115. Competing With Project Builders With Andy Skarda

Anybody that's been watching the news recently will see that predominantly the builders that are failing are the project builders.

Welcome to Professional Builder Secrets, the podcast for building company owners wanting to grow safely and securely. I'm your host, Will Blunt and today I'm joined by our head coach, Andy Scarter. Andy, welcome to the show.

Thank you very much, Will. Nice to be here.

Absolute privilege to have a one on one podcast with you. We were just talking off air that I don't think we've actually had the chance to do this yet and I feel as if I'm getting a, you know, a one on one coach coaching session here.

Well, let's hope that it meets up to your expectations.

Oh, I'm sure it will. I'm sure it will. Today we want to talk about a topic that came up in our members Facebook group. So one of APB's members posted a comment in the Facebook group about competing with project builders and how they felt they were getting priced out of a lot of jobs because of that. And there was quite a bit of chatter about it. So we thought it would be, would be worthwhile diving into some tactics that our builders could use to overcome that challenge. Do you want to just go into a bit more about the challenges that custom home builders are facing at the moment? When it comes to project builders, it's.

A very difficult one because they're almost two separate worlds. You know, the reality in any business situation is that you end up needing to make a decision. Are you going to go for low margin and high volume or are you going to be going for lower or low volume and high margin? And obviously in the case of a project builder, they've made the decision that their business model is high volume, low margin. And we might, we might get into the nuts and bolts of this a bit later, but the reality of that is they are constantly looking for ways to build economy of scale just by the sheer volume of what they buy, what they build, who they employ, et cetera, et cetera, etc, and they're making very, very little money on everything. But because it's a little bit of money on a lot of things overall, it eventually makes them some money sometimes. Anybody that's been watching the news recently will see that predominantly the builders that are failing are the project builders. And the reason for that is quite simply that they don't have the margin headroom to be able to weather the kind of things that have been happening in the industry in the last couple of years. So it's a long way of answering your Question. But what I'm saying is it's, it's one of those situations where the sheer volume of presence of the project builder often makes it look like they're very difficult to take on. But the truth is we've got to understand that they are after a different market to the one that custom residential builders should be after. And that's where the difference lies.

A different market. Interesting, because I think from a consumer's perspective even, I mean you've spoken from business perspective, the differences there. From a consumer's perspective, I'm probably just seeing all the billboards out there with cheap houses to be built.

Yeah, well, I mean it's like anything else. You can buy a cheap anything and most of us buy at least one of those, you know. So the reality with this thing is going to be you probably as a custom home builder aren't looking for your first time home builder. I think you'll find with a lot of people that they will go down the project builder road once and they won't go down that road again simply because. And again, I'm pretty certain we'll get into the nuts and bolts on this one. The difference lies in the experience. You know, anywhere that you are just a number, that you are one of many, you're obviously not going to get the same level of attention to detail and service that you're going to get if you're in a more, it's called exclusive kind of environment. And, and that, that's really the difference. And I think from a, from a consumer perspective, those people that are making their decision purely on price, absolutely, the project builder is the way to go. But then you got to understand you're going to get what you pay for. And as I say, I think most people go down that road once and then decide next time around we're not doing this again, we'll pay a little more to get a little more.

That makes sense. So before we dive into the solution of how custom home builders can deal with this challenge, what's the wrong way to go about it? If they're hearing chatter a lot from leads that they talk to all about, oh well, I can get it for this price over here. What do they, what's the wrong way to go about it?

Try and compete with that. And the fundamental reason for that is you don't have the ability as a residential homebuilder in most cases to fight the volume of everything. So bottom line is if you look at where we, how pricing is made up in this industry, there are always going to be three components. There's going to be materials, there's going to be labor, and there's going to be profit. And if you think about it, because the project builder is going through a lot of materials, is employing a lot of people in terms of subcontractors and those kind of things, they can generally negotiate slightly better prices. They're not going to be hugely different, but they will be better purely because of the volume. And then of course, what are we left with? If, if the custom home builder doesn't have those two economies of scale, the only thing they can cut is their margin. And unfortunately, in this industry, when you cut margin, you're on a spiral. You kind of racing to the bottom, unfortunately. And bottom line is, if you're not making enough money out of every single job that you're doing, because you're not doing as many as the project builder, you are going to end up in trouble very, very quickly.

What's the, what's the flow on effect from just cutting your margins to try and.

Well, cash flow disappears, you know, and the reality is virtually every builder that I talk to wants to grow their business. Growth sucks cash. So bottom line is you need cash in order to fuel growth, you need cash in order to cover your marketing costs, hire new people, etc. Etc. If you don't have cash, you can't do any of that. And unfortunately, because of a variety of factors, you can very easily cut your margins to get the job and end up in a place where you aren't making enough money to even cover your overheads, in which case your business is running at a loss, you're trading in liquidation, and then there's all kinds of ugly things that come along with that. So, yeah, not, not a good idea to be cutting margin at all.

Yeah, it's a slippery slope.

Yeah, absolutely. And it never works. I mean, we've been analyzing building businesses all over the world for the last decade. We haven't ever found anybody that managed to cut margins in a custom home building environment and end up doing well. It just doesn't work.

All right, well, let's get into solution mode then.

Okay.

I'm for a moment going to play devil's advocate and say, okay, leads have dried up or all the leads that come to me, they're talking about how they can't get finance and so they need to have a, you know, a lower cost build and they're getting all these quotes from these project builders. As the builder, I'm really feeling the squeeze that I need to Drop my margins. I need to actually come to the party for these leads because I don't have any other leads coming through. So what do I do practically?

Well, let's, let's start with a broad answer that I think is, where I'd really like people to go is don't compete. That, that is the fundamental answer to this conundrum. But you've raised a valid reality that some builders may be facing. Their real problem lies in the fact that they're not attracting the right kind of lead. So the quality of their lead flow is bad. Okay, they're not a project builder. They don't have all of those things working for them, but they're not trying to compete in that realm. Not going to work. So you generally will find that a builder that knows his numbers will know his break even margin. And let's just be brutally honest here, any builder listening to this podcast who decides that it's a good idea to build a home for less margin than he needs to break even is not going to be in business much longer anyway. So it becomes academic. So really what are we saying? What we want for this particular builder is that they are able to do something in the short term to keep the lights on while they do something else to improve the situation for the future. So we've got a temporary stop gap and then we've got a solution. And the temporary stop gap needs to be that it's not the solution. But for example, if you look at the model that we work to worldwide, we always talk about builders working with at least a 25% gross margin. And the reason for that is that fundamentally we have found that, that building businesses that are growing, custom home builders that are growing their businesses need at least 15% to fund that growth. That's the cash that we were talking about earlier and that leaves them with a 10% net profit. Now I'm almost, I'm biting my tongue about what I'm about to say, but I'm going to highlight the fact that this is a temporary stopgap. It is not what we recommend ever. But if you have no other option, the 10% net margin could be shaved to some degree, but I would still never shave it completely because you never know what can happen in the six to nine months that you are actually going to be doing the build. So if on one or two jobs you could compete with a lower net margin, then I would grudgingly allow you in inverted commas to do that. As long as at the same time you are ramping up Your marketing to attract the right kind of client who's not going to be in that price is the only determining factor space. And then you are working as quickly as possible to get decent margin jobs into your pipeline, generating revenue and then burn through the low margin jobs, get them built and out of your system as quickly as you can. And if you, if you adopt that 1, 2 approach of temporary stop gap. While I do this and really my focus is on doing the solution, what you should find is six to nine months from now, you're into the blue water. And from there, as your marketing continues to improve, you've got a better quality of client, you're not up against that price.

For anyone that's not familiar with the general model, the high level model of how you increase your margins through marketing, can you just give an overview of that?

Sure. So what we're really saying is that the, the problem lies in the kind of client that you're attracting. So those clients, as I said at the outset, that are purely interested in the cheapest price because they don't know any better or they don't have an option, those are not the fish we want to be catching. So it's a little bit like we're throwing out a net and we want to catch salmon and we keep catching gummy shark as well. We don't want to, we don't want to eat gummy shock. Although I have heard that a number of fish and chip shops do a really good gummy and don't tell us about it. Anyway, that's another story for another day. We want the salmon. Now. The problem is if what's in your net is only gummy shark, well then you've got a problem. You have to change your net or your location or your methodology. Something's got to be different. And what you're really trying to do is to make sure that the money you spending on marketing is bringing only the fish that you actually want to catch and eat. Now in the beginning, it's not going to be only, but what you want to be doing down that road is constantly refining, tweaking, measuring. It's quite weird for me to be sitting here telling you how we should be running the marketing side of things. But anyway, so be it. So that we get to the point that that relationship between gummy shark and salmon improves significantly and ultimately we may not only be attracting salmon, but those are the only people we actually talk to. So it's really, if you look at it, it's not just marketing, it's marketing Running into sales and then the qualification process becomes critical. We all know as business people, if we don't know, we will learn very soon that our most precious commodity is time. So bottom line is we don't want to be talking to gummy sharks, we only want to be talking to salmon. And if what we've got is a net with nine gummies and one salmon, we need to get through the gummies quickly and get rid of them and then make sure that we put our time and our energy into the quality leads that we've got to convert those as quickly as we can.

What type of ratio we think talking about when it comes to the salmons versus the gummies? Because I know having been a business owner myself before and having spoken to a number of builders in the industry, there is a bit of a mentality of, oh, I just need to get a good lead now or I need to spend some money and get a couple of leads in and then that's all I need. So what is the ratio we're working towards here?

Well, I mean, ultimately we want at least 10% of the leads that are coming in to be the high quality people that we're actually looking for. So it might sound counterproductive, but what we're saying is if you are moving them through your process correctly, 10% of what you're getting will eventually deliver what you need in terms of revenue, growth, margin, et cetera, et cetera. Now to go back to that horrible example that you threw at me, if you've got nothing, well, then the ratio changes. And really what that becomes is you then have to be looking for the best opportunity available while you start to work on the other things. And the solution is going to be an iterative process of it's going to start off with quantity. You want to see that the leads are coming in and then really what you want to be doing is finding what is missing in your messaging that's not bringing in more of the kind of people that you want to be talking to. And if you can adjust the messaging you're putting out there over a period of time and reduce the number of wrong people coming in. Because if you think about it, that's, that's really the ideal. It's still weird to be telling you about marketing. That's the ideal situation with the marketing system. You want it to be doing two things simultaneously attracting the right people, but simultaneously repelling the wrong people. Because again, we're back to the whole discussion on time. Most builders that we work with are really good people. And if you make an inquiry, they will take the time to call you. Well, that's 10 or 15 minutes, even if they are very, very good at it, before they can politely decide that you're not their particular prospect and move you on. Do that eight times a week and that's two hours of your week gone on Gummy Sharks, where you haven't spoken to a single salmon. So it's, it's almost. You've got to assess the, the quality of the lead you're getting. If it's not the people that are prepared to pay for the level of service that you're able to deliver, you need to change your marketing. That's, that's the bottom line on that end of the scale. And then as you start to see the correct people coming in, you want to get rid of the others as quickly as possible so that you can invest your available time into those quality leads.

I like that. Actually, as you were just saying that, it got me thinking. We often focus so much on that ideal client, the person that we want to have. There's probably a lot to be said for spending a bit of time focusing on that. The not ideal client, the person that you don't want to attract.

Sure.

And actually just, I mean, if you structure your messaging to repel that person, then, you know, the law of averages would suggest you might attract the one that you're interested in.

Yeah, well, and let's go this way. What we don't want to be doing is, is going with negative marketing, but I guess we want to be going with neutral and positive. If, if gummy sharks are going to respond to prawn and salmon are going to respond to octopus, then we want no prawn anywhere in our, in our, you know, we just want the thing that's going to bring the right people because. And again, when you're in that horrible devil's advocate scenario that you painted, it's very hard to not take anything that comes across your path. But again, unfortunately, what we've seen year after year after year all over the world is that builders that get into that end up in a very, very horrible place in a world of pain. And it's, it kind of needs somebody to be saying to you, I know it feels like you should, but don't, you know, just have the faith, stick with the system. I, I've, in fact, I saw some of our clients in, in Perth last week at an event that we did, and one of them in particular, husband and wife couple who have really stayed the course you know, getting very, making progress, but just little bits where I think a lot of people would have thrown their hands up and just said, I'm out of here. They've stuck with it and, and it's now turned and they've now got a, a Runway of good quality jobs at decent margins. And that, from a coaching perspective, is nirvana. To, to see people that have stuck through it, kept the faith, in other words, and then come out positively on the other side is fantastic.

That's an uncomfortable journey, though, if you need to pay the bills and you need to get some work through.

Yeah, and look again, we weren't really talking about, I don't think we intended this to be a marketing podcast necessarily, but the truth is there's a difference between what we build and what we advertise to build. So if we've got meager cash resources to invest in marketing, we want to make sure that the money we spend is only to attract the quality clients we want. Now if something comes through the door that'll keep the lights on, we don't want to be paying to get that kind of work. So it's this balance of we will build what we need to build, but we will invest advertising money into what we want to build. That's, that's probably the differentiation.

Yeah, that's a great way to look at it. It's almost like there's the now, there's the keeping the lights on, keeping things going, and then there's looking towards 12, 18 months of your, your slots to make sure that you're getting the right clients through.

Absolutely. And the thing that people need to understand is to get the right clients through in 12 to 18 months. You've got to start now. You know, it's that old story about you want to sit under the shade of an oak tree. When was the best time to plant it? And the answer is 20 years ago or when's the next best time to plant the oak tree today. So, you know, it's literally. And again, it just feels like this is going down the marketing road because at the end of the day, marketing affects margins. That's, that's just the reality. But essentially what we want people to be doing is there are organic things that don't take a lot of money that people can be doing on social media, old fashioned neighborhood letter drops, those kind of things that are not hugely expensive, but the reality is if those start to deliver the kind of clients that people are looking for, that's going to get them out of this short term problem. That will generate the cash, then we can invest that into more marketing and that will then bring the kind of clients that we want long term without.

Going too much deeper into marketing. I think the other part of it is understanding how you can differentiate yourself from the project builders. So maybe it'd be worth if we could just spend a bit of time talking about what those key differentiators are for a custom home building company compared to, you know, the scale of a project builder.

Yeah, well, and that I think you've, you've really just put your finger on the real issue here. You know, the sort of, the way we led into this discussion was how, how should a custom home builder compete with a project builder? Well, the short answer is they shouldn't know that. That's like, how do we, how do we have a sports competition between an ice hockey team on one side of the field and a cricket team on the other?

You can't be an interesting new sport.

Absolutely. But, but it, it, it's never going to work. And, and for all the reasons that we've already mentioned. So differentiation becomes the key. And the point that I've, I've tried to make earlier is that most people having been down the project builder road now, are there good project builders out there? Absolutely. Are there people that do give reasonable service for the kind of product they're offering? Absolutely. Are they all bad? No, they're not. But because of all of those things that make their model work, they can't afford to be as individually focused, as customized, as service oriented as a custom home builder can be. And therein lies the fundamental differentiation. If you look at the APB's mission statement, we want to improve the global construction industry for home builders and consumers. So really what we're saying is it is possible to build a home at a profit margin that makes it worthwhile for the builder and give the consumer a wonderful experience. It doesn't need to be a nightmare. So that's really the place that we want to, we want to get to. And what we find coming back from so many of our members who get into a professional and structured sales system, including design, including costing, is that the feedback they get from their clients is, we absolutely love your process. It makes so much sense. We feel secure, we feel, we feel like you care about us, like you're looking after us. This is a wonderful experience. And that's where the differentiation is going to come in, actually putting the time and effort into making sure from first contact through to end of warranty period, those people are looked after and taken care of.

Yeah, it makes a lot of sense and I think you mentioned it earlier in terms of the ideal customer for a custom home builder is probably someone that's already built a house before. They've maybe gone down the project builder path as well and therefore they're looking for something more personalized.

Exactly. And you know, the, the sad reality is that our industry has a shocking reputation for a variety of reasons. You know, in people's minds they don't, here comes that word again. They don't differentiate between the construction company they see failing on the, on the 7 o' clock news with a professional custom home builder who isn't comparable but they don't understand the difference and therefore they look at that. They've. We've all got a brother in law who at a barbecue has told us about his nightmare building experience, you know, or we've had them. We, we've been down that road and we've had a builder who's, you know, hasn't done his estimating properly or he's deliberately given us a price just to get us into the contract. And then some way down that road comes back and has that conversation where he says, I'm sorry but if you want me to finish your home, it's going to be double what we agreed. At which point, you know, forget, forget the financial reality of that. Just the lack of respect and the way that, you know, you feel like you've been caught, you've been scammed, et cetera, et cetera. Nobody wants to be in that place. So the reality is what's the opposite of that? The opposite is somebody that from minute one is taken care of professionally and properly. And the, there is, that is really where the ability to achieve the kind of margins that we are talking about is founded. If you are giving people a different experience, those people that understand the value in that will be prepared to pay for it. And that, that really is the fundamental differentiation whether we're talking new home build or custom remodeling or renovation. It it that the value you offer your client is really where the difference is going to come.

It's a weird, it's a weird place that the building industry's in actually because traditionally you would think as a consumer bigger is more secure, is safer. You know, will I give my money to the guy down the road just because he provides a personal experience or will I give it to a big bank like Westpac or you know, Commonwealth bank or the United States bank or something like that? They, there's a perception that the larger, the larger institution is going to be safer for you. But in the building industry, it's almost like it's quite different, isn't it?

Yes and no. Again, we've got to be careful that we don't kind of paint every single project builder with the same brush. There are some of them that are running within their business model a good ship. And although they're not making huge margins on any one contract, they are making margin and that means they will be around for a long time. What we saw happen recently is largely the COVID pandemic's reality. Eating up the little bit of bandwidth that those kind of guys had and them not being financially or business adept enough to be able to make the necessary course corrections in time. For some of them, it wouldn't have been possible just because of the way they were set up. So, and I think if we talk about even the banking world, we go back to the gfc, you know, that was supposedly rock solid banks that had really done exactly this. They'd, they'd gone into marginal territory that they shouldn't have gone into in the hope of making money quickly. And it all went belly up on them, you know, so it's a, it's a similar scenario. I don't again, want to necessarily go back to marketing, but if you think about it, what we're really talking about here is the narrative. It's, it's us as custom home builders communicating with our market to explain the differences and why we are a viable option. Not for all of them. And I think that's maybe something we must underline. We are not saying that a custom residential builder is the answer to every single home buyer's requirements. That's okay. Let, let, let the project builders have those people for who money is the determining factor, because we can't make the correct margin out of those people anyway. But let's make sure then that we are getting the people in our geographical market that are able to spend that extra money and they spend that with us. That's, that's really what we want to do. And the only way we can do that is to make sure that our service offering lines up with what they are looking for. You've heard this phrase before. Good marketing enters the conversation that's already going on in the customer's mind. That that's you, you're looking for that customer who's saying, I want to build, but I don't want to go through what I went through the last time. I need to find somebody who's going to look after me. You looking for a builder who'll look after you? Bang. I can see it on the back of a truck now. You know, what's that, what's that guy gonna do? Up comes his mobile phone click. Hopefully he doesn't get caught and get 10 demerit points. But when he gets, when he gets to the office, he's gonna be calling that builder. Why? Because that's exactly what he was looking for. And therein lies the differentiation.

Okay, so marketing's a big part of it. And then obviously understanding where you can provide a benefit to a certain type of person that is the ideal customer for you. Is there anything else you can do to I guess help with the financial side of things such as strategic partnerships to get the right materials or you know, better quality materials potentially that, that can be a part of your differentiator.

Yeah. And the sad part is that you've touched on quality. Let's talk about that first. You're not going to find anything in a project builders material lineup that is illegal or not to code, but it's going to be the absolute minimum that it needs to be because that's how that model works. So straight away, if you've got a more discerning client who is looking for a level of customization, they're probably not going to find it in the project builder anyway. So there straight away is, is an, is an obvious one. We, we talk a lot at the APB about building a 12 to 18 month Runway of work. So actually managing your construction slots so that they are limited in any one year. And obviously what that does is builds in scarcity. On the positive side for getting the sales side, you as a builder want to make sure that you are building at a level that your capacity can handle. Because if what we're talking about is giving clients a better experience and a better quality build, by definition that means you don't want more builds than your team can handle. But if you are able to show your subcontractors that there is an 18 month projection of work, there's even a six month projection of work with you. If you are consistently buying more and more materials from your suppliers, they are going to be prepared to offer you better pricing at discounts. And then all over the world we've seen a number of, let's call them builders, cooperative buying groups where a bit like our rewards program builders are able to join one of these groups and then benefit from a consolidated pricing model that gets them better pricing than they would have got. On their own. So there's a number of things in that space that builders can be doing to. Again, the message I really want to give is don't compete with the project builder. Yeah, that's, that's, that needs to be very clear. But you can certainly improve your margins and if you're in one of those stop gap scenarios, then you know, this kind of situation of joining a co op, using that buying power to give you that extra bit of margin, very, very good way of doing it.

It all sounds like you're just building to a position of strength. If you get the marketing right, the qualification right, you get enough people through the door of the, like that, the type of client you want to work with and you can book yourself out 12 to 18 months in advance. You then have more power to start negotiating things because you can, you know, invest more in materials, et cetera, et cetera.

Yeah, absolutely. And you know, the, the, the thing is a lot of the builders that we work with don't like promoting themselves, but the reality is in a lot of cases they've been around for decades. People just don't know that. So, you know, in this time of financial uncertainty, there's even the question being asked, is my builder? And this applies to both sides of this discussion, whether you're talking project building or custom residential stuff, is my builder going to be around to finish my build? Know that's a, that's a big thing. So we're back to making sure that we are educating the market on the fact that we've been around. We have the financial stability, we have the experience, we have the testimonials from people that have loved working with us over the last X number of years. That's gotta be part of what's out there all the time.

Well, if you have been around for, for a decade, you can demonstrate that you've been through these market, you know, ups and downs before and, and come out the other side.

Yeah, no, but I think what's really good about, about the discussion we've had is that in your devil's advocate role you went to the reality that a lot of builders are facing. You know, it's, it's easy for us to talk about. When you get it to this point, it all comes together. That is true. But there is the Valley experience to get it there and you know, we would be remiss to pretend that it doesn't exist. It does. And I think that the one thing we maybe haven't highlighted enough is knowing your numbers, knowing, knowing what your margins actually are. So that if you do in that stopgap scenario, have to do some kind of accommodation, let's use that languaging. At least you know you aren't building at a loss. That comes back to financial management and understanding what's going on in the business.

Yeah, extremely important. Well, Andy, I've learned a lot today. Been really fun talking to you about competing with project Builders. Is there any final advice you want to give the builders listening out there?

Don't. You know what I mean? It's all the D's. Don't and differentiate. Yeah, that's the key. Find the thing that makes you different and understand you are looking for a different type of client. Find that client, problem goes away.

And as you just said then if you need to get cash in the door to keep yourself going as you plan for the future, make sure you know your numbers. So that, yeah, everything's. Everything's looking good. Well, yeah. Fantastic to have you on the show today, Andy. Thanks for coming on.

Great pleasure. Thank you for having me.

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