Hedging Your Bets in the Commercial Market
Case in point: “Tom” is a retailer who was quite successful – the envy of most of his competitors – with his high-end carpet and area rugs business. That is, until the 2007 downturn. He soon discovered he was unprepared when the floor traffic slowed and the phones stopped ringing.
That’s when my phone rang.
“I’m going to get more involved in the commercial side of the business, since retail really sucks right now,” Tom told me. “When can we meet?”
I spent almost five hours answering questions about how the commercial business really works: where to start, margins to expect, a potential line-up of products and so on. And we only scratched the surface.
Tom had made the classic mistake of waiting until his main business was suffering before he attempted to branch out into other areas. The time to review your market segments is when things are on the upswing, not when you’re casting about for business to improve cash flow.
Another dealer considering the leap into commercial business said, “I’m thinking of calling on some general contractors and maybe doing some tenant build-out work so I can improve my retail cash flow.” It fell to me to explain that most commercial work exacerbates problems with cash flow rather than fixes them.
Retail business can be quick turn since money is paid as a deposit, helping cash flow, and the balance is usually paid upon work completion. Contrast this with commercial business where deposits are not the norm and you’re lucky to be paid in 45 days after completion.
Questions I usually ask when consulting on the issue of new market segments include: “How solid is your current business, and are you able to finance your entry into this new business?” “If not, where will the money come from?” “What are your goals for sales volume and profit in this new area?” “What average gross profit do you expect to generate?” “How will you generate sales and who will do it?” “Will you need to hire new people or will you use existing employees?” “How will the delivery and installation be handled?” “What time period will you use to judge the success or failure of this new segment?”
Here are a few of the answers.
Financing the New Business
Unless your other business is terrific and your reputation impeccable, you’ll likely have trouble borrowing the money from a banker (unless you don’t really need it). Break-even on a new area may be a year to 18 months or longer; this depends on what you are doing.
Take a hard look at your current cash flow and availableretained earnings to see how much money is available without putting your other business in jeopardy. You should have already done a “cash needs” forecast for the new venture, especially if you’re investing in expensive new equipment or technology. With money that is available and your monthly expected outlays for advertising, equipment, personnel (and screw-ups) in the new venture, how long do you have to turn a profit?
We’ve all heard the tales of success where “he borrowed from family, friends and everyone, and finally hit it big.” Many good ideas that wouldhave worked failed because the money ran out.
Goals for Sales Volume and Profit
If there has been one area where bright people have failed, it is a lack of research. What is the average volume size of a specific project, its duration, and expected gross profit? Have you assessed your internal costs and how this will affect overhead? In spite of the research, your own experience maybe substantially different; if the average gross profit on a $10,000 job is 22%, as a start-up yours will likely be lower.
Your own experience, allowing you to do things quicker and easier, may be worth an extra 2%-3% on your gross profit. One dealer said he was operating at a retail gross margin of 40% and was incredulous when I pointed out that his entry into a commercial segment was likely to 22%-25% if he did everything right.“Well, how can I make money at that rate?” The answer was higher overall volume and a blending with his current high margin business.
An important thing to consider is this: Are you selling to some of your existing clients or starting from scratch? It is ideal when you can sell an “add-on” instead of a new product/service.It’s really tough when you have to build a completely new client list. Carpet cleaning or programmed maintenance of flooring, wood floor refinishing or specialty repair work are just some examples of what you might be able to sell your existing client base. You will definitely shorten the selling cycle by using your reputation for exemplary performance.
Sales, Delivery and Installation
“Heck, Rick can sell anything, he’ll be great, we’ll just add this to his list of things to sell.” What a bad idea that turned out to be. He just oozed charm and conviction on the sales floor and was a good closer; he was a disaster when it came to the more careful, deliberate, organized approach to commercial sales. “Rick” didn’t have the patience or get the ego boost that comes with retail sales.
If you are tempted to save money by using existing personnel, temperament and attitude is critical. One of my bigger goofs as a manager was bringing a retail star into the commercial arena.
Start by assessing your current employees, make some tentative selections, gauge their interest, and then interview them for the new area. Maybe you’ll end up giving one or two a new opportunity.Unless you have no choice or the segment requires it, refrain from hiring a lot of new personnel. It will cost you a lot more money, and the chance for failure in the venture will be higher and more costly.
How versatile is your delivery and installation team? Is charm and technical proficiency of equal weight or is fussiness and perfectionism an absolute requirement for success? When installing liquid applied flooring, mixing product ingredients, adding color, and applying quartz crystals or vinyl chips, it is all about timing. Setup time varies with temperature. Once a project area is started, there is no stopping.
Training is important, but your attitude is crucial. Be candid about what you expect but realize that mistakes will be made due to inexperience. Don’t blow a gasket! Be happy if you are within 25% of the profit goal on a project when all the costs are tabulated. It will get better.
Judging the Viability of Your New Market Segment
After a specific time to get going, plan a comprehensive evaluation. Review even the smallest detail, including sales volume; gross profit; growth potential; internal cost of operation; financial drag on the company; and potential liability or damage to company reputation. Does the research you did tally with your own experience?
Is there enough of a market for the segment? One company I know spent considerable effort and funds on a colored concrete offering, only to find the hot offering on the west coast was of little interest to east coast clients. In a similar vein, an exciting new carpet product that was virtually indestructible and easily cleaned was summarily rejected by virtually all to whom the product was shown. It is a good thing they did test marketing.
One decision to terminate a demolition service was the cost of liability insurance, its limited scope, and unlimitedcompany liability. On a personal note, there was once an instance where client personnel interfered with our procedures for safe product installation; this couldhave resulted in front page news in the Washington Post. The damage to our reputation would have far outweighed the profit being made in that business.
Judging a new venture can be emotionally trying. Sometimes, it’s as simple as not being a good fit for you or your existing personnel at a particular point in time. Has this business become a “pain in the a**” to the point that you dread the start of each day? It is hard to admit it when you’ve made a mistake and spent thousands of dollars trying to make a segment work. The important thing is this: make a decision!Take your lumps, write it off, and go on down the road.
Once upon a time, an owner began with a small storefront and an idea for selling carpet remnants. That worked and he began doing smaller commercial jobs; then with general contractors on larger projects. Over the years, the company continued to expand with government purchase agreements, annual contracts, select general contractors, hospitals and local school systems. Various segments were tracked, evaluated for profit, ease of performance, and repeat business. Diversification provided the balance during tough economic periods. No one area comprised more than 40% of total volume.
That company has now been in business for 35-plus years and multiplied sales by 20 times. This is why you hedge your bets.