What’s Your Most Powerful Sales Tool? It Could Be Helping Your Customers Avoid Failure

Here’s one of my favorite yet least-known statistics about the challenges dealers face: In a typical year, roughly one out of nine home builders and one out of eight remodelers with payroll go out of business. And this year is anything but ordinary: A survey in August by The Farnsworth Group and the Home Improvement Research Institute found that 52% of firms making less than $750,000 annually and 45% of those with revenues topping $750,000 are expecting reduced revenues this fall.

All types of companies see their churn rate increase when the economy sours, but even then, your remodelers and small builders are one-third to one-half more likely to fail than the average U.S. business. Odds are, lots of your former customers aren’t ghosting you because they went to a competitor. It’s because they became ghosts—typically because they never learned how to run a business.

“That’s just life,” you might reply. But keep in mind that researchers estimate every 5% increase in customer retention rates increases profits by 25% to 95%. Consider as well the dollars you spend acquiring new customers. In 2014, the Harvard Business Review estimated that it costs five to 25 times more to bring in a new account than to retain an existing one. And remember: Those numbers come from pre-COVID days when it was far easier to meet with and make a pitch to a prospect—it won’t be surprising if they’re higher now.

Worrying about small contractors in peril might seem like a strange way to respond to what at many lumberyards has been a record-setting, surprisingly robust year. I suggest you keep an eye on your DSO numbers as a gauge of potential trouble ahead, particularly if the unemployment rate remains elevated, as the Federal Reserve thinks it will stay high through 2022. We’re heading into an economy where many in construction supply will feel like running wind sprints while pulling a heavy sled. There’ll be a drag on performance, and contractors in financial trouble are the weight.

That’s why it makes sense for dealers to include in their 2021 plans an initiative to help their customers stay solvent by teaching them basic business skills. Among the possibilities:

• One of your contractors’ biggest problems paying you is that they aren’t very good at collecting from their customers. So, enlist your collections officer to teach contractors how to get what’s due them. Basics on liens and contracts would be useful, too.
• Have your controller or chief financial officer offer classes on financial basics, such as the crucial difference between markup and margin, how overhead and profit relate to each other, and what to charge to break even on a job.
• Accounting baffles even the best contractors. Consider engaging a local expert on QuickBooks to teach contractors how to use the software and generally manage their books. Buy a few additional hours of the expert’s time to provide personal help to the neediest—or most difficult to teach—customers.
• Work with groups like Remodelers Advantage and the National Association of Home Builders to place customers in roundtables where the members discuss their numbers and their operations with peers from across the country.

There’s a world of difference between being a builder and being in the building business. Too many LBM customers fail to understand that distinction. Helping them make that transition could ultimately boost your business.