A successful service business can operate a successful remodeling company — but only if the companies function in distinctly separate ways.

Over the years, many service contractors have read Frank Blau’s “Business Tips,” column written for PM. The columns have helped thousands of contractors crunch their numbers and turn their businesses into profitable operations.

I’ve met many of these success stories myself since my father usually brings his visitors over to tour my bath and kitchen remodeling operation, Blau Bath & Kitchen. After a tour of the showroom, we often discuss the potential of making money remodeling bathrooms.

I always give my visitors the same advice: Yes, you definitely can make money in the remodeling business — but only if you set up the remodeling business as a totally independent operation from an existing service business.

The irony is that what makes you successful as a service contractor could make you a failure as a remodeling contractor. Here’s one big reason: A service contractor markets to a broad scope — everyone needs plumbing repairs at one time or another. But a remodeling contractor can’t ever expect to gain such mass appeal without diminishing his worth. First, they’d never have enough money to advertise. Second, they’ll lose too much to either end of that spectrum. On the low-end work, they’ll lose out to the home centers. On the high-end, people won’t trust them to do it right.

There are definitely important financial considerations to setting up a remodeling business apart from an existing service business.

A successful service contractor will always base overhead on billable hours. But the remodeling business is different. The overhead cannot be based only on direct labor hours because the potential to oversell, or worse, to undersell the job is great. The remodeling job has many more direct and indirect costs associated with it than the average plumbing service job. Overhead based on the percentage of costs that include direct labor, materials and fixtures, and subcontracting cost is a more accurate method, and allows you to mark up your labor and materials equally with sublabor, as a percentage of the selling price.

Likewise, there are unique marketing expenses and decisions that must be made to generate the proper leads. For example, do you treat your display expenses as inventory or as assets? There are plenty of sales expenses that may or may not be classified as productive. And there is also nonproductive time that also needs to be tracked.

In upcoming issues of PM, we’ll get to work crunching the numbers that will help you run a remodeling business just as successfully as you run a service business.

However, as important as the numbers are to the long-term success of your remodeling business, the mindset of remodeling is essential to its short-term success. I’ve found that the cardinal rule of remodeling is: It’s All About Them, Not You.

I can say from experience that a remodeling business needs to stand on its own with its own mission statement and corporate culture. I’ve owned Blau Bath & Kitchen since 1990, but it was started by Blau Plumbing in 1985, and operated as part and parcel of that business until I bought the operation. In those early years, no decisions were made apart from what made Blau Plumbing a success. We didn’t even have separate books for the two businesses.

To see how this impacted the remodeling business, take a look at how we determined our product mix — a pretty important part of remodeling. When you’re running a service business, you want three prices on copper elbows, and you’ll stock the ones at the best price to you. As a result of this mindset, product lines were brought into the showroom based on who could give us the best deal. So rather than determining beforehand who our customers would be and what their wants would be, it was all about who could put the vignettes in for free.

The original showroom featured a series of complete, functioning bathrooms and pinned a price tag on each package. There was also a price per item without the installation labor. Also included was an 1,800-sq.-ft. lower level dedicated to the do-it-yourselfer. We even went so far as to include a packet of information for the DIYer that contained graph paper, scale dimensions of the displayed bathroom, rulers and instructions, as well as a videotape library about how to install product. And if that wasn’t enough, we also held classes for the DIYer on installing tile, plumbing and other simple tips. Above all was the idea that if customers couldn’t do the job, we’d be right over to finish the installation.

Now I ask you: Who was our customer? What image did we project?

At the time I purchased the company, we were doing 60 percent remodeling and 40 percent what I would term retail sales — selling everything from hot tubs and new construction packages to a single faucet. Our business changed drastically when shipping china become so affordable. Overnight, we became the area’s biggest specifiers of product — but we didn’t necessary sell or install the product. It was all too easy to “see” how much lower prices were somewhere else, particularly at home centers that could obtain the products just as easily and quickly as we could.

We stumbled around like this for about five years, being a little of this and a little of that. In 1990, Blau Bath & Kitchen become a separate business — my business. We determined to cater to the demands of the high-end customer. Our showroom, staff, operations and product lines all fell in place behind that one decision. Here are some of the ways we changed our mindset from service to remodeling:

  • Get to know your customer: To offer value, you must add value — and do so every step of the way.

    The remodeling customer is different from the service customer. Normally, the need is not as immediate. It’s something that has been driven and cultivated by many outside sources such as magazine articles, home fix up shows, friends, relatives and keeping with the Jones’s. The desire in 90 percent of our customers starts with the female member of the household. It is difficult to use conventional marketing to create such a need in most consumers, and impossible unless you have unlimited advertising dollars to create an immediate call to action.

    The retail market is also a completely different animal. You’re completely exposed to changes in decisions at any point in time unless you find a way to take that customer immediately off the market. Those customers who seemed so nice and friendly could walk right out the door and never come back — and take your ideas with them. One of the most important ways we get to know our customers — and take them off the market — is one of the first things we do. After prospective customers have finished their first tour of our showroom and we’ve gotten a feel for what they need and they’ve gotten a feel for our dedication, we send them home with a five-page survey to fill out. We also include a postage-paid envelope in which to mail it back. The information is quite thorough as you can see from just one of the pages we’ve reproduced along with this article.

    The information gained from this process is invaluable once the would-be customer becomes a definite customer. You can tell a lot about what kind of working relationship you may encounter by judging how open the customers are with their answers. But there’s another excellent reason to gather this much information: Depending on how soon we get the information back helps us gauge just how serious this customer is. You can bet if we get it back the very next day, they’ve determined we’re the company for them. In the long-run, it is essential to your success to get to know your customer. Currently, 80 percent of our business is from referrals. And plenty of our business is repeat business from customers wanting to remodel another bathroom, or who have moved on to another home.

    We still advertise, but at this point I would say our most successful marketing comes from continuing to cultivate these relationships. Right now, one of the most effective promotions we do is invite a past customer along with a friend of their choice to spend the day at a cooking school held in Kohler, Wis. You’ll find that it is invaluable to stay within the same circle of friends as your customers.

  • Prejob schedule: Our contracts are very detailed, often as long as seven to 10 pages, and say everything we will do and won’t do. Every step of the way, we try to educate the customer about what to expect. Can there be anything more disruptive than to jeopardize a person’s bathing and toilet facilities?

    A big way we set ourselves apart is with a prejob schedule that tells the customer what to expect every day of the project. With this, customers can see that when we schedule the work, we bring in craftsmen like an air traffic controller brings in planes.

    In a bathroom, supplying such a schedule is not that difficult, but other competitors don’t do it.

    We’ll do whatever it takes to make a bath remodel as carefree as possible. For example, we put in temporary showers in the basement on all our jobs. We’ll install a shower stall over a floor drain, hook a garden hose up to the laundry sink faucet and tell everyone it’s going to be like camping for a few weeks. Once, when we remodeled a home’s only bathroom, we hooked up a toilet at the end of each day for the duration of the job.

  • Expert Installation: We do “hand grenade” bathrooms — basically rip everything out and start from scratch. The only thing we try to keep in place is the toilet, or at least keep it moving only laterally in the joist space. But everything else is fair game.

    I’m a master plumber. A majority of the work needed in a bath remodel is mechanically intensive plumbing. And the most money per square foot will be spent in a bath remodel job. In other words, your customer needs someone who knows plumbing, not just a guy who’s a great designer, but who doesn’t know that you can’t move a toilet across a floor joist without major construction.

    A lot of my competitors don’t bother hiring professional plumbers. They figure the carpenter who’s setting the cabinets can hook up the plumbing, too. Maybe some can. But I’ve remodeled some of these remodeling jobs, and I’ve found some fantastic uses for duct tape. Likewise, a plumber doesn’t make a good carpenter either. I’ve seen holes drilled through floor joists that would make a carpenter cry.

    This is where you can really outshine the competition. Your customer will never get the job done better than when you have each individual portion of that work done by someone who does nothing but that particular task for a living. However, that doesn’t mean you should do the plumbing work yourself. We subcontract all the work out.

    We’ve spent a lot of time selecting the tradesmen we work with, and we will talk about that system in future issues.

    To sum up, ask yourself these questions:

    • Who is better educated to handle the biggest part of a bathroom renovation, namely replacing the plumbing system?
    • Who is in a position to be the “expert” and differentiate himself from the other kitchen and bath dealers in the field?
    • With the drastic changes that have taken place over the past 10-15 years on how the plumbing fixtures get to the end-user, what is my best bet to control as much of the plumbing fixture market as I can?
    • Why should I let this closely related field go to others?
    • Do I want to end as a trade only providing PVF similar to electricians?

    The remodeling business offers plenty of opportunity to expand your existing business. Your competition won’t just be the K&B dealer; I like to think our biggest competition comes not from other remodeling firms, but from the luxury auto dealer, the boating industry or the leisure field, where people use their discretionary income to enjoy life.

    In other ways, you’ll become an investment counselor. The immediate return on a bath remodel in this market is 98 percent. And keep in mind, the real secret is to make the job look good 10 years later. And any real estate agent will tell you that it’s the most important room in the house. And of course the big benefit comes from enjoying the space every day.

    In coming months, we’ll talk more about the business of remodeling in a new column for PM.