The kitchen and bath design and remodeling market today has changed dramatically from what it was not so long ago. The big box stores sell most of the products we include in our projects and also offer installation. In fact, most of them have partnered with local contractors to provide “full-service” remodeling. Additionally, the internet allows our clients to compare prices on the products we include in our projects.
At the other end of the spectrum, there is competition from carpenters who have decided to become remodelers, many of them without the business background to determine how to price their projects to enable them to survive over the longer term.
This month we will take a look at how to target your market, how to determine a fair price for your products and services and what that strategy means for your bottom line.
Determine Your Market
There’s a tendency to want to be all things to all people, offering any and all services whether or not we have any particular expertise or experience with that product or field. On the other hand, we sometimes focus entirely on what we have always done and ignore opportunities in new fields or products where our expertise could make that a viable line of business for our firm.
If you’re one of those that have maintained your focus on a narrow area of the housing market, say, selling cabinets and trim to custom builders, you’ve already learned that this market has shrunk to near extinction, and have likely expanded into retail remodeling services. Likewise, if you’ve been concentrating on kitchen change outs, you have likely expanded into bathroom remodels, minor (or major) additions and perhaps even added a “handy-man” service to increase the number of potential clients for your services.
Expanding your range of services is a reasonable approach to increasing your revenue, as long as your firm possesses the expertise to compete with those already established in that segment. In most cases, you will be faced with adding additional employees or sub-contractors to supplement your in-house capabilities.
The key here is to make a conscious effort to identify areas where your resources and expertise will allow your firm to be competitive. It only makes sense that people in the construction trades who perform the same tasks on a regular basis will be more effective and efficient than those who only perform those same tasks occasionally. Herein lies the danger of trying to be all things to all people.
How to Compete
We sometimes hear the lament that it’s impossible to compete with someone who has only a box of tools and a pickup truck for overhead. As mentioned previously, it is not unusual for those considering a remodel project to try to get multiple “bids.”
The easiest way for a customer to get multiple bids is for them to separate the design function from the build portion. While this separation has long been the norm in new construction, and to some extent, in major remodeling, combined design/build has been the rule in residential remodeling. Recently we are seeing a trend where clients with even minor projects are anxious to have plans that they can shop around to several contractors.
While it cannot be said that bidding for work is never profitable and successful, it requires that your firm be managed efficiently, and costs be strictly controlled. If you choose to adopt the strategy of bidding against several other contractors, you will have to aggressively manage costs.
Having said that, running a tight ship is equally important even if you are able to maintain the design/build, negotiated contract form to your business. In all likelihood, before you sign a client to a design retainer, you have already been through a ballpark estimating process, with the client probably having obtained similar preliminary estimates from your competitors.
Being able to maintain the design/build format does not mean that you can be sloppy with managing your costs. It’s important to regularly review all costs, including overhead. Speak with your sub-contractors about the need to trim any “fat” in their operations so that they can give you the most competitive pricing possible. Take a look at luxury indulgences such as “gas guzzling” work vehicles, tickets to the local pro team, etc. If your subs have these types of expenses, you may want to question whether their bids to you are staying competitive. If the current market seems to allow you and your subs to cover these things, be prepared to make corrections if your competition decides to eliminate them.
Once you feel that you have these variable job costs minimized, it’s time to look at your overhead. Have you looked at every line item of overhead to make sure it really is necessary and that there is not some other, less expensive way to accomplish it? Look at out-sourcing as a possibility or, conversely, having your staff perform some tasks previously farmed out.
Once you’ve determined what the costs are that you will need to cover, the next step is to determine how much revenue is needed to cover all of those costs and, hopefully, result in a profit. Since the answer depends on what level of gross profit margin you’re able to achieve, the volume required goes up as the margin goes down.
The answer to this question is simple math. If your total overhead costs are $50,000 and you can achieve an average gross profit margin of 33%, the formula is 50,000/.33. So the sales revenue needed is $151,515 (the break-even point) and every sales dollar after that produces $.33 of profit. Keep in mind that overhead costs are never entirely fixed and, as your sales volume increases, even these costs will tend to rise over time. Also, remember not to confuse mark-up with gross profit margin; a 50% mark-up only generates a 33% gross profit margin.
The important thing to remember in any pricing decision is that the critical issue is gross profit, not raw sales numbers. It’s easy to get caught up in the allure of chasing that big job and cutting the price to “get the job,” only to find that all the time and effort it took to manage that project did not generate enough gross profit to cover overhead. Being aware of your break-even point will allow you to make good decisions about your pricing strategy. ▪