The elegantly simple pipe wrench is nearing the sesquicentennial of its birth. OK, so that’s still a decade away but that’s not long when we’re talking about a sesquicentennial. It’s amazing to contemplate that screwed pipe fittings were in use for decades before Stillson invented this simple yet powerful tool. Imagine spending your entire career in the pipe trades being forced to tighten pipe with little more than a pair of tongs. It would be an understatement to say that the pipe wrench is one of those tools that revolutionized the pipe trades.
What does Stillson’s invention have to do with business? First, let’s examine the fundamentals of the pipe wrench. In essence, the pipe wrench provides leverage and a way to use that leverage for torque. A pipe wrench without a handle might grip the pipe but without the leverage provided by its long handle, we wouldn’t be able to torque the pipe. Need more torque? Get a longer pipe wrench. If you need still more torque, I’ve heard that there is a leverage augmentation device designed by some guy named Cheater. All this is to say that leverage is the key. More leverage means you can deliver more work.
Marketing LeverageYour business may have all the parts it needs to function, including a service to offer, customers to buy it and employees to deliver it. A marketing system leverages your abilities and good will, making it easier to build a profitable enterprise.
When I am helping contractors establish profitable selling prices, we have to talk about costs. They will tell me about rent, truck expenses and wages (this is usually after they ask if I know the “going rate” for their town). All these expenses are necessary to run the business but rarely do they mention marketing as one of their expenses.
The typical contractors I deal with are trying to build their business with undersized marketing tools. Would you use a 14-inch pipe wrench to install 500 feet of 2-inch black pipe? Let’s look at some examples of how marketing leverage works for you.
Effective Marketing To Reduce Your OverheadIf you have a truck, you probably have a truck payment. If you have an office, you probably pay rent, taxes, utilities, taxes, insurance, taxes and maintenance (plus additional taxes on the improvements). You get a monthly phone bill and pay someone to answer it, even when it’s not ringing. All this and more are counted as overhead. And I haven’t even mentioned that the owner should be in the overhead budget as well.
We already know that your customers have to pay for all this overhead, so wouldn’t it make sense to spread the load over more customers? Let’s say you have $10,000 per month in overhead (including your marketing budget). If you complete 100 jobs, then the overhead per job is $100. If you produce 125 jobs on the same budget, your overhead per job drops to $85.
Your job count is directly related to your call count: no calls, no jobs. If you’re not helping customers find you, then your call counts will be lower than they could be. Savvy contractors use their marketing programs to keep the phones ringing and to smooth out the highs and lows of business volume. A marketing program cannot guarantee that it will make the phone ring but one fact is guaranteed: People can’t call you if they don’t know about you.
There are ways to track and improve marketing programs but that’s a different subject. The important point here is that without budgeting for marketing, you won’t have a program. It’s like installing screw pipe without a wrench.
Marketing Leverage IllustratedDetermining the effectiveness of your marketing program can be challenging and will often require some fuzzy math. For now, let’s use our company with the $10,000 monthly general budget to create a simple illustration. We’ll stipulate that our general budget includes $1,000 for advertising. In our example, we had a base of 100 jobs but typically at least half of those jobs would be repeat/referral clients. You might say that we had 50 “free” jobs and that the 50 “new” jobs cost about $20 each (more on this below).
In our example, we will credit additional marketing for increasing the job count from 100 to 125. Advertising isn’t free, so let’s say gaining those additional 25 jobs required an increase of $1,000 in our marketing budget. We could say that those 25 jobs cost $40 each - twice what it cost for the first 50 “new” jobs.
Why not just settle for whatever comes in instead of spending all that extra money? Let’s look at those numbers from the profit perspective. The additional marketing investment adds $1,000 to our general budget for a new overhead total of $11,000 per month. We were budgeting for 100 jobs per month because we don’t know how effective our marketing will be. This means our budgeted cost per job rises to $110 instead of where we started at $100. If our extra marketing push yields more of the same, then we can still be profitable because we have that cost in our budget.
If, on the other hand, the additional effort delivers a total of 125 jobs, the cost per job drops from $110 to $88. Regardless of the selling price of those jobs, we have “earned” an additional $22 per job multiplied by 125 jobs; that equals a net of $2,750 for the month simply because the marketing paid off. I say “earned” because our budget was based upon 100 jobs. Once we sell 100 jobs, the overhead is covered, so the difference would go straight to the bottom line. A brief way to say all this is that our extra marketing increased volume enough to reduce our overhead per job, resulting in increased profits.
But wait! There’s more! In our discussion, we assigned the costs only to new jobs (work performed for new customers) and we determined that these new jobs were still profitable even with the added expense of increasing our marketing budget. An even bigger payoff is in the repeat and referral numbers - those so-called “free” job leads. At one time or another, every repeat customer was a new customer. You’ll spend most of your marketing budget on acquiring new customers but the real payoff is when they become repeat customers.
You might think that it is possible to build up a large enough base of repeat customers so that you wouldn’t have to spend money getting new ones. This sounds good but in real life customers move, gain mechanically inclined friends and kinfolk or take up golf with a competitor. You will always be losing customers, so you always need to pick up new ones. More importantly, if you are able to satisfy customers well enough to earn repeat and referral business, then why wouldn’t you continue to build your empire by seeking more new customers?
Marketing leverages your capital, abilities and reputation, so if you’re going to build a business, you’re going to have to spend money on marketing. Your marketing efforts won’t always pay off the way you’d like but you won’t know what works best for your company and your market until you start trying things. When you find a program that works for you, do more of that.
But you’ll never find a marketing program that works if you don’t include it in your budget. Even a pipe wrench needs a hand if it’s going to get anything done.
A note to “the big guys”: I don’t have to convince you about the need for marketing so I used numbers that should make sense to the contractors who are just now trying to figure out what to do.