LEAH: Ken, you have been in the industry nearly 50 years now. A lot has changed since then, but what would you say is one business issue that has remained constant?
KEN: Well, kitchen/bath design firm owners haven’t ever realized their full income potential. That’s still true today. Maybe a handful are, but the vast majority aren’t even coming close.
LEAH: What’s holding them back?
KEN: A number of things, really. First, most don’t know their numbers. That is, they don’t know what their financial statements are saying about their operations. For simplicity purposes, most are running their operations based upon cash accounting, which gives them a false picture of their company’s financial performance. Cash accounting inflates revenue, inflates gross profit and inflates net profit. Under accrual accounting, many of them would be losing money.
LEAH: You are telling me then that they don’t know what they don’t know?
KEN: That’s right. Business has been really good lately. Kitchen and bath dealers are busy. Apparently too busy to take time out to learn what they don’t know. The hefty customer deposits they can command in good economic times like now can make them feel flush. Yet a simple benchmarking report would be an eye-opener. When someone can see a baseline report of their financial results compared to a select successful group of dealers, their metrics in many areas could be way below average. If they are at all competitive with their peers, that should jolt them into wanting to get educated in the areas of finance and financial management.
LEAH: I have seen that with many of our members. Dealers need to remove their blinders and truly recognize how their company is performing. What else could be holding dealers back from earning serious money in the industry?
KEN: Owners don’t charge nearly enough for their projects. Most are undercharging by as much as 15-20% because they think their market can’t bear higher prices. They don’t understand that there is a direct correlation between their overhead and the markup required to not only cover that overhead, but also make a decent net profit for the company. It comes down to getting educated. And an owner’s mindset and resolve to effect real change once he or she has gained the requisite knowledge.
LEAH: I know people who attended last fall’s NEXTgen Conference really appreciated learning how to develop the correct price formula for their operation. But they were also skeptical whether they could actually charge higher prices without losing a lot of sales.
KEN: Actually, it’s possible to substantially raise prices and substantially increase sales at the same time…in the same year. It takes major changes in the way dealers market themselves, the sales process they adopt, the training they invest in for their personnel and how much discipline owners exert over their team to follow the prescribed best business practices. Research shows that today’s consumers are well-educated, and that they don’t want to be sold anything. Rather, they prefer being informed so they can make the right choices for themselves. As a result, dealers would do well to adopt an educational approach to their sales process. Their showroom should not be just focused on fashionable product displays, showcasing the company’s exceptional design ability, but also function as an educational center. There are many ways of accomplishing that objective. The ultimate goal is for consumers to perceive the company as a much better value than its competition. That’s when consumers will pay more – according to research, even up to 30-40% more – for a kitchen or bath project. That educational strategy, well-executed, can rapidly lift a company into a whole new stratosphere of profitability for the owner.
LEAH: What are some of the key aspects of the overall educational strategy?
KEN: There are plenty of things that can be incorporated into a consumer education strategy. Some items are as simple as a posted mission statement. But one of the top priorities to truly make more money, in my opinion, would be a ‘good-better-best’ budgeting approach performed interactively between the sales designer, who serves as a facilitator, and the prospects. Consumers simply love the pricing transparency. They love the discovery process of finding out what things cost. They love the involvement of choosing their preferred products and services. And they believe the outcome, whatever the total project cost is. Because they have seen it add up before their very eyes on the computer screen. They feel so good about what they have accomplished in 30 minutes or so that they are ready to retain the sales designer on the spot – in many cases, even without waiting to receive bids from the other dealers with whom they have interviewed.
LEAH: So, the consumer sees the dealer as not only technologically much more advanced than his or her competitors, but also a better value – despite the fact that the dealer has built in higher profit margins into the ‘good-better-best’ offerings.
KEN: That’s correct. The meaningful involvement of the prospects in determining their own project price, from the choices presented in this software program, is viewed as an exceptional customer service. And it’s such a compelling demonstration that prospects intuitively perceive that every other service the dealer will perform – the design process, ordering, scheduling, project management, installation, etc. – will be equally exceptional. And that feeling leads to a speedy client commitment.
LEAH: If this ‘good-better-best’ budgeting approach became the centerpiece of the kitchen/bath dealer’s educational sales process, how much money could an owner make in this industry?
KEN: Great question. Time for a little math! An owner’s return is defined as the total of three things: salary, perks (expenses paid by the firm) and net profit. For ‘showroom’ business models, where the owner serves as a general manager with a fleet of sales designers, the return should be 18-20% of the company’s total revenue. On a $3 million operation that comes to $540,000-$600,000. For ‘design studio’ business models, where the owner does all the sales with the help of a small support team, the return should be 25-28% of total revenue. On a $1 million operation that comes to $250,000-$280,000.
LEAH: From the financial statements our group reviews for prospective members, most dealers are averaging about 50% of those numbers. The ceiling is so much higher! Something for dealers to look forward to in this new year! ▪
Ken Peterson, CKD, is founder and president of the SEN Design Group, the industry’s first buying and business development group. Leah Peterson joined her father in 2013 after a decade in corporate sales and marketing; she is now the company’s executive v.p. Representing both industry-specific and corporate business experiences, as well as different generational points of view, Peterson & Peterson address industry issues for KBDN in their quarterly column, NEXTgen Business Matters. For more information on SEN educational opportunities, please contact Leah at [email protected] (1-800-991-1711). The Petersons welcome comments, questions or concerns.