Ep. 162 - Are You Really As Profitable As You Think? | Kirk Koskiniemi

You can't just raise prices. It's really easy. It's one thing to raise prices in a recession when you're zagging while everyone else is zigging. Right now, everybody's raising prices. So, if you're just raising prices, you're probably not doing enough.

This is the Wealthy Contractor Podcast, brought to you by G4 Marketing. Interviews with today's top home improvement entrepreneurs about marketing, sales, money, mindset, mindset and lifestyle. Now here's your host, Brian Kaskavalciyan.

All right everybody, welcome to another episode of the Wealthy Contractor Podcast. This is Brian Kaskavalciyan with G4 Marketing Group, and, uh, today I have with me Kirk— oh God, Kirk, you're gonna kill me— Kosemi.

No, you're Cascadian.

Yes, as a Cascavalcian, that should be easy for me.

But yeah, thank you, Ben.

So, uh, welcome. Uh, Kirk owns a company called Ibex, uh, Roofing. He is up in the, uh, Northwest, the Great Northwest, um, and he's back again You can check him out. This time I have a number. He, he was last on episode 123. And today, I thought it would be interesting. So Kirk brought— Kirk is in our highest level mastermind group here at The Wealthy Contractor. And on one of our recent mastermind calls, he had a very cool discovery. As he was comparing this year's results to last year's results. And I thought that that would make for a very interesting conversation. Kirk, before we jump into that, give everybody just like the quick 1 minute on IBEX Roof and, well, and also the Happy Gutters?

Okay, so the 1-minute Ibex Roof is a residential roofing replacement contractor, has a sister company Happy Gutters which does the same thing with gutters, serve the Portland market predominantly and a little bit basically within an hour of the Portland market. Roughly we It's about a— between the two is $6, $7, $8 million company depending on how the year shakes out. We're at about $6.5 last year between the two. Been in business 7 years, I think. And yeah, that's about it.

Cool. All right. So you were looking at some information comparing this year to last year. Can you set that up? What were you looking at?

Okay, so basically, uh, I was looking at our numbers and Q1, so January through March of '22 this year, um, and I guess to set up, we're having our— probably our— well, definitely we're having our best year ever. Last year was a little bit Last year was a good year, but not as good as I wanted due to inflation on materials. We have corrected for that this year because we've had a lot of inflation. We've adjusted our pricing model and we've caught up to it. So I was looking at Q1 '22 numbers and the profitability is good. And so I started to dig a little deeper. Profitability is as good as it's ever been. Uh, started to dig a little deep into some of the other stuff, and I found some, uh, into the numbers, and I found some, some things that were— that I thought would be useful to share with other people, I guess. Great. Do you want me just to dive right into them?

Yeah, let's dive into it. And, and the reason I'm asking him to do this is I think that it's, it's, it's really interesting what he discovered, and I would imagine that he's not the only one that is experiencing this. And it's something for you to also look for in your business. I'm talking to you, the listener. So yeah, so go ahead. What were some of the things that you found out?

Okay. The main idea to summarize it up is, um, I'll try to keep this as lively as possible and not too dry, but the main idea is sales are slightly up. But activity is significantly down. So, and kind of my hypothesis on this is that inflation, especially in the construction materials, inflation and rising prices is hiding other things, is hiding inefficiencies. And I feel personally, I can't say it's the same for everyone, but I feel like my company is riding the wave of high pricing and has the threat of going into unsustainable model. For example, our total sales, our net income's doubled, which is great, and I love that, but for Q1, but I don't want it to— I'd rather have something that's sustainable than something that's really good right now.

So, for example, and sorry to cut you off, but just to be clear, net income, net bottom line income is what you're talking about right now?

Yes. Q1 of 2021 was when the inflation really started. Our net income straight up suffered. I think we might have had 5% or something in Q1. Okay, now for Q1 of 2022, we are— the net income is just beautiful. It's everything I'd ever want. Okay, um, and if I look at the sales for '21 versus '22, our sales are up. Our sales are up about 5% roughly. Our total income is up about 5%, which is great, but the problem is our number of re-roof jobs is down 42%. So we're selling 40% less jobs at a much higher price. Yeah, which is great as long as it's sustainable. Our appointments are down 12% per week. Our dollar sales is— yeah, is up 5%. Our average rough price is up 63%. So some of this is price correction Some of this is price correction where we, we missed it, and then some of it is, you know, we're in this, we're in this inflation frenzy market, so it's easy to raise your pricing because everything's going up. Okay, um, which we've done the correct thing by taking advantage of that. However, um, if I break it down, our marketing cost per re-ref appointment is up 135%. So our marketing cost per appointment is up 135%. Um, our cost— our marketing cost per roof sold is up 250%, 257%, but, uh, 2.5 times. For every roof that we're selling, our marketing cost is up 2.5 times. Um, and so then our, our non-marketing overhead per roof So is up 86%. So if I back out marketing and I look at the overhead, so we got less roofs. The numbers are great, the bottom line is great, but we got less roofs being done. Keep in mind this is a month ago, so at that point we had more people doing less, uh, roofs, and we've started making changes to correct this stuff, but This is the stuff I'm seeing. I guess the message is, you know, times are good just because the numbers are good. You got to keep peeling the onion because I feel like this is our best year ever, but I'm finding more inefficiencies than ever. And in my opinion—

go ahead, in your opinion.

Oh, there's no better time to correct now when you have the breathing room than, you know, when you're on the other side of the, when you're losing money.

Yeah, so what I think is really important about this and why I asked Kirk to come on is one, I just wanna point out, look at how he knows his numbers. And we've talked, we talk about this here all the time, numbers, numbers, numbers. You've gotta know this is a numbers-driven business. You've gotta understand the economics of your business. You've gotta have KPIs in place. You've got to understand what your lead costs are, what your demo cost is, what your per roof or per window sold. You got to know these costs. You got to know your overhead, everything. You got to know all of these things. What's fascinating about this is a lot of people are in the same boat. Hey, we're making money. We're up over last year. But how many people are digging in to see Okay, is this a, for lack of a better word, is this just a big bubble that is, you know, it's growing now and it's good, but is this thing gonna pop? And then is it gonna pop on me? Am I gonna get, you know, am I gonna get, you know, priced out of the market? You know, what are the threats that are possible? And so when you understand this stuff, you can look at it and say, okay, well, what are the things that I need to do to make sure I have a healthy business on the other side. And, and Kirk is one of the best I've seen at this. And when it comes to, you know, operating his company, he knows all the nuance, all the little ins and outs. So, so you've made some of these discoveries. What are some of the things that you're doing about it?

So we've replaced, since making this discovery, we've replaced two of the office people. You got 2 people doing— 2 new people doing the job that 2 other people were doing, except for they're doing more with that job. We have our marketing. We're obviously looking very hard at the marketing. We're not reducing our marketing spend at all because I think this is the year where the marketing— you're gonna have to spend in marketing. I think the, the abundance of leads will go away.

I agree.

But the biggest thing we're doing is we're looking, basically breaking everything out. We're having a 2-hour, hour and a half finance meeting every week. We're coming up with new metrics. Like a new one is overhead per roof sold or per roof installed. So, because back in the day, so here's the other thing is our, you know, I get, and I got this kickback from some of the people here that, hey, our overhead is still 24% or whatever it is, you know, we're still good. Our overhead's still 24%. It's just like last year. But we need new metrics because the numbers are changing so quick. And with inflation and everything else, the old metrics of 24%, you know, that worked for the last 5 years don't work anymore. So we have to come up with new metrics like, you know, our overhead per roof. What is it per roof? So because just because the roof costs more doesn't mean it should take more people to make it go through the system, if that makes sense.

Yeah.

And two, if this inflation continues, what will happen is the overhead wages and everything will have to follow. And so the overhead will quickly follow if we don't get that right-sized. So, so yeah, we've ended up— we've replaced two people because we said, you know, that were resistant to some of the changes. So obviously we had to replace them. And we're just— we did a— we honestly did a spending freeze for office supplies, all that kind of stuff. Kind of just a— that's one thing I do if we don't— if it's too high but no one really knows where to cut it, say, okay, let's cut everything and then let's go from there. You know, if no one has an answer, if we— the old saying, I heard this maybe at Accelerator somewhere, but Someone said, um, if we have the data, let's go with the data. If we don't have the data, let's go with my gut. So, uh, some of the stuff we're just having to go with my gut, and then if I'm wrong, we'll figure it out, you know. So you can always— you can always get costs back. You can always call someone up and say, hey, I shouldn't have fired you, will you come back? Um, so I don't know, sometimes you roll the dice, I guess.

You know, I wish that that is advice that I had heard 20 years ago because there was a— we didn't stop and look at— I would look at a number on our P&L, like I just— when you said office supplies, every month I would look at this number and I would say, what the hell are they spending all of this money on? And I wouldn't, I wouldn't say, okay, stop spending. Stop spending until we figure it out. I just let them keep doing it. You know what I found after when the business scaled back and I sold it and I ended up with all the stuff I would have? I had cabinets filled with office supplies, like all this crap. I had so many highlighter pens that— I mean, it's a dumb thing, but at $1,000 a month or what, $2,000, whatever it was, a month, month in and month out, year in and year out, that it starts to add up. And that's just one silly line item, right?

So when we put, uh, we, we put one person in charge of like the Amazon account and said everybody has to, uh, everybody has to ask Alyssa. And if actually— I don't know if you can see me, but I got a new office. I'm using this stool. I had to ask Alyssa this morning, like, can I please have an office chair? And she says, I suppose, you know.

So yeah, so you've got an $8 office chair.

Yeah, I got a better one coming, but for now I just got a stool, so this improves it, you know. So it cuts both ways. So, but, um, but yeah, it's, uh, that's the main thing we're doing is we're, um, I mean, we're not doing anything crazy, it's just we're— I don't— I honestly don't know where our overhead needs to be, but I know it will— it needs to be back where it was as a cost of, uh, Basically, our overhead used to be, you know, I don't have it in front of me, but say our overhead, I'm guessing, is $3,000 per roof sold.

Yeah.

It needs to be somewhat back in line with that, adjusted for 10% annual inflation or something. I don't know.

So, yeah.

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So As we look at this, and I think that— I think this is something that everybody needs to really dig into and look into. What do you— you mentioned hypothesis before. What is kind of your gut, your hypothesis about what's going on?

With the overall market or with—

Well, in what you discovered in your business.

I think that, um, honestly, just times have been good. Um, and I know, and I don't want to give any advice against yours, but your advice has always been to raise prices, and 90% of the time that is the correct thing because most contractors are too cheap. Um, I honestly feel like with our company we've got away with raising prices a little bit too much and it's hidden a lot of other stuff, which is fine. But you can't just raise prices. Yeah, it's really easy. You know, it's one thing to raise prices in a recession when you're, you're, you're, you know, zagging, whoever else is zigging. Right now, everybody's raising prices. So if you're just raising prices, you're probably not doing enough. Yeah, that's what I would say.

Well, and the ironic thing is, up until a year, year and a half ago, um, it was very, very sound advice. A year ago, year and a half ago, it started to become like if you didn't do it, you were, you were forced to do it. Even if you wouldn't do it before, you were forced to do it. And over the last year, you've been forced to do it multiple times. So it's an interesting thing. I mean, yeah, I've never seen this in, in my 25 years in home improvement. I've never seen anything like this where inflation was just so out of control that everybody is forced to raise price. I just went to flipping Chipotle and got a bowl It was $15 or $14, something like that.

Yeah. You know, I just ate at Five Guys. It was $18.

Yeah.

For burger, fries, drink.

Yeah. It's— everything has gone up. Everybody's raising prices. And, um, but you got to know what you're doing. You got to know, okay, here's what it's costing me. You got to know, uh, my labor, my material. I got to get my gross margin. Then from that, I got to understand what is my marketing cost, what's my selling, and what's my overhead. And then that's after all of that is what's going to leave me my profit. And if you're not making money right now, you never will.

You're done. Yeah, you're done. Yep.

Right. If you can't make money in this environment, you never will. But it's also It's weird times because is this the new normal? Or is, is your— you said your, the price of a roof is up 63%, right?

Yes. And part of that is because I would say our price was too low at the beginning of last year. We had a back— so we had a backlog and price increases monthly and we were behind our backlog. So we had to really take some price jumps. I mean, just period. Because that was, in the old days, you wanted to get a couple month backlog in roofing and then you're set. And you do that work, all the prices remain stable and it's security, whereas it turned into a liability beginning of last year, end of the year prior. And then, I forgot what you asked me.

Me too. We were just talking about— oh, that you're— oh no, we were talking about that, that, that you're— the average cost of a roof to the consumer. Yes, that's significant. Yeah, so that's a $10,000— what was a $10,000 roof a year and a half ago is now a $16,000 roof.

Yep, it's, uh, oh, there's $11,000 roof. A year and a half ago is $18,000 now.

Yeah, I mean, that's crazy. Now, is that— so now the question is, is that the new normal? Is that how it's going to be now for the next 2 or 3 years? We don't know.

No, we don't. And I think it's, uh, I mean, my personal thought is that we need to make basically— so if, if you wanted to make 20% before this And you probably need to make 30% now because just— and this is me just guessing, I don't know any more than the next guy, but I would say if you're not making money now, a year from now you're at negative 10%, you're out of business. If you're making 20% now, a year from now you're going to be at, uh, 10% and then trying to get your margin up. That's just my personal thought. Yeah.

Well, the other interesting thing that you said is, and you noticed, is your marketing cost. So you said, what was it, 257%?

Yes, 257%.

Yeah.

So significant. 2020, we were— 2021, sorry, we were 60% repeat and referral. Yeah. And we had lots of work and it didn't make sense to spend money on marketing. And now we're trying some things and that's, that's it because we're, we're trying things, we're spending money, we don't have it's not formulaic yet for us. So we're having to play with some money and test some things, which again, much rather be doing it now when you have some margin to play with than once things hit the fan, you know?

[Speaker] Well, and it's very, very smart because when things do start to slow down, the mistake that people make is they stop marketing, whether it's because we're too busy or because we don't have money. Or for whatever reason. And if you aren't marketing today, you're, you're potentially in trouble a year from now when things do start to contract a little bit. I was talking with, um, Scott at CCN last week. We were at an event together and we were talking about the subject. In fact, I'm going to have him on, um, on an episode soon because we had kind of a We had a little bit of a scary conversation just because of some of the things he's seeing out there through, through Certified Contractors Network. And of course, some of the things that I'm seeing through, through my clients. He was saying that one of the biggest mistakes that people make, one of the biggest mistakes that people make when things start to slow down is they stop spending on marketing and they stop spending on training, which is two areas that you do not want to cut, right? And so being ready, having the budget today. So it's very smart that you were, you know, you were relying on repeat and referral last year. You did some marketing, you had marketing out there, but now you're becoming more of a marketer. You're not relying on anything, you're not taking anything for granted. I don't want to put words in your mouth, but that's kind of what I see.

Yeah, for sure. I mean, it's— we have to— I mean, we're down— our number of jobs sold is down 40%. I mean, yeah, what are you going to do, right?

Yeah. Now, now, on the one hand, there is a beauty in doing less and making more, but again, the question is how sustainable it is.

Exactly. Yeah. And if, and if that's the way it is forever, then I'll gladly say I'm wrong and then just quit coming to work. But yeah, just in case, I'm going to make sure that we're, you know, the ship's tight.

So absolutely. Yeah, yeah, yeah. No, it would, it would actually be great if this, if this was the new normal and we could make more on less. Great. Especially roofing with all that.

I've talked to, and I've talked to other guys locally that have seen the same thing and they say, hey, you know, what's the big deal? This is great. You know, some of my competitors. And I'm like, well, It is great as long as it keeps going like this. Yeah.

And the whole thing here, again, to the listener, is these are things to just think about. And Kirk loses nothing but gains everything by doing the things that he's doing now, by not taking things for granted, by saying, you know, this could go on forever, but let me make sure the ship is tight. So that if things do change, and we know they will, but let's just say if, if they change, I'm going to be prepared. I'm not going to be the one that goes negative 10%. I'm the one that's going to be still making money.

And just as a disclaimer, I'm the guy that bought his first house when he was 19 in 2007, when the market could never go down. And I was also working in construction then, so I was 20 years old watching people buy houses for half of what I paid for my house. And, and all this, you know, watching everybody take advantage of the market and the situation, and I was just sitting there watching it. So I don't know, I may be that And then the opposite happens. So now I question stuff.

Yeah, Kirk, I'm sorry, man, I lost you there for a minute. You were just about to say— you were, you were saying, um, about the house, and then you were saying— and I completely didn't get it.

Can you start over?

Just at the part where people were buying houses for half of what you paid, and then you were, you were going to make a point.

Oh, gotcha. People were buying houses. I sat there after the recession happened, watch people buy houses for half what I paid. And, you know, all these old wise people had told me that the price would never go down. So now I question stuff if things go too good.

Yeah, well, and that's good. Um, I, I think it's good. Well, Kirk, thank you. I appreciate it. Um, I know you're gonna do a little presentation for the mastermind group on, um, the discoveries and the numbers, and we'll dig into them a little bit more in mastermind. But I, I wanted to have you on here just to make people aware. This is about awareness. These are just things for you to think about We want you to be successful. If you're listening to this podcast, we want you to succeed. We want you to, you know, get past all of this, whatever this is, and then whatever the next thing is, you know. So the healthier your foundation is, the better you'll weather any storm that comes along, and the greater opportunity you'll have to take advantage of current market conditions. And so that's what I hope that we're doing a little bit up here. So, Kirk, thank you. Appreciate it.

Thanks for having me, Brian.

And to everyone listening, until next time, this is Brian Kaskavalciyan with G4 Marketing Group, and this is the Wealthy Contractor Podcast.

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