65. Why Margins Are Linked To Marketing With Russ Stephens

You really can't be hard proof, can you? When you start something, you've got to put the system in place in order to continue that. It's all about the end result for consumers. The harsh reality is you've got to pay to play in this game. You must stick to your plan. You must cap your supply, keep it at a level that you've budgeted for. I think it's really important, important to remember in business that what does not grow, dies.

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To industry experts and your fellow professional builders on everything you need to know to generate more leads, more sales and higher margins while improving the building experience for your clients. Hello and welcome to the Professional Builder Secrets podcast, a podcast by the association of Professional Builders for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales, processes, financials, operations and marketing. We have another exciting episode from the Professional Builder Secrets podcast. Joining us today is Russ Stevens, co founder for the association of Professional Builders. Russ, nice to have you again.

Hey, Bosco, nice to be here again.

Well, listen, you know, I've had you here before and we've talked a little bit about the SOURCEI report, but I'm just curious, what has the APB discovered when it comes to marketing through this reports for our listeners out there?

Well, I think it's something we've always known. However, you really can't be hard proof, can you? The data that we collected in the annual State of the Residential Construction Industry report, well, that clearly demonstrates that the building companies that spend more money on marketing and advertising, those are the building companies that have the highest gross margins. Now we typically, we recommend 3 to 5% of revenue should be invested in marketing and advertising. And it all depends really on the builder's growth plan. But I think what this report clearly showed in the data was that those builders that are spending less than 1% of revenue on marketing and advertising, those guys had the lowest margins and they were way, way lower than the other guys.

It's interesting, it shows that there's proof and the science towards spending revenue on marketing as well. But were there any shocking finds or surprising finds when you were going through the report?

Look, most of it I think we kind of expected because we got a good idea on the whole marketing of a building company. So we've kind of got a good idea. So it wasn't particularly shocking or surpr to us. Although one thing that probably did stand out as being a bit of a surprise was that builders in the US are not using social media as much as builders in other countries. And I would have thought that would have been the other way around. But this is both in terms of posting content and even what they spend on advertising as well. They are clearly a lower percentage of builders in the US using social media compared to builders in other countries. So that was a bit of a shock.

Yeah, that's interesting considering that you have such a big presence on there as well. Right, so it's interesting that you say that they're not using it as frequently. How do you balance the supply and demand equation? Is there marketing ratio for when to actually ramp up when it comes to spending?

Yeah, of course there's numbers for everything, isn't there? Even beauty. I think allegedly there's a ratio for that, but there absolutely is a ratio for managing supply and demand in terms of marketing because it's all in the numbers. And there's an industry benchmark for leads to contracts, but that can vary by marketing channel quite a bit because some channels are stronger than others. So, for instance, search engine optimization leads that a building company generates from search engine optimization are probably going to be the best quality leads they're going to generate and they have a much higher percentage going straight through to contract. Whereas when you're using a channel like Facebook for interruption marketing, the cost is very low, but the quality is a lot lower than SEO, so the conversion rate will be lower. So what we tend to look at, rather than lead to contract, we tend to look at what we call sales qualified leads. So these are leads that have come in, they've been marketing qualified, I. E. They've been identified as potential clients, but then they're sales qualified to determine are they our ideal avatar, you know, are they looking to build what we specialize in? Are they in our geographical location? We start finding the emotional triggers as well. So this is all part of the qualifying process really that we've spoken about on other episodes. We've spoken about the disqualifying questions, the closed questions that without emotion disqualify people. And then we go on to the more emotional questions, the discovery questions. And the end result of that is that we end up with a sales qualified lead. Now, it really doesn't matter if they've come through SEO or Facebook. A sales qualified lead typically converts a very similar percentage from that point on. And that's because we've weeded out A lot of rubbish, really, for want of a better word. I think that's really important to understand because we can get very misled, I think, especially when we start advertising in a new channel. And we heard this a lot with builders that maybe relied on referrals when they start a paid advertising strategy, in their mind, the leads are rubbish because they're not converting at the same rate as a referral. Referral. And of course they're not. These are stone cold leads. So very important to understand that those ratios can differ, but once you get to a certain point in the funnel, things, they do tend to even out. But I think really, to answer your question in terms of the marketing ratio, we're looking a little bit further down the funnel still. We're looking beyond sales qualified leads. We're actually looking to the next stage where they become an opportunity, then they become a design client. If we're doing a design and construct model. And the key ratio is the prelims, that's the last step before contract. I think most builders, they're always shocked when they hear what we have to say on this part, on this conversion ratio. Because most building companies, when you ask them, what percentage of your prelims do you convert into contracts, they'll say 80, 90, or even 100%. But we always say that is way too high. You've got to be converting at 50%. And the reason for that is simple. You don't want to be dependent on all of those prelims going into contract because one or two fall over in exceptional circumstances and all of a sudden you're on the back foot. You become very dependent on those prelims. But when you convert at 50%, that really is what they're saying is you're in control, you're disqualifying, even at the late prelim stage. And that really is the key. That's a key marketing ratio. I guess it's really a sales ratio, isn't it, really? But in terms of supply and demand, that is a key key ratio for builders to understand. 50% of prelims into contract.

All right, so, Russ, are they any best practices for a company looking to ramp up their marketing?

Well, content is king, but it's really, it's all about the right type of content. Now, a big mistake we see a lot of builders do is they get very focused on the process, so they'll be taking a lot of pictures on site of a home being constructed. And I've seen marketing companies advertise services to builders or provide services to Builders where they'll go out and film the process as well. And that's not what sells the idea of building a luxury home to a consumer. It's all about the end result for consumers. And we must remember that they are buying the end result, not the process. So we don't want to bog our feeds up with progress shots about what's going on on site, because all that does that reminds people of the PA really of construction and all the things that could go wrong. But what we got to be addressing with our content is the questions going on inside the consumer's mind. And a lot of these questions relate to before the process has even started. So we can provide content that answers those questions. And that can be as simple as writing a succinct blog article can be 6, 7, 800 words. And then in terms of video content, just have the builder record that article in. A video positions them as an authority. But that is way, way more valuable than having progress shots on site. And that content can be broken up into shorter clips, it can be used in multiple ways. And typically 12 blog articles can provide a building company with a year's worth of content for their blog, for their YouTube channel, for their emails and their social media post. Close. But yeah, it's really, it's about the right type of content.

It sounds like you want the consumers to use that content as well. So you're really tapping into what they need and what they're looking for when it comes to information as well.

Yeah, because we're trying to get the attention of the ideal client very early in the build process or sorry, not even the build process, the design process, before the design's even started. So we've really got to be tapping on into the. The questions going on inside their mind, what kind of things are they thinking about and grab consumer at that very, very early stage. That's why this stuff is just so important.

Now, obviously the association of professional builders have front access to a lot of the pain points, a lot of the blind spots, you know, around builders as well when it comes to marketing. What do you see as the biggest blind spot today for builders when it comes to ramping up their marketing?

I think consistency is probably the number one. And we see this in a lot of areas and not just position for builders, but all business owners, especially small business owners, they'll start something, it'll be exciting, and then they don't carry on the momentum. I think podcasts is a great example because how many podcasts you see out there and they kind of stop at six or seven episodes. I mean, sometimes that's by design, but yeah, a lot of time people just run out of time. It's same with newsletters. I can't tell you how many newsletters I've seen with newsletter number one proudly on the, on the front and then I've never seen another one again. So it really is consistency. So you know, when it comes to a marketing strategy, when you start something, you've got to put the system in place in order to continue that. And obviously that, that will involve delegating a lot of the components as well, if you can. But if you can't do it consistently, maybe have a rethink on what you're committing to. And then apart from consistency, I think the other thing is amplification because the harsh reality is you got to pay to play in this game. Relying on organic traffic, whether that's on Google or even social media, it's a little bit like relying on referrals for your business. I mean, referrals are great, aren't they? They're high quality opportunities that can typically go to contract at higher margins. But a building company isn't scalable if they. All they do is rely on referrals. And it really is the same with your traffic. You know, if you're going to put a lot of effort into creat some great content, then you want to do more than just rely on organic reach, which is very, very limited. You got to amplify that content that you're creating. You got to put money behind it to make sure it gets seen by plenty of people.

I'm sure you get this question quite a bit, but when is the right time for a building company to scale up?

It's always once you've fixed your margins. That is the number one thing. And it's always been our philosophy at the association of Professional Builders. Building companies have coming to us for over eight years now, maybe not so much over the last couple of years because generating leads and making sales has been relatively easy over the last two years. At the time we speak anyway, that probably will change next year. But prior to that I would say probably about 90% of the building companies that come to us, they either want more leads or more sales. Because they got more leads, they're going to have more sales and if they got more sales, they got more revenue and that's going to help them scale up and make more money. But we always, always focus on their financials first and get a good understanding of their margins because a building Company that doesn't have sufficient margins in place that cannot be scaled profitably. In fact, it's quite the opposite. You get the diminishing influence of the owner. More resources have to be put on which increases the fixed expense ratio very quickly. That company, if it's not already a loss making company that's being masked positive cash flow, it will become a loss making company very, very quickly once you start to scale it. So fixing the margins and getting them to or close to industry benchmarks, at least before you embark on scaling, is very, very important. Absolutely critical.

Should every building company scale up eventually?

Well, I guess that really depends on the agenda of the owners. And a lot of people, they, they say they don't want to grow, they're, they're happy with where. I think it's really important to remember in business that what does not grow, dies. And in business you've got to be growing at some level, otherwise you're dying. There is no such thing as standing still. Yeah, we're talking about balancing something on a knife edge here. You're either growing or you're declining. It's as simple as that. There is no in between and especially now that we've got inflation to contend with and business owners cannot underestimate the effect of inflation on their business. You've got to be growing just to stand still. And you could be growing at a certain level and still in reality be in decline because of the effect on inflation. And it's important to understand that if you are not growing, then your income is potentially going backwards. So if you've got enough wealth built up that that's not important to you, then great. But if your Inc is important to you, then you could end up in trouble at some point in the future, unless you're planning to grow year on year.

Now, Russ, let's visit the other side of the conversation, which is what are some of the critical impacts to a business, especially a building business, when a building company rushes to scaling up, but they rush and they aren't really doing it properly or doing it too quickly.

By this I assume you mean that they haven't got a well thought out business plan to follow as they scale. Because if you don't have a business plan in place and you start scaling, you're just winging it really. And you're going to be reactive to every bottleneck and every challenge that pops up. And they will pop up and they'll pop up in different places and you'll fix it in one part of your business and then as it expands, that pressure point moves to somewhere else and you'll find yourself in a constant state of reaction which will cost you time and money and even your reputation as well, because service levels will Dr. So really important to have a business plan in place before you grow. Because when you've got that plan in place, you've planned out your resources. You know, this is what we're going to grow to. This is, you know, we did X amount of contracts last year, we're going to do Y this year. These are the resources we need in place. This is what needs to happen in marketing to generate that. And it won't go completely smoothly. Yeah, I'm not going to say there's a silver bullet there. And yeah, it's going to be a perfect line going upwards. There will be challenges, but you can see them coming. You've got a good idea and you're attempting to address those challenges ahead of time. So yeah, the business plan will reduce the pain probably by about 90%.

Okay, so let's just say we're taking the proactive step rather than the reactive step. Is there a step by step process for scaling up?

Well, every company is different and that's because they're going to have different levels of, of growth that they're planning on within a one and a three and a five year plan. And they're in different niches as well. But what I would say as a kind of general indicator is when you are creating this plan, the plan really starts at the bottom in terms of looking at the budgeted plan for the year and the years ahead. And there's a simple question you need to ask yourself. How much net profit profit do you want to make out of your building company and what net margin is realistic? Because once you get a good idea of how much money you want to make and when you've looked at previous years, you know what net margin you've done, you know what would be realistic to target. And obviously if you're operating a company that after you've drawn a market salary or you may be clearing 1 or 2% net margin, you're not going to suddenly get to 10%, which is the benchmark, the industry standards standard overnight, you're going to have to work towards that. So you've got to be realistic in your planning. But getting that number really clear first and foremost, I think is so, so important. Because once you understand how much money you realistically want to be making and what a realistic net margin is, then you can build out your fixed expenses. You know, how much money you can allocate for fixed expenses? Because it's again, it's all built on ratios. And then, then from your fixed expenses you've got a good idea of the net profit that you need to be generating. And from that you then know based on your average contract value, exactly how many contracts you need to be completing, how many you need to be signing up, how many prelims you need to be signing up. All these other ratios just fall into place. And once you've done that, then it's time to kind of sit back, look at that plan. Does it make sense? Yeah. Do you have a salary built in at market rate? How much are you budgeting for marketing and advertising? The number of contracts that you need to sign? Is that realistic based on past performance and the grasp you have of marketing? Do you have the marketing in place to generate the amount of leads you need to generate that will give you the marketing qualified leads, the sales qualified leads, the opportunities, the prelims to deliver those contracts? Because if you don't, you may have to scale back your expectations which will then obviously affect your net profit as well. So that's critical really to get those things in place.

And I guess you also need to factor in a cash reserve too because you just alluded to the fact that we're going through a global inflation, then everyone's feeling it. So things won't usually stay the same price points either. So you have to have some sort of cash reserve to accommodate for that too.

Yeah. And there's two things there, like, first of all, as you grow, it isn't a straight linear line. It follows what we call as the S curves, where as you put on more resources to service the increase in revenue, your net profit is going to go down because your fixed expense ratio has gone up. That can be a bit disconcerting, but you've got to power through that in order to get to the next level with your business. But in terms of cash reserves. Yeah. This is why it's so, so important to build up net retained profit in a building company. It's something we talk about a lot of the time in apb, always trying to really encourage our members to build up those cash reserves because especially in new construction, which is cash flow positive, it's very easy to get misled with the amount of cash in the bank account which always far exceeds the equity that's in the building company because of the nature of front loading jobs. Nothing wrong with that, it's just the way it is. However, if you own A real remodeling company, you could find yourself in the opposite position where you're actually having to fund the growth. And that can make growth a lot more challenging for a remodeling company because yeah, it requires a lot more cash in the company to service that growth. But regardless of what model you follow, like you say Bosco, you've got to have those cash reserves in place because we never know what's going to come at us. When you have those reserves in place, you can make better long term decisions.

So outside of marketing, what activity can play a vital role in a successful scale up?

Well, capping the supply is probably, I don't know about a misunderstood component, but a not commonly utilized component, especially amongst small to medium sized building companies. Really I think that's because more demand, it can create a temptation for the owner of the building company to scale faster than is maybe in their business plan. And all of a sudden they've got this opportunity to sign even more contracts than they kind of budgeted for. And it can be tempting to sign those contracts, but it's really important that you don't do that and you stick to your plan and you limit your supply because that strategy is absolutely crucial to building your margins long term. You must stick to your plan, you must, must cap your supply, keep it at a level that you've budgeted for. One other thing is stay in your lane. It can be a lot more profitable to say no to jobs that are outside of your niche. And the best way to scale a residential building company is by doing similar work. Now there are exceptions to that. I realize if you operate a building company in a very remote location, there might not be the volume of work there to really focus on a niche and you have to take on work outside that niche. But generally I see a lot of building companies that will do high end custom homes, for instance, and then they'll talk about plugging the gaps with a few small renovations. But when you analyze it, those jobs are typically costing you money. And it might not even be obvious, but it's simply because the way you set your building company up, you become more efficient when you repeat the same work worked over and over again and everything outside of that becomes more of a challenge, there's more decision making to be done and it can be detrimental to the overall optimization of your construction funnel.

Now one of my mentors once said to me, all excuses are created equally. And I'm just curious, what advice do you have for people that complain or have, you know, use the low Margin excuse that says, you know, I can't really ramp up because, you know, our margins are set in stone or we can't really, we're scared to ramp up the prices. What advice do you have for them?

Best advice I can give is put your prices up because it is a lot easier than you think. Now, obviously, you can't put them up to the industry benchmarks. Like I said earlier, if you're operating on 1 or 2%, you can't suddenly increase it to 10% net. And just to clarify that, when I talk about 1 or 2% net and 10% bet, we're talking about going to 33% markup for new homes because we've got a fixed expense ratio of 15. So don't think that I'm confusing net profit with gross profit. But yeah, it's a lot easier to put your margin or your prices up than you probably realize. It's. That's the biggest bit of feedback I take from builders all the time. They're always amazed how easy it was. Secondly, I'd say if you are suffering from low margins, you probably believe that you're in a competition for price. The thing that is most likely missing from your business is a sales process. Again, this is just from our experience. We typically see that building companies come to us suffering from low margins. They don't have a repeatable, documented sales process in place. So that's one of the first things that you should look at implementing. Once you've implemented that, you can implement a marketing strategy and then obviously an advertising strategy to amplify your marketing. Now, it is hard work and it's the reason why most building companies don't do it. Which actually makes it quite exciting because when most building companies don't do this, it makes it a lot easier for the 20% that do do it to succeed.

Wow. Well, how do you build an effective business model that's just right for a builder?

In today's market, the most effective business model is design and construct with fixed price contracts. That is the. The way to go. Now, there are a lot of builders that quote plans, and those guys are simply seen as a commodity in the eyes of the consumer. That's taking their plans round to three, four or five builders and getting them to quote them for free. They view builders as a commodity. They don't see any real value in their service. They see no difference in one from the other, and they make a decision purely based on price. And that means there is no real profit in that model. There's a lot of builders that prefer a cost plus model as well. And all that does is it focuses the client's mind on the price. And again, there's no real profit in that particular model. And it can also be a bit of a nightmare to to administer. Now, having said that, there's a lot of builders out there that are happy quoting other people's plans and doing cost plus contracts and, and that's fine, but those guys don't make anywhere near the kind of money that a professional building company operating on a design and construct model with fixed price contracts makes. They don't even come close. So that to me, without question is the most effective model model that a residential building company can operate.

So can you give us an example of a building business model within your membership that is doing this right and what was their key to their success?

Well, it's pretty much all of the that have been in our membership and especially in our mentoring program for any period of time because that is the methodology that we teach. Now I do notice in our private members group we get a lot of new builders come in, they join the association of professional builders and they post in the private members group and interact with other builders and they start talking about cost plus or maybe quoting for architects and they're always looking for advice on how they can increase their margins. Now another thing, we also get team updates every month from our coaches on a specific success story that they've had, each one of them on our team meeting. And these are just internal wins that we share amongst ourselves. And the majority of these are always about a new member or a member that recently joined. They went into the executive coaching program and they've just signed their first prelim and they were amazed how easy it was. Or maybe they transitioned to a fixed priced contract and they've just signed their highest ever contract at the highest margin they've ever signed. We see plenty of those examples all the time. But I guess to really answer your question, if I don't look at anyone in our membership that's been in there, and certainly the guys in the mentoring program, they're all great examples of this.

Business model when it comes to the struggles that builders face. Are there any common trends that you're currently seeing when it comes to building an effective business model?

Yeah, I think the common trend that we see now that has always been there since we started back in 2014 is understanding their finances and that is simply because their accountants don't understand them either. So what hope have builders got when, let's be honest, 95% of accountants don't understand or fully understand construction financials. That should be. Should get me off their Christmas card list, shouldn't it?

I was going to say, Russ, I don't think you get many Christmas cards from accountants this year.

No, no. The conversations with accountants tend to be quite short. And I must admit I did used to have a lot more sympathy for account because I always blamed ourselves. I said it's because of the jargon we use in the industry. It confuses accountants, it's not their fault. But after looking at in particular in Australia, the Australian accounting standards and seeing that accountants in Australia are not even following their own guidelines, I must admit I've lost a lot of sympathy for them. If they can't follow their own guidelines on construction accounting, we shouldn't really be making excuses for them. But yeah, that is the biggest part the builders struggle with, it's their financials. And just to be clear, in case I wasn't clear, I don't blame builders for that. I blame their accountants. But until you get that part mastered, you're always going to struggle in business. And it doesn't matter if you're running a building company or a website design company or whatever, if you do not understand your financials in your own business, you will struggle to grow that business profitably. And I think in our particular industry there are three key things that builders must master very quickly, quickly. And it's things that, I guess these are the three most common struggles that they come to us with. The first of all is obviously understanding the financials. And for that there is a key financial formula that has to be clearly understood, which is the work in progress calculation. Yeah. Because until you understand how to do that, and more importantly you do that every month, your financials will never make any sense, ever. The second component I think is pricing. It's a very misunderstood topic. Pricing contracts. Probably around about 80 or 90% of builders still use a traditional pricing model, which is to add a percentage to the cost of materials and labor. That's an old fashioned, outdated way of pricing construction contracts. We use a pricing for profit method which calculates the fixed expenses that need to be attributed to each job, builds that into the contract, and that means the builder then puts a net profit profit on the contract rather than the gross profit which guarantees they make a net profit at the end of the day. And the third thing I think is the sales process. Again, it's something we all know that we need to have a sales process. But in business, way too many people wing it and to a large extent get away with it because it can always be successful to a certain point. But until you implement a repeatable sales process, it's very hard to be truly successful and scale up properly profitably.

I could talk to you about these topics for a long time, but my last question for you today would be what are some of these marketing resources that are available for the builders and listeners out there? They're looking or thinking about ramping up their business.

We cover everything really to do with marketing. Inside our membership portal we got the fundamentals. You know, covering messaging, creating content, website optimization, and then in our next level, the executive level, which is mentoring, we go deeper and we even provide actual email templates and downloadable guides that builders can use. But one thing that I'd recommend for every listener, whether they're a member of the association of Professional Builders or not, is to get a hold of our book, which is Professional Builder Secrets, because that clearly explains how marketing connects to sales and how sales connects to margins. And that creates a highly profitable building company because you can't just do marketing. You need to have a good understanding of sales and financials to create a building company that's really going to fly out there in the marketplace.

Sounds like a plan. I'm assuming we'll be sharing some of these links to the book as well in our show notes as well. Russ, thanks for being here as always and giving us your time and energy. I look forward to the next topic that we'll be diving a little bit deeper with.

Great stuff, Bosco. Thank you for listening. Remember to subscribe to Professional Builder Secrets.

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