The "marketing budget"

Tom Lykos receiving the Renovator of the Year award at the Florida Home Builders' Association. Tom, president of the Lykos Group in Naples, Florida, is Sonny Lykos' son

Recently, in response to my posting quoting the contractortalk.com thread reporting on participants' advertising budgets, Sonny Lykos filed this comment. It is important enough to be worth republishing here:

I found the discussion on contractortalk about budgets for advertising and marketing (A/M) a little off the track. Let's say one has $300K in annual sales. If budgeting six per cent of sales for A/M, the dollar amount would be $18K. For sales of $600K it would be $36K.I wonder if any or these business owners ever considered that every dime of that A/M budget could be eliminated if they would just do something different, like taking care of the past and current customers. In other words, "Brand" their company in a manner that would eliminate the necessity to find and sell new customers. How about doing things for their customers that would be not only different from our industry, but literally WOW their customers. One idea I've suggested a couple of times in various construction forums but never got any interest, typifies the mindset of most contractors. And my idea would not even cost the contractors a dime.
Calculate the labor charged labor rate of a field person. Say it's $75/hr. Multiply that by two hours and you arrive at $150. Multiply that three times to get $450. Say you're about to sell a kitchen remodel for $40K. Increase it's sales price by that $450. If it's a large remodel, say about $200K, or a house for $500K, increase it by $900 ($75/hr x 4 = $300 times three = $900). If a job is sold at $40K, it can certainly be sold at $40,450, and the same for selling a house or large remodel at $200,900 vs. $200,000. Here's the prepaid marketing part of it. This cost is part of the selling price, and costs the contractor nothing. Not a dime!
At three months, then again nine months, and again, 18 months, an appointment is made with the customer for a field technician (with great personal skills) to stop by to inspect the completed work. On small projects two hours are allocated including travel time. On large projects four hours. And at every appointment something is looked for, and corrected on the spot, whether it's just some caulking, adjusting cabinet doors, anything.WOW!
Name me just one customer anywhere who has ever been serviced in that manner. Yep the above is just one more part of the "branding" process, and one part totally alien to our industry. This idea can be expand even further, but that's another rant. So I have no sympathy for contractors who find the need to spend thousands or tens of thousands of dollars to just market, when other options are available to them should they decided that indeed, they are in business to "serve". And when "serving" in a manner we all which to be served, A/M budgets are eliminated while margins rise.
Understand, that obtaining net profits is not goal #1 - serving is. And "how" one serves, determines the size of the net profits, or a lack of them.Yet a tradesman mentality, and even many with a business owner mentality, will never understand that basis aspect of marketing. Stop now, being mediocre. Think WOW! No. think double WOW!

Now, Lykos also reported to me in an email that he disagrees with one of my other favorite gurus, Michael Stone, about advertising budgets. Stone recently visited Lykos' son in Naples, FL to provide consulting services and help the local business grow with solid business management principals.

However, my philosophy on that subject is 100 per cent the opposite of Michael Stone's. It's the one thing he and I disagree about. Actually one of two things. He thinks no company should depend upon referrals. When he was here, hired by my son Tom, (about 4-5 weeks ago) he told Tom he should budget 4 per cent or more for marketing. At $6M for last year in sales, that's about $240K. In my opinion, ridiculous! Besides, if Tom did that and generated an additional 20 per cent or more in sales, could have been catastrophic if Tom did not have the "systems" in place (he didn't) to service those additional sales. Exceptional grown that's not prepared for can be just as devastating to a company is not having good cash flow.
That's why I suggested to Michael, as Tom did, to concentrate on helping Tom create those systems (Tom will not accept advice from me) so he would be better prepared to sustain his current growth rate.

In a further email, Lykos added:

I think Michael's marketing percentage is fine for start ups, and could be good here and elsewhere for certain seasons. For example, Tom gets a lot of jobs while the snow birds are here, and schedules most of the major jobs for while the owners are up north. If he had less sales, not enough to keep everyone busy during the summer, he could market specifically for full time residents for that summer time slot."

So, what can we discern from all of this?

Lykos' point that if you took some of the 'marketing budget' and put it into really WOW client service and follow up makes a lot of sense, but Michael Stone is also right in warning about a passive approach to referral and word-of-mouth marketing. One good reason, as noted in Lykos' second email, is that this is a seasonal business -- you need to adapt to different market conditions/environments, and the referrals won't necessary 'carry you' consistently through all market conditions, both seasonal and (as we are experiencing now) a major economic slowdown. This creates balancing challenges -- as to maintain your work-force with steady employment (a real important marketing advantage, because secure and happy employees represent your relationship with your clients) you need to be able to manage the work flow volume and create a steadier cash inflow.
However, of course I would advocate that you would do better developing a systematic client follow up and communication system coupled perhaps with strategic advertising/marketing for seasonal variations rather than blindly repeating your Yellow Pages ad (of course repeat it if works). And I also agree that your marketing needs to be thought through and budgeted, and planned, not seat of the pants (though it probably doesn't hurt to allow a little 'slush fund' for last minute ideas, inspirations, or that really resourceful media salesperson with a great idea to test.)