My wife and I get up every morning around 6 am, start the coffee, and together we read the Los Angeles Times and USA Today. Last week I was traveling to the CONSTRUCT show in Indianapolis later that morning, so I didn’t have time to read every news section I wanted to. But I did read one newspaper article which made me think about the typical construction company trying to do business in today’s tough and slower economy.
In California, total unemployment is predicted to reach ten percent or more over the next few years. Construction unemployment is almost double that sad statistic. But the monthly statistics which got me thinking even more, were construction permits issued in the State. Commercial construction permit dollar volume was down 66% and residential permit dollar volume was down 75% since the peak years of 2005 through 2007. This is a horrible situation if you are a contractor in California trying to keep your doors open and make a profit.
At several large construction conventions I have spoken at this past year, I have repeatedly heard shocking and similar sales figures from national companies who supply construction materials like cement, drywall, light fixtures, and lumber. Your state might not be in as bad of shape as California, but it does make you think about your business model going forward.
What type of company would you own?
If you were not in the construction business, what type of company would you want to start, buy, or own? Would it be dependent on the Federal government or your State to produce enough budget money to insure there was plenty of work for your company to bid on? Or would it be dependent on potential customers to ask you to bid plans and specifications against an unlimited number of competitors – qualified or not? Or would it be a business where you were awarded contracts based on the lowest possible price, regardless of your capacity, reputation, service, quality, or workmanship. Would it be a business where you do all the work and don’t get paid for weeks after you finish? Would it be a business where you do a great job and then the next contract is awarded based on the lowest bidder? Or would it be a business where you do a great job for a customer and then they may not have another job for you to bid on for a few years, if ever?
Being a contractor is a hard way to make an easy living. Or not! Most observers think contractors make a minimum of ten percent net profit and have all the freedom in the world. But the reality of our business is that as you may build a better and better company, you are really at the mercy of the market and customers to create opportunities to generate your revenue potential. In other words you don’t create your own future. You are at the mercy of others to decide to build and then give you an opportunity to present a proposal.
Build a better donut?
Let’s look at the donut business as a comparison to construction. If you make the same donuts as every other corner donut shop, you are at the mercy of potential customers to stop by and buy your donuts when they decide they want one or are in the neighborhood. If you don’t improve your donuts, you can only improve your revenue by offering better customer service, increase your marketing, or lowering your price. This is similar to the construction business. But if you build a better donut, both your revenue stream and bottom-line will improve as customers flock to enjoy your unique and special donuts. When this happens, you can raise your prices and afford to offer better service and customized unique donuts which will attract even more customers.
So the question for contractors who rely on their customers to create revenue opportunities and then get work by being the low bidder is – what are the alternatives? A down market forces construction company owners to look at many options they didn’t need to consider during busy times. Some have tried to move from residential construction to public works only to find bid lists growing to as many as twenty or thirty bidders. Others have tried to move from bidding on retail and commercial projects to public works as well. As most have found out, this strategy is not working. So now what?
It’s not just about the donuts!
Back to the donut business. How could a donut shop increase their steady stream of ongoing and reliable revenue regardless of the economy? When the economy moves up or down, what kind of customers will continue to bring in orders to the donut shop? Successful donut shops don’t rely on customers to show up at their door. While unprofitable donuts shops sit and wait for their customers to show up at their door.
I hold two day Profit-Builder Circle Academies every few months. Many of them are held at my office in California. When I hold them, I always drop by the local donut shop a few blocks away to pick up several dozen muffins, donuts, and refreshments for the group. Never has the shopkeeper asked me for my name, contact information, or what the event was I was buying donuts for. They also never look very busy as I have never had to wait in line.
Companies can’t survive selling one donut at a time!
Successful donut shops do business different than most of their competitors. They go out and seek regular accounts which will guarantee their doors stay open in any economy. They don’t just rely on their reputation, repeat customers, and their advertisements to work. They make business happen. They seek customers who order a steady number of donuts every day, week, or month. They call on churches to get their weekly Sunday morning business. They call on local markets, coffee shops, restaurants and schools to get their daily orders. They call on charities, business groups, and other organizations who have daily or monthly breakfast meetings. In other words, the key to building a successful donut business is more than making good donuts. It’s about selling, going out, and getting regular accounts.
When you study good donut shops, they are really two different businesses in one. One department builds good donuts, serves them in an excellent environment, has good people manage the process, and charges a competitive fair price. But successful donut shops also have a second important department that steadies their revenue and increases the bottom-line. They have several ongoing accounts who deliver ongoing steady revenue every month to them.