He finds a job
John may have started doing landscape work because he was tired of other jobs or because he couldn?t find any other work and had a family to feed. Perhaps he started in high school, and signed on full time after graduation. But he stayed with the job, which said something about his character.
John paid attention and learned to do things the right way and get the jobs done on time. He kept himself presentable, showed up on time and developed good work habits. He was good at dealing with both customers and fellow employees.
He soon became a lead man, and then got the nod when a foreman?s job opened up. Before long, he became the field superintendent. He treated everyone well; his jobs were done on time and they made good profits.
The owner asked John to learn estimating and sales. He excelled, and slowly worked from the superintendent position over to a less physically demanding estimating and sales job. John worked hard, learning all he could. He attended every training seminar possible, spent many Saturdays doing estimates, job recaps, and reviewing completed jobs. He asked questions, paid attention and watched how the business was run.
Then one year he didn?t get his expected Christmas bonus. To make matters worse, the boss got all over his sorry derriere because a couple of jobs came in over budget. Everyone could see it was the boss?s fault. He was not paying attention to his business. He was putting up with incompetent help in the office and hiring bad people in the field. Nobody bothered to order the right materials, and some of the necessary equipment was down, since it hadn?t been properly maintained.
So, on the Monday after Christmas, John walked in the office and told the boss he was done. He quit the company after nine years, and decided to start his own business.
His wife Susie had been encouraging him to quit anyway, so it was no surprise to her. She knew John was not happy. She was working full time, making a good income, and could help pay the bills while he got started.
He starts his own business
To begin with, he picks up a few small jobs, and with persistence is given a chance to bid on larger jobs with a general contractor. He doesn?t really know how to price jobs, because he doesn?t have his overhead figured out, so he prices his bids at cost plus 15%. He doubts that he really has any overhead, since he is working out of his own garage.
He gets most of his bids, and makes a few dollars on one or two. He doesn?t pay himself yet because his two employees get paid first. He purchases new equipment with a credit card. Soon that one is maxed out, and he gets another, and then a third.
He?s concerned when he loses money on two or three jobs, especially when the profitable jobs can?t make up for the losses. He vows to work longer hours.
Someone tells him to go to his bank and get a line of credit so he can catch up on his bills and start fresh. So he gets the line of credit, pays all his back bills, and starts raising his prices. He knows he has to make more money if he is to survive.
The industry standard
He still doesn?t know his overhead. He loses four bids in a row, and is told he is at least 25% higher than anyone else bidding the same jobs. Then he decides to cut his prices once again. He uses a 1.20 markup, which someone told him is the industry standard. He gets three of the next four jobs he bids.
Unfortunately, John missed a few items on the estimates. Two of the jobs will lose money, and one will barely break even. That?s okay; he?ll make it up on the next one. At least he has money coming in now; he can meet payroll on Friday and can pay down some of the old bills.
John has stepped into the world of trying to compete on price. Sound familiar?
If John survives the first three years in his business, which at this point is highly unlikely, he will certainly be badly in debt. Thirty percent of all new construction-related businesses fail the first year. Twenty-seven percent more fail by the end of the second year. Another 17% will fail by the end of the third year, for a total failure rate of 74% after three years. Those sad statistics have remained the same for the 23-plus years this author has been tracking them.
Why must they continue? Why won?t hard work and determination get you over the hump?
Doesn?t building top quality into your jobs account for something? You have to be competitive in your bidding or you won?t get the jobs. Unless you have work, you can?t pay your bills or meet payroll. What is a business owner to do?
The Great American Dream turns into a nightmare for most of the people who start their own businesses. It certainly has for John.
Let?s see what John does.
He hates to go home at night, because Susie will ask questions he can?t answer. He has bills to pay and no money to pay them with. He is well over $50,000 in debt, with no progress payments due on jobs. All their savings are gone, and Susie is furious. Everything she says to John leads to a fight. The kids are pulling away because ?Daddy yells at us all the time.?
On the way back from dinner at Susie?s parent?s home, she lays down the law. Her patience is gone. She is tired of working to pay the bills so John can follow his dream. He?s wasted every dime she saved, and it?s time for John to get a real job. His days of working on his ?hobby? are over.
It?s a long drive home. John can?t deny where his business is and he fears for his marriage. He needs help.
The next morning he calls a family friend who is retired. His friend was in the business world for many years, and might have some valuable advice.
John?s friend listened while John told his story. He understood the tears in John?s eyes as he described the conversation with Susie the night before. She had lost faith in him, and his ability to make money in their business. He had let Susie down.
John?s hope was to hear a magic formula; the secret that would fix everything. He quickly found out that wasn?t going to happen.
The first thing the friend told John was that education is the key to success in any business. You must stay on top of your business and never get the idea that your way is the only way or even the best way.
He emphasized that John was in trouble because of decisions that he and he alone had made. He told John he wouldn?t let him talk about how it wasn?t his fault. John would have to take full responsibility for his trouble, and full responsibility for getting out of it. He told John to make the smartest decision of his business career and get a business coach ? someone who knew the business and could walk John through what it took to survive and succeed.
It would take an investment, and that would mean a risk. Susie was tired of risk, but agreed to one last gamble ? one last chance to make the business succeed. They were already $50,000 in debt, but this business coach had helped other clients out of bigger debts.
The coach started by giving John some homework. He wanted to know every debt to the penny, and the monthly overhead expenses to the penny. He asked John to calculate how much work he could realistically sell, build and collect in the next year. And John was not to give any more quotes without the coach?s okay.
At the second meeting, the coach looked at John?s numbers and then showed him how to establish the correct markup.
> John had set a goal to sell, build and collect $385,000 for the year.
> He wanted to make 8% net profit or $30,800.
> He projected his overhead at $100,911.
> Projected job costs were $253,289.
The coach told John to forget margins. ?KIS? is keep it simple, and margins are not. He told John the only number that counts is the 8% net profit. At 8%, his company would stabilize financially and he could focus on running his business instead of worrying about how to pay his bills. ?KIS,? said the coach, ?and stay focused on making money, not doing math problems.?
The coach divided $385,000 by $253,289 to arrive at the markup. It was 1.52. John knew then it was all over; no one could ever sell a job at that price.
John repeated all the tired excuses he had heard from other contractors (who had gone broke and were now out of the business) about why you could never use a markup that high, as the coach listened. The industry standard was cost plus 20%. Customers simply would never pay more.
The coach asked, ?If you?ve estimated correctly, you have properly calculated your overhead expenses and you want to make an 8% net profit, how can you do the job for less? Show me where the math is wrong. Show me how you can cut your price and still pay your overhead and make a profit.?
John was stuck. He knew his coach was right. He had to use the 1.52 markup, but how can anyone sell a job at a 1.52 markup? He knew it couldn?t be done in his town.
The coach smiled and told John that he used a minimum of 1.55 markup on every job, 1.65 on smaller jobs, and sold one out of every 2.85 sales calls he went on. John knew he wasn?t lying, but how could anyone use that markup and sell jobs?
That?s when the coach told John the secret. He explained that he was caught in the trap of trying to sell price. That is the trap that leads most contractors out of business, and it brings you difficult customers.
The coach also put quality in perspective. He said, ?Others can do the job just as well or better than you, John. That is the reality of our business. What you need to sell is yourself, then your company and the service you provide.?
?When your customers are looking for a contractor, they have three basic fears. The first is that they won?t get what they want. The second is that it will cost too much. The third is that the job will take too long. You must build your presentation to address each of those issues for the customer. Once these fears are resolved, your customer will begin to buy you. Price is number seven or eight on their list of concerns. Once a customer buys you, he will accept your price almost without exception.?
John was told to work on his sales skills. He was sent to the local bookstore to purchase the book by Tom Hopkins called How to Master the Art of Selling.
The last thing the coach told him was to stop trying to sell price, because you can?t win or build a business selling price.
It worked. On his next sales call, John focused on asking questions instead of giving advice or opinions. He listened and discussed everything they said they wanted. He had them prioritize their list. He summarized their project.
Then he asked for their budget for the job. He arrived at an approximate price for the job based on their budget and his knowledge of what things cost. They were willing to compromise on some things, while others were a necessity. At the end of the discussion of the budget for the job, they knew approximately what the total cost for the job would be, and they were comfortable with that.
He reviewed on paper the time frame for their job. He talked about when materials would need to be ordered so they would be available for installation on his schedule. He allowed a little extra time for ?stuff? that Uncle Murphy brings to each job, and came up with a realistic time schedule. In short, he thoroughly addressed their three major concerns.
John?s coach had told him to start using a design agreement, and he decided it was time to give it a try. He explained to the customer how the design agreement worked. They were purchasing his services to get the plans drawn, compile a firm fixed price quotation within the agreed-upon budget, and write the specifications and contract for their approval. If they chose to continue with the job, the design agreement would be credited against their price.
The customer looked John right in the eye and said, ?Where do we sign??
He couldn?t believe it. Why hadn?t he been doing this all along? It wasn?t easy ? he had worked hard to improve his sales skills. He had practiced with Susie; he had gone the extra mile in preparation for his sales calls. He had done his homework, and now his hard work was paying off.
Euphoria in success
He was so excited he couldn?t wait to tell Susie. He would have bought flowers, but money was too tight. It didn?t matter. She still fell back in love with him that night.
He knew he had a lot of work ahead, but he was determined to turn his company around. It was the first step on a long journey to success.
Over the next few months, John?s business started to turn around. It took four to six weeks for his checkbook to see any difference and at times he wanted to give up. But he stayed with his commitment. He was paying all current bills on time and began retiring the old debt. There were fewer customer complaints, and he didn?t hear ?your price is too high? any more. Somewhere along the way he had figured out five basic principles that he needed to stay out of the ?low bid? game:
1: Always interview the potential customers to see if they qualify to buy from you, not if you are qualified to sell to them.
2: Get the owner to agree to certain standards that you and your company abide by. The customer must then compare all other companies to you and your standards.
3: Address and resolve the three basic fears that customers have in working with a contractor.
4: When on a sales call, stay focused on four basic questions: 1) What do you want to do? 2) When do you want to do it? 3) Who will make the buying decision? 4) What does that person want to spend?
5: Never get involved with Cost Plus or Time and Material contracts. Give firm price quotations for all your work and honor your quotes.
John still heard ?no? from potential customers. The coach reminded him that even the best salespeople in his business hear ?no? on two out of three sales calls. But he didn?t quit, and he kept his focus. John was determined to make it.
One day he did the math and realized that his sales ratio with a markup of 1.52 was almost identical to his sales ratio with a markup of 1.20. The coach had told him that would happen, he just didn?t believe it. Now he knew the truth.
As time went on, John got out of debt. He maintained his markup, and actually increased it as his sales abilities and his company reputation grew. He was worth more, and he charged it. He realized he had become a true professional in the irrigation and landscaping business.
Editor?s Note: Michael Stone is a business coach and consultant with more than three decades of experience in the construction industry. His book, Markup and Profit; A Contractor?s Guide, is published by Craftsman Book Co. He can be reached by e-mail at firstname.lastname@example.org, by phone at 1-888-944-0044, or on the web at www.markupandprofit.com