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Choosing Your Customer
by Reed Kneale
The single biggest factor affecting profitability is how you select your customer. That’s right; you select your customer instead of them selecting you. By selecting your customer instead of vice versa, you are in control of the deals you supply labor on or pass on based on the strengths of your organization and the expected profitability of the job.
If the concept of “choosing customers” is a new way of thinking, the way to start is by looking at your profit margin for past customers and look beyond the obvious to identify patterns. It is usually easier to identify patterns that are hurting the profitability of installed sales. Do disorganized customers have a history of killing margins? Do specific customers have scope-creep issues caused by poor quality plans? Are there customers or customer segments that have recurring issues with keeping to a schedule? Is site supervision poor? If you are in a leadership role, there may be ways to adjust to protect the organization from these profit killers, and I will outline some of these measures later on, but it is vital to have a clear way for the entire organization to identify customers who will never be a fit for your business due to risk of lost margin and increased liability. Every organization is different, so the way you define which customer is a bad fit will be unique to your business.
Similarly, having a definition of an “ideal customer” for installed sales can guide the deals you bid on, how aggressively you pursue those deals, and where to build certain relationships. The more sales and profitability data you have at your fingertips, the easier it is to create a profile of your ideal customer and create a plan for expansion.
Testing New Customer Segments
Taking a calculated, reasonable risk on working with a new customer segment can be a great way to expand the definition of ideal or no-go customers.
I began working with a track builder who had entered into our regional market. They brought with them their budgets and systems, with the goal of subbing out labor. Our executive team decided to supply labor for three homes for them to get a feel for how they did business. We quickly found out that they wouldn’t pay extras, even for problems that they had caused, they scheduled poorly, and none of the paperwork for any of the three properties matched the on-site prints. After the test we had no reason to believe things would change and moved on to supplying materials only. These kinds of tests are valuable if done intelligently.
Keeping a backlog will allow you to pick and choose projects and will ensure your labor is being adequately utilized. No one will blame you for passing on a project if your capacity is full. However, adding on work that is clearly profitable is worth adjusting schedules. Being hard-to-get via backlog can also help you hold the line on your pricing when discounts are requested. Keeping a backlog is the most profitable way to say no.
Common Customer Segments
1. National accounts already know what they are willing to pay you for labor and materials, and it is low. Too low to make money unless you have a deep competitive advantage in a specific area or are a pick-up truck builder with no overhead. A president of a national home building company once told me that their business model is to never build a home without a decent margin. Lumber yards and subcontractors have to see this for what it is, and I would advocate to apply the same rule to your jobs. If the margin isn’t there, then pass! Very few dealers will be successful serving this customer. The old saying goes, “If you sit down at a poker table and don’t see a sucker, you are it”—so it goes with the national home builders and the vendors and laborers they work with.
2. Your current customer base. The easiest way to add revenue is by expanding existing accounts. Existing customers are a known commodity; you know a great deal about them and you already have a working relationship. If all you did was target existing accounts and get aggressive about installed services, this could be a tremendous boon for the organization.
I once framed a job to repair fire damage for a customer that needed it rebuilt fast with very poor drawings. It wasn’t competitively bid and the project was over six figures in materials and labor with a margin of 40%. It took our team about six weeks, we used a sub paid hourly, and it was easy to be generous with change orders. The deal was a grand slam and was only possible because of the pre-existing relationship.
3. Homeowners and professionals building for themselves are receptive to installs but are not always a steady source of business. Their time and knowledge is often limited. The margin opportunity for helping homeowners is much higher than light commercial projects. Homeowners will see your team as the experts and are receptive to value engineering their project. Many times, they are not shopping your bids. In my experience, it is best to avoid homeowners that are getting multiple bids. Qualifying this segment for payment and making sure their total budget is realistic is important.
A great example of an ideal homeowner/professional for us was an architect who needed a home built before winter and came to us for materials. After pricing materials and upselling installation, the net result was profitable sale on materials, windows, and labor. The deal closed quickly at $73,000 with a 40% profit margin vs. the original $28,000 materials, only quote. We did not guarantee materials; the customer paid for them a la carte. The architect can’t wait to provide referrals as the job was on time, high quality, and within the quoted budget. If done correctly, this market segment can be a sweet spot for your organization.
4. Labor subcontractors can be a great source of leads, and they occasionally buy materials. Be sure to know their credit habits before they place orders to avoid awkward incidents. Many times leads are warmed up using subs as agents; you have your internal lead network plus your subs if you communicate with them about future work.
5. Project customers require the most qualifying as you will be with them for a long time, have considerable liabilities, and are best able to manage adversity if things go wrong. This customer could be called “light commercial,” and they could be building townhomes, apartments, office buildings, nursing homes, hotels—basically large wood-frame buildings. You need your first string on these projects, best estimator, best subcontractor, best negotiator, best field manager, etc. The customers can be an owner building for themselves or a general contractor or a builder.
PARTNER, NOT COMPETITOR
LBM companies just starting an installed sales program are worried that they will offend existing customers by offering labor. While it is true that some customers will see you as a competitor, most won’t. Remember, the labor market is tight in most areas. When labor availability becomes an issue for a customer, offering to partner with them on their terms is almost always welcome. I once found myself as the successful low bidder on a six-unit city project only to find out that the second- place bid was also a customer. The easy fix was to meet and have a candid conversation with the second-place bidder. We ended up smoothing things over by offering the subcontract labor to second place. He just wanted the labor anyway and continues buying today. We actually sold this customer on our labor on our most recent project because his own resources were backlogged. Having great relationships with subcontractors that provide labor can create future opportunities for everyone if you are creative and open, and treat people the right way. Many builders and subcontractors appreciate you handling the selling, managing the contract, risk, and collecting money—all they have to do is perform the labor correctly and on time.
About Reed Kneale
Since the late ’70s, Reed Kneale has enjoyed and thrived professionally in the lumber industry. Rising from entry- level sales to top management in family-owned, independent lumber companies gave Kneale the experience needed to master best practices in a dynamic industry working in Ohio, Pennsylvania, and West Virginia.
Building mutually profitable relationships with customers from remodelers to national builders has been his approach to business. Restructuring businesses during downturns was a necessary skill to acquire to survive and ready for better times through many business cycles.
His current project is identifying and systemizing factors for profitable turnkey framing. For more information follow Kneale at linkedin.com or email firstname.lastname@example.org.
The preceding was an excerpt from Reed Kneale’s white paper “Turnkey Framing: Major Factors Affecting Profitability for Independent LBM Dealers.”