audit comes around, we're going to our insurance agent and saying, "The last six months of our insurance bill needs to be adjusted because we have six less people on our payroll, and we don't want to wait until the end of the year to get that money back."
Tom: There are also areas, as you've said, that even if someone isn't experiencing bad times and recession, they can take a look at it even in good times. It's not a bad bit of advice, either.
Dave: For a long time we experienced a lot of growth. Then we stagnated in the last three or four years and haven't been able to grow past $6 million. Yet, what I found was, without real diligence our overhead continued to grow. Even though we didn't, our overhead did.
Tom: We experienced that, too. That's brutal.
Dave: It's like a disease. I got to a point where we had to put everything under the microscope.
Tom: Mat, do you use different sales techniques than when everything's booming?
Mat: We use urgency. We try to sign them on the first close. We were a little bit more relaxed with that. We try and have them waive the three-day recision, such as cancellations. What would happen is we would go out there and price the job at $8,900 and then a competitor would come in and say they'd do it for $8,700. And people would actually cancel over $200 without any thought to the quality. And of course you have the higher gas prices. We explain that if they sign on the initial close we're at $3 a gallon, we can save you a little bit of money instead of having to come back out to write this up. And, of course, we always hype quality. Check us out; look at the Better Business Bureau. Check out our report. Call the building department, get different references. Don't base this solely on price. We really try to educate them on how they should shop for a remodeler and what might be the right choice for them.
Tom: Dave, do you find yourself selling differently or using different techniques?
Dave: We definitely are. I'd like to say we adopted this earlier in the game, but we didn't change as quickly as we could have or should have. We still have clients that are willing to sit with designers and go through the design process. I sit with our sales staff on a weekly basis and find out what projects everyone thinks are going to sell, and what time frame. For the last nine months, everyone's been wrong. If we thing we're going to sell $500,000 or $800,000 in a given month, better than half of that slips to the next month. We had a hard time getting our clients to create a sense of urgency; there is no sense of urgency. People are very happy to just plug along at a very slow pace. Some of the things we've been doing to create urgency are to use manufacturer's price increases or price increases in general, and say, "In this time frame, the price is going to go up. If you sign now well lock in." That has helped a lot. It's helped clients move in a positive direction. We use a complicated sales approach. We could sell design agreements in the first call, but we never sell projects in the first call. Generally, our job size is a little bit larger. If we're on a sales call, we now set up two or three follow-up meetings. It just seems like it's been a bear to get clients to commit. Once we are face-to-face, we can get those meetings. But over the phone or by e-mail it seems our clients are either busy or not motivated. It's been a killer getting people to finalize things.
Tom: Very interesting. Dave, do you market and advertise more or less during changing times like this?
Dave: We've been keeping the pressure on and advertising more. One of the things we do that we haven't done in the past is advertising at times that we historically have not. In summertime, our leads have been dead. This year, for the first time as an experiment, we threw a big campaign in when leads were lowest and we saw it pick up. The same thing is happening at this time of year. During the holidays, leads are dead. We created another program for this time of the year. We've been doing that to see if we can have an impact on what seems to be the natural cycle of leads being down to see if we can turn that around.
Tom: Great. Mat, do market and advertise more or less during changing times like this?
Mat: We're fairly consistent. We change the medium. With satellite, radio, cable, and direct TV becoming more prevalent, I'm beginning to prefer the smaller local papers. I'm not talking about The Detroit News or The Free Press, but the ones that get mailed free to the homes have really done well for us. Also some of the dollar saver magazines, like the JB Dollar. As long as they've got food coupons in there, there seems to be a lot more longevity. If everyone's advertising home improvement, people will pitch it. If there's coupons for money off pizza, and what have you, and the coupons don't expire for a coupe of months, people will tend to keep those and look through them a little longer. And billboards. With more people in their cars, I have begun to put billboards on the side of the freeway. People notice those as well.
Tom: Mat, if I were to ask you "what is the one best form of marketing that has been successful for you, what would you say?"
Mat: I used to say television, but you're seeing the Web preference increase. Everyone that comes out here — Yellowpages.com, Comcast — everyone has some type of Web-enhanced marketing plan to promote your site. I would say right now we're in a transition. It used to be TV, but if you don't have a website, you had better develop at least a small one, something to keep your name out there. It's the only thing that's available 24/7, 365 days a year.
Tom: Dave, what's your best form of marketing?
Dave: I guess my best form is no one particular form. There has been no silver bullet for us. It's been an increasing number of strategies that have allowed us — whether it's teaching seminars, home shows or inserts — it's the variety of leads to turn around 23 percent. It's not one shining star.
Tom: Both of you are bringing up a very interesting thing. What happens a lot when you're in a down market is that you look and say, "How can we save money?" and you go to advertising and see that line item and quit advertising. Sometimes it's difficult.
Mat: One thing I'd like to add. If you've had a great relationship with a TV or radio station, you can approach them and ask them, "Can you help us out?" There are times when we get free spots, just because they understand that and they want you to succeed. Don't be shy. When you go to sell your company, don't just sell it to a client; sell it to the marketing media as well. You'd be amazed; they'll discount the rate, give you better spots, or give you free spots some of the time.
Tom: Mat, I'm going to stay with you here. What we've experienced, we've tracked our past customers and referrals as our best form of leads. Do you look at that, and is that a correct statement?
Mat: Oh, yes 100 percent. They've bought from us once. They know what the experience is. We have a 95 percent referral rate. People who have used us will recommend us and use us again. They've already seen the process. They are your best form of advertising. A happy client will spread your name all over.
Tom: Your percentage is a little higher, but our percentage is in the high 80s. We like it there because we track it. We ask everyone that calls in, "Why did you call?" They have 8 or 9 reasons why they call you: radio or home show. Most of them say, "I've used you in the past" or "You were referred to me." If past customer referrals are our best form of leads, what can be done to attract more business from this group?
Mat: Use of direct mail. You have all their information. Go back three or four years. Mr. Jones had a kitchen done; has he got an interest in remodeling his bathroom? Go through and develop a list and send them a direct mail piece. It does work. Direct mail, unfortunately, gets a small response, but it keeps your name out there.
Tom: Dave, same question. If past customers and referrals are the best form of leads, what can you do to attract more business from them?
Dave: We try to be a circle of influence to those people who are important to us at least four to five times a year in different ways. We'll do it with a newsletter. We'll do it with a holiday card at a non-typical time, like New Years. Last year, we did a promotion and sent 9-volt batteries at a time when they change the clocks and reminded them to change the backup batteries in their smoke detectors. We do promotions to try to stand out a little bit with out past clients. One of the things we're going to do going forward this year is to require our sales staff to make weekly past client contacts, asking for referrals — just going back through their list of clients and contact one or two a week just to press the flesh and say, "Hey, how are you?"
Tom: That's also one that you have to keep up and track. Because they're not held accountable. That's the only thing I'd say on that. Dave, let's say if things slowed down and were stagnant, as you've indicated, what are the best practices for your workforce? Layoffs? Alternative strategies? In other words, what do you do? If it stays stagnant, maybe you just don't hire. What do you do with your workforce when things get slow?
Dave: We've gone through and streamlined. We've cut down six people in our total staff. Over and above that, I still have a short list of other positions if we don't see the numbers we want to see that I could consider letting go. In terms of people that we have, we've also redefined some people's roles. Back to the marketing example. I eliminated a marketing coordinator salary and reallocated that responsibility across four different people. So it didn't dramatically change anyone's job responsibility, but it redefined things to some degree while keeping our costs down. Where we can do that, where we can create efficiency by having underutilized employees take on some additional or different responsibilities, we're doing that. And then over and above we are "open book" with our staff and we share with everyone how we are performing and what's going on. And a huge component of it is just rallying the troops — getting people to buy in and believe in the company and back the company. You have to put a cost concession on the table, or when you have to put something that's less desirable on the table, you've got a company culture that's going to back you up and help get you through a tough time.
Tom: Mat, what do you do when it gets slow? I know that you have trade partners out there who you work with. When you get slow, what are the best practices for your workforce? Are there alternative strategies for what you do?
Mat: Unfortunately, like Dave, I had to lose a couple of positions. Another thing I've done is in-house. I alternate the people who answer the phones and the administrative positions where, "OK, you'll get a four-day week now instead of a five-day week." They seem to like it. Generally, if you're off on Friday, you get the following Monday off, but you're still paid for four days a week. It saves a little bit on payroll, as well as telling the sales professionals to go out and maybe market door-to-door. Make sure that the jobs you do have going have the job sign up there. It's proof positive that work is happening in the neighborhood and, "You should give us a call."
Tom: Your sales people are primarily on commission?
Mat: 100 percent commission.
Tom: Dave, are yours on 100 percent commission?
Dave: Yes, there are some folks that are on that basis but it's all commission driven.
Tom: Dave, the question is: We need help. In other words, where do we go? Where can we network with other remodelers in the same situation of a changing and down market?
Dave: I'm a member of Remodeler's Advantage and also a facilitator for Remodeler's Advantage. That's a good resource that I can't credit enough in terms of keeping my head on straight and in terms of giving me new and fresh ideas. A couple of weeks ago there was a sales management workshop that I went to. I'm the sales manager for our company, and I constantly feel it's a position I grew into. It's something I don't do well enough and I to have the opportunity to get exposed to that is really valuable.
Tom: Good answer. Mat, it gets lonely at the top, I can tell you. Where do you go, or where would you suggest other remodelers go to network with people that may be in the same situation in a changing market?
Mat: Networking out here as far as remodelers are concerned is pretty difficult only because our local NARI chapter folded up a few years ago. There is the National Association of Home Builders that has a remodelers council. They aren't that strong right now because most of the home builders have left. I believe that the trade publications such as Remodeling, and Professional Remodeler and Professional Builder are great reference material for a qualified remodeler to go through and get insight. Unfortunately, in this market we really don't have great networking opportunities. One of the things that I've done is take advantage of the Better Business Bureau seminars that are offered out here. They give you some hope.
Tom: Mat, what's the biggest problem you face in down times, and what did you do or what are you doing to address that problem?
Mat: The biggest problem, obviously, is lack of work. You have crews threatening to move to different states.
Tom: Yeh, that's right.
Mat: You have to spread the work out instead of feeding one carpenter; you feed them all the best you can and the strong will survive. Some people have created their own problems. They never thought there would be a down time, like you said earlier. A lot of them you can't help. They've mortgaged their homes to the hilt and declared bankruptcy. There is only so much you can draw in a market like this. It's very difficult because of the abuse of the media, it's gloom and doom every time you turn on the TV. Who's leaving the state now? Comerica, Pfizer — there are huge companies that are packing up and taking off.
Tom: Dave, what is your biggest problem, and what have you done or what are you doing to combat it?
Dave: Our biggest problem is carrying too much overhead and being inefficient in the way we operate our business. We re-evaluated our business top to bottom. We had to make some real tough decisions. But it's something I should have done three years ago, quite frankly.
Tom: Incidentally, we called out around here. I termed it having a hard edge. We've been through down times. We believe that the owner or manager who has what they call the hard edge. In other words, as you said earlier I believe, you're re-evaluating your fuel allocations and it's not the most popular thing. We had a lot of those that aren't the most popular things but the person who has the ability to do it. Mat, what advice would you give, in closing, to a remodeling contractor who's out there and he's struggling and he doesn't know what to do?
Mat: Well, no matter how big or how small, please keep an open mind and remember to deliver your product and quality consistently to the homeowner. Consistency, I totally believe, is the key. When you're trying to go out and lower the price through less quality, you don't have consistency. People used to ask me, "Who are your customers?" I used to tell them they were any homeowner who wanted remodeling, but that's probably not the truth. Our customers are the ones that want quality and are willing to pay for it. And when you can give small price concessions, do so but don't give away the store.
Tom: That's great advice. Dave, what are your words, thoughts and wisdom to people out there who a reading this or listening to it?
Dave: I would say that in a changing marketplace and in a changing economy that business as usual isn't going get it done. So, you need to be introspective, critical of your own processes; be critical of your previous assumptions. The way you looked at your business three or four years ago can't be the same way you look at your business today. And the reality is, it's hard. You need to take a hard look in the mirror and say, "Are you the leader that the company needs to make the hard choices?" Are you forcing your company to conform in ways that it needs to? It may push you outside your comfort zone. It may actually change the quality of your life, which when you run your company for a while may not be something you want to do. At the end of the day, it's better to have a viable company in the long run that will allow you and your employees to survive and experience a little bit of pain than to try to stick your head in the sand and avoid the real issues that are out there.
Tom: Gentlemen, you've made a difference. I always start these and think "What's going to come out of this?" You've brought some great things to the table. You've made a difference and an impact.