A Difficult Balancing Act
Here’s a riddle for you:
- Its price keeps getting higher but if you don’t buy it, your trucks will be stuck at the shop.
- Some get more efficiency with it than do others.
- Everywhere you turn, there’s another expert with a “surefire” device to improve efficiency.
- These days, it can easily cost you more than your truck payments.
- But like it or not, you have to buy it.
Almost daily, I deal with contractors who can’t make their budget numbers work because they can’t make the phone ring consistently. This leads to a difficult balancing act as they calculate budgets because overhead costs must be spread across their production volume. More production units means lower overhead cost per unit. Fewer production units means higher overhead cost per unit.
If higher production leads to better overhead efficiency, then it should make sense to increase the opportunities to produce. If you’re in the construction end of the business where a single contract can produce a six-figure sale, your marketing may include association memberships, country club memberships and other forms of face-to-face marketing.
However, if you’re in the service business, where production is in the form of hundreds or thousands of small invoices, then you need to make contact with tens of thousands of prospects. Face-to-face contact just won’t get the job done because you can’t get around to enough faces.
In the service-contracting world, low marketing budgets may be a relic from construction bid practices. For example, a construction contractor may tally the expected costs of materials, add the expected cost of the man-hours to install the materials, and then tack on a fixed percentage to cover overhead and profit. That percentage may be in the neighborhood of 20 percent to 30 percent. The construction contractor, tiring of squeaking by on the jobs he “wins” and tired of missing jobs because he calculated a profitable price, may decide to go into service work where there’s “real” money to be made and it’s C.O.D. to boot!
The budding service contractor still tries to cram the cost of overhead and profit into that 20 percent to 30 percent overhead budget and just doesn’t give a thought to the cost of marketing. What’s worse, having little experience with the effort involved in getting the phone to ring, the contractor turns the job over to the Yellow Pages sales rep. After all, he’s in the business, he should know how to get the phone to ring, right? The inexperienced service contractor then learns a hard lesson: Marketing is quite a bit more involved than simply placing a phone book ad.
Marketing Is A Numbers GameLet’s take a look and see how often a phone needs to ring in order to keep a service contractor busy. First, let’s establish the production capacity of a typical service tech. Without a doubt, production capacity varies from company to company, but it’s reasonable to estimate that half a service tech’s time is spent on “nonproductive” items such as paperwork, travel, stocking, meetings and other necessary chores. If a typical work year spans 2,000 or so employee hours, and about half of that time is productive, then we’ll use 1,000 as our production target (besides, 1,000 is an easy number to calculate).
Next, let’s estimate how many jobs a tech will need to visit in order to meet this budget of 1,000 production units. The construction contractor might think that getting around to more customers each day equates to higher efficiency, which means techs could knock out six or seven calls per day per truck. Sales-savvy service professionals understand that better customer service means doing more for each customer, resulting in only two or three customers served per day per truck.
This opens a whole different discussion but for this month, we’re going to arbitrarily say that each customer represents one production unit per visit, so we need to hear from 1,000 customers per year. Actually, we can cut that number back a bit if we assume that half our service work comes from repeat or referral business, so let’s just say we need to find 500 new customers each year.
We haven’t yet started budgeting a cost for this marketing effort, but bear with me as we further identify the number of potential customers we need to touch. It’s difficult to pin down exactly how often a typical consumer finds a need to call a plumber. Some homeowners require PHC services more than once per year. Some landlords have weekly needs. But most homeowners easily get by with a service visit maybe once in three or so years.
For this discussion, we’re going to lump the high-volume customers under our “repeat/referral” category. What this means is that in a year’s time, we need to make contact with at least 1,500 customers who would call us if they actually had a service need. Warning: We’re about to unleash a torrent of costs, so get ready.
OK, we need to touch 1,500 customers who would use us if they need us. But we don’ t know who they are or when they’re going to need us. All we do know is that we need to make contact with them. Just for simple math, let’s say that we’re going to have to contact 10 customers before finding one that will use us. Suddenly, we’re making 15,000 contacts per year (this is a conservative estimate). Another factor we have to deal with is that a potential customer is likely to ignore your beautiful advertising material until such time that he or she needs to call for service. It’s reasonable to estimate that we need to touch those potential customers three or more times per year just so they will think of us when they need us.
There are many ways to make contact but for our example, let’s say we’re using direct mail because it’s fairly easy to calculate. So, 15,000 potential customers multiplied by three contacts each means we’ll be sending out 45,000 direct mail pieces each year. Now, once again, just to keep the math simple, let’s say that each contact costs 75 cents to cover printing, postage and a mailing list. This means that a direct mail budget to keep just one service truck busy can easily reach $33,750 per year - and this is a conservative number, since some marketing efforts can cost several times as much.
Is this starting to make your fuel bill look a little more reasonable?
Now, let’s look at this number as a percentage of sales. If each service truck is turning $250,000 a year in sales, then our marketing budget for $33,750 works out to about 14 percent of your sales. Some contractors expect to spend more, some spend much less. The investment required varies according to the goals and needs of the particular business, so your mileage may vary.
Direct mail is only one marketing tool. Truck signage, flyers, mass media (such as radio, television, the Internet) have benefits and drawbacks, but they all have costs. Even word-of-mouth referrals require an investment if you provide ways to make it easier for your customers to refer their acquaintances.
There are myriad ways to improve marketing efficiency, but the purpose of this month’s column is simply to highlight the very real cost of a marketing budget, a line item that I rarely see addressed among the smaller contractors I deal with. Just like fuel, this budget item cannot be ignored. If you are having a difficult time keeping your trucks away from the shop, then perhaps your marketing budget needs a fill up.