Episode 65: Why Margins Are Linked To Marketing With Russ Stephens

In episode 65 of the Professional Builders Secrets podcast, we’re joined by Co-founder of the Association of Professional Builders Russ Stephens. Throughout this episode, Russ dives into the most effective strategies when it comes to marketing and how successful marketing practices have a direct impact on increasing net margins.

 

Inside episode 65 you will discover

• How much builders should be spending on marketing
• The biggest blind spots most builders miss when marketing
• A step-by-step guide to scaling
• The business model that is helping builders thrive in today’s industry 
• The key resources builders need to help them ramp up their business
• And much, much more.

Listen to the full episode to uncover how the professional builders that are investing a larger percentage of their revenue into marketing are enjoying bigger profits due to the law of supply and demand.

 

Russ Stephens - Co-founder

Russ Stephens is a Co-founder of the Association of Professional Builders, a business coaching company dedicated to improving the residential construction industry for both builders and consumers. Russ is a data analysis expert who has introduced data-driven decision making to the residential construction industry. Russ is also a proud member of the Forbes Business Development Council.

Connect with Russ

 

Timeline

3:33 Supply and demand ratio in marketing

7:48 How to ramp up your marketing

14:07 Should every building company scale?

25:46 A business model set up for success

32:11 The key resources builders need

 

Links, Resources & More

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APB Website
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APB on YouTube

Join the Professional Builders Secrets Facebook group for builders & connect with professional builders world-wide.

Russ Stephens:

You really can't beat hard proof, can you? 

Russ Stephens:

When you start something, you've got to put the system in place in order to continue that. 

Russ Stephens:

It's all about the end result for consumers. 

Russ Stephens:

The harsh reality is you've got to pay to play in this game. 

Russ Stephens:

You must stick to your plan. 

Russ Stephens:

You must cut your supply, keep it at a level that you've budgeted it for. 

Russ Stephens:

I think it's really important to remember in business that what does not grow, dies.

Bosco Anthony:

Hello and welcome to the Professional Builders Secrets Podcast, a podcast by the Association of Professional Builders (APB) for building company owners, general managers, VPs and emerging leaders. Here we discuss all things running a professional building company from sales processes to financials, operations and marketing. We have another exciting episode from the Professional Builders Secrets podcast. Joining us today is Russ Stephens, Co-founder of APB. Russ, nice to have you again.

Russ Stephens:

Hey Bosco, nice to be here again.

Bosco Anthony:

Listen, I've had you here before and we've talked a little bit about the SORCI [State of the Residential Construction Industry] report. But I'm just curious, what has APB discovered through this report when it comes to marketing, for our listeners out there?

Russ Stephens:

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

Bosco Anthony:

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

Russ Stephens:

Most of it we expected because we've got a good idea of the whole marketing of a building company. So we've kind of got a good idea. So it wasn't particularly shocking or surprising 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've thought that would've been the other way around. But this is both in terms of posting content and even what they spend on advertising as well. There is 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.

Bosco Anthony:

Yeah. That's interesting considering that you have such a big presence on there as well. 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 a marketing ratio for when to actually ramp up when it comes to spending?

Russ Stephens:

Yeah, of course. There's a number 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 that leads to contracts. But that can vary by marketing channel quite a bit because some channels are stronger than others. 

Russ Stephens:

So for instance, leads that a building company generates from search engine optimisation are probably going to be the best quality leads it’s going to generate. 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. What we tend to look at, rather than lead to contract, is we call sales qualified leads.

Russ Stephens:

These are leads that have come in and they've been marketing qualified. That is, they've been identified as potential clients. But then they're sales qualified for you as the builder to determine if they’re your ideal avatar. Are they looking to build what you specialise in? Are they in your geographical location? You start finding the emotional triggers as well. 

Russ Stephens:

This is all part of the qualifying process 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 you go onto the more emotional questions, the discovery questions. The end result of that is that you 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 you've weeded out a lot of the rubbish, for want of a better word.

Russ Stephens:

That's really important to understand because you can get very misled, especially when you start advertising in a new channel. We hear this a lot with builders who maybe rely 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, and of course they're not. These are stone cold leads. So it’s very important to understand that those ratios can differ. But once you get to a certain point in the funnel, things do tend to even out. 

Russ Stephens:

To answer your question in terms of the marketing ratio, you are looking a little bit further down the funnel still. You're looking beyond sales qualified leads. You’re actually looking to the next stage where they become an opportunity, then they become a design client if you're doing a design and construct model. The key ratio is the prelims, that's the last step before contract.

Russ Stephens:

I think most builders are 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 their prelims they convert into contracts, will say 80, 90 or even 100%. But we always say that is way too high. You've got to be converting at 50%. The reason for that is simple: you don't want to be dependent on all of those prelims going into contract because if one or two fall over in exceptional circumstances, all of a sudden, you're on the back foot. 

Russ Stephens:

You become very dependent on those prelims. But when you convert at 50%, what we're saying is that 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. It's really a sales ratio, isn't it? But in terms of supply and demand, that is a key ratio for builders to understand, 50% of prelims into contract.

Bosco Anthony:

All right. So Russ, are there any best practices for a company looking to ramp up their marketing?

Russ Stephens:

Well, content is king. But really, it's all about the right type of content. Now, a big mistake we see a lot of builders make is that they get very focused on the process. So they'll be taking a lot of pictures on site of a home being constructed. I've even seen marketing companies advertise services to builders or provide services to builders where they'll go out and film the process as well. But that's not what sells the idea of building a luxury home to a consumer. It's all about the end result for consumers. You must remember that consumers are buying the end result, not the process. So you don't want to bog your feeds up with progress shots about what's happening on site because all that does is remind people of the pain of construction and all the things that could go wrong.

Russ Stephens:

What you've got to be addressing with your content is the questions going on inside the consumer's mind. A lot of these questions relate to before the process has even started. So you can provide content that answers those questions and that can be as simple as writing a succinct blog article of six, seven or eight hundred words. Then in terms of video content, as the builder, you just record that article in a video. It positions you as an authority. But that is way more valuable than having progress shots on site. That content can then be broken up into shorter clips. It can be used in multiple ways. 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 posts. But really, it's about the right type of content.

Bosco Anthony:

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.

Russ Stephens:

Yeah, because you're trying to get the attention of the ideal client very early in the design process, before the design's even started. So you've really got to be tapping into the questions going on inside their mind. What kind of things are they thinking about? Grab the consumer at that very early stage. That's why this stuff is just so important.

Bosco Anthony:

Now obviously, APB has front access to a lot of the pain points, a lot of the blind spots 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?

Russ Stephens:

Consistency is probably the number one. We see this in a lot of areas and not just for builders, but all business owners, especially small business owners. They'll start something, it'll be exciting, but then they don't carry on the momentum. Podcasts are a great example. How many podcasts do you see out there? They often stop at six or seven episodes. Sometimes that's by design, but a lot of time people just run out of time. 

Russ Stephens:

It's the same with newsletters. I can't tell you how many newsletters I've seen with newsletter number one proudly on the front and then I've never seen another one again. So it really is consistency. So 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. Obviously 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 are committing to. 

Russ Stephens:

Apart from consistency, the other thing is amplification because the harsh reality is you’ve 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. 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 all it does is rely on referrals, and it really is the same with your traffic. If you are going to put a lot of effort into creating some great content, then you want to do more than just rely on organic reach, which is very limited. You've got to amplify that content you are creating. You've got to put money behind it to make sure it gets seen by plenty of people.

Bosco Anthony:

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

Russ Stephens:

It's always once you've fixed your margins. That is the number one thing. And it's always been our philosophy at APB. Building companies have been 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. If they've got more leads, they're going to have more sales, and if they've got more sales, they've got more revenue and that's going to help them scale up and make more money.

Russ Stephens:

But we 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 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 by positive cash flow, will become a loss making company 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 important. It’s absolutely critical.

Bosco Anthony:

Should every building company scale up eventually?

Russ Stephens:

That really depends on the agenda of the owners. A lot of people say they don't want to grow; they're happy with where they are. But I think it's really important to remember in business that what does not grow dies. In business, you've got to be growing at some level, otherwise you are dying. There is no such thing as standing still. 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.

Russ Stephens:

Especially now that we've got inflation to contend with, and business owners cannot underestimate the effect of inflation on their businesses. 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 of inflation. 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 so that's not important to you, then great. But if your income 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.

Bosco Anthony:

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

Russ Stephens:

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 are just winging it really. You're going to be reactive to every bottleneck and every challenge that pops up and they will pop up. Then 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 drop.

Russ Stephens:

So it’s 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. We did X number 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." It won't go completely smoothly. I'm not going to say there's a silver bullet there and 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%.

Bosco Anthony:

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?

Russ Stephens:

Well, every company is different and that's because they're going to have different levels of growth that they're planning on within a one and a three and a five year plan. They're in different niches as well. But what I would say as a 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. There's a simple question you need to ask yourself. How much net profit do you want to make out of your building company, and what net margin is realistic? 

Russ Stephens:

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. Obviously, if you're operating a company and after you've drawn a market salary, you’re clearing maybe 1% or 2% net margin, you're not going to suddenly get to 10%, which is the benchmark, the industry standard, overnight. You're going to have to work towards that.

Russ Stephens:

So you've got to be realistic in your planning. But getting that number really clear first and foremost is 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, again, it's all built on ratios. 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 and how many prelims you need to be signing up. All these other ratios just fall into place.

Russ Stephens:

Once you've done that, then it's time to sit back and look at that plan. Does it make sense? Do you have a salary built in at market rate? How much are you budgeting for marketing and advertising? Is the number of contracts that you need to sign realistic based on past performance and the grasp you have of marketing? Do you have the marketing in place to generate the number of leads you need to give you the marketing qualified leads, sales qualified leads, the opportunities and 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 to get those things in place.

Bosco Anthony:

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

Russ Stephens:

Yeah. There are two things there. First of all, as you grow, it isn't a straight line. It follows what we call the S-curves, where as you put on more resources to service the increase in revenue, your net profit's 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 important to build up net retained profit in a building company.

Russ Stephens:

It's something we talk about a lot of the time at 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 by 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. There’s nothing wrong with that, it's just the way it is.

Russ Stephens:

However, if you own a remodelling company, you could find yourself in the opposite position where you are actually having to fund the growth. That can make growth a lot more challenging for a remodelling company because 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 you never know what's going to come at you. When you have those reserves in place, you can make better long-term decisions.

Bosco Anthony:

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

Russ Stephens:

Well, capping the supply is probably, I don't know about a misunderstood component, but a not commonly utilised component, especially amongst small to medium sized building companies. Really, I think that's because more demand can create a temptation for the owner of the building company to scale faster than is maybe in their business plan. All of a sudden they’ve got this opportunity to sign even more contracts than they budgeted for. 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 in the long term. You must stick to your plan, you must cap your supply. Keep it at a level that you've budgeted for.

Russ Stephens:

One other thing is to stay in your lane. It can be a lot more profitable to say no to jobs that are outside of your niche. The best way to scale a residential building company is by doing similar work. Now there are exceptions to that. I realise 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.

Russ Stephens:

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 analyse it, those jobs are typically costing you money. 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 over and over again. 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 optimisation of your construction funnel.

Bosco Anthony:

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

Russ Stephens:

The 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. Just to clarify that, when I talk about 1% or 2% net and 10% net, we're talking about going to 33% markup for new homes because you've got a fixed expense ratio of 15%. So don't think that I'm confusing net profit with gross profit here. But it's a lot easier to put your margin or your prices up than you probably realise. That's the biggest bit of feedback I take from builders all the time. They're always amazed how easy it was.

Russ Stephens:

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.

Bosco Anthony:

Wow. How do you build an effective business model that's just right for a builder in today's market?

Russ Stephens:

The most effective business model is design and construct with fixed price contracts. That is the way to go. Now, there are a lot of builders who quote plans and those guys are simply seen as a commodity. In the eyes of the consumer who'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.

Russ Stephens:

There's a lot of builders who prefer a cost plus model as well. All that does is focuses the client's mind on the price. Again, there's no real profit in that particular model and it can also be a bit of a nightmare to administer. Now having said that, there's a lot of builders out there who are happy quoting other people's plans and doing cost plus contracts 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 that a residential building company can operate.

Bosco Anthony:

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?

Russ Stephens:

It's pretty much all of them who 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 APB 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. 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, from each one of them in our team meeting.

Russ Stephens:

These are just internal wins that we share amongst ourselves. The majority of these are about new members or members who 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 price 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 look at anyone in our membership who's been in there, and certainly the guys in the mentoring program, they're all great examples of this business model.

Bosco Anthony:

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?

Russ Stephens:

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. 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 get me off their Christmas card list, shouldn't it?

Bosco Anthony:

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

Russ Stephens:

No, no. The conversations with accountants tend to be quite short. And I must admit I used to have a lot more sympathy for accountants because I always blamed ourselves. I always said it's because of the jargon we use in the industry. It confuses accountants, so it's not their fault. But after looking at Australia in particular, looking at 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 that is the biggest part that 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.

Russ Stephens:

But until you get that part mastered, you are always going to struggle in business. 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. I think in our particular industry, there are three key things that builders must master very quickly. 

Russ Stephens:

These are the three most common struggles that they come to us with. The first is obviously understanding their financials. For that, there is a key financial formula that has to be clearly understood, which is the work in progress calculation. Until you understand how to do that, and more importantly you do that every month, your financials will never make any sense ever.

Russ Stephens:

The second component 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 labour. 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 and builds that into the contract. That means the builder then puts a net profit on the contract rather than the gross profit, which guarantees they make a net profit at the end of the day. 

Russ Stephens:

The third thing is the sales process. 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 profitably.

Bosco Anthony:

Russ, 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 who are thinking about ramping up their businesses?

Russ Stephens:

We’ve covered everything to do with marketing inside our membership portal. We’ve got the fundamentals covering messaging, creating content and website optimisation. 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. 

Russ Stephens:

One thing that I'd recommend for every listener, whether they're a member of APB or not, is to get hold of our book, which is Professional Builders Secrets, because that clearly explains how marketing connects to sales and how sales connect to margins. 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.

Bosco Anthony:

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.

Russ Stephens:

Great stuff, Bosco.

Bosco Anthony:

Thank you for listening. Remember to subscribe to Professional Builders Secrets on your favourite podcast platform and leave a review. To learn more about how the systems at APB can help you grow your building company, visit APB.com. See you next time.