Construction marketing: Effort, money and relationships

Which is the most important element in construction marketing success: The effort (work) you put into the process, the amount of money you spend, or the quality and nurturing of your relationships?

The 25 cent answer is: All of them count.

The $25 dollar answer is: If you work on two of them, you probably can cut back on the third.

But I wouldn't "rely" on just one, unless you are ready to go to extremes, a highly risky approach. And if you can balance all three, you are virtually assured of success.

For example, lets say you are like most people in this industry right now, and don't have much (if any) money to spare. By focusing your efforts, you probably can raise market awareness through hard personal work (for example, door knocking or phoning potential clients yourself) and if you are really smart, focusing your efforts to enhance and build the quality of your relationships, both with current and referred clients, and community/business centres of influence.

Lots of money and lots of effort: You can really blitz the advertising and pound the pavement. People may hate you and your business, but you'll still do enough through sheer force.

Lots of money and great relationships: You are behaving like you've "made it" already -- and you can take it easy as the cash rolls in. (For everyone else, isn't it nice to dream?)

But when we get down to earth, I suppose the ideal combination incorporates something of each element.

You'll want enough money to pay for effective, targeted advertising, fair wages and commission for your sales representatives. You are ready to put enough work into the process to ensure your money is spent properly and relations are properly maintained. And you of course enjoy great and rewarding relationships, with people and organizations who could care less about how much money you actually contribute. Probably, ultimately if you are great at relationships you can reduce the money and effort without too much harm. (But I'd reduce the money before the effort!)

How much should you spend on construction marketing -- and where? (2)

In my last posting, I answered the first part of the question with a one-size-fits-all answer, suggesting the percentage of resources for marketing (and sales) should be 5 to 25 per cent of your projected sales.

Of course, this is a wide range -- because the allocation depends on your business. Your most important concern should occur if your marketing allocations are above and below this range: If it is above, I can't see how your business can be sustainable unless you are ripping off your current clients, and if it is below, I can't see how you can retain any meaningful future business.

The next part of the question, "Where?" suggests a hierarchy of answers, as well. Usually, you will be in the higher range if you need to hire or contract with a direct sales force. Sales representatives, of course, need to eat, and good ones need to be paid well. The issue of whether to pay representatives salary of commission is complex and consistently debated -- but my experience is sales reps who forgo a portion of their commission for better marketing are usually much happier, if the marketing provides actionable leads which they are confident will convert.

(The volume of quality leads is probably the best metric of your marketing success. Softer indicators like "branding" and "top of mind awareness" are used to justify expense, but when it comes to brass knuckles business, good, convertible leads, are what count the most.)

In essence, you want to allocate your marketing resources so that you achieve the highest quality leads at the lowest possible cost -- while retaining your current clients, of course.

Here is my ranking order of the cheapest and best sources of leads:

1. "Free" word-of-mouth referrals and repeat clients
Obviously the highest and best source of leads, if you don't simply "rely" on this source. Usually good referral and repeat volume indicates you are doing your work well, and ensuring clients are satisfied. Skimping on the quality of your work to enhance your profits (or external marketing budget) is usually not such a good idea. But the problem with this source of leads is that it can be fickle in hard times. You don't control the process. You are "marketing" by chance.

2. Positive media publicity
Attention to you and your business and referrals by endorsement through news media (newspapers, radio, television) and relevant social networking and rating sites can be highly powerful -- of course this is only free if you receive it without spending any money on advertising or public relations consulting. The problem, of course, is again control -- you simply can't tell the media when to promote you, and you can encounter negative publicity. (Our business offers a service to generate positive editorial publicity, which is free if you have the scale of business to induce co-operation from your suppliers.)

3. Your website and/or blog
You can have your website designed effectively for $500 or less, and produce a blog for free. With time and effort, you can then achieve high Google search engine rankings, and when you reach first place on Google within relevant keywords, the "free" leads will start flowing. This solution often requires patience and can be difficult to achieve in highly competitive markets -- and Search Engine Optimization (SEO) scammers out there will promise you gold when they deliver nothing. But you can often pull it off.

4. Associations, community groups, and networking organizations
You may have to pay some dues, or (in some cases) make in-kind contributions, but the right associations can pay dividends far greater than their costs, especially if you can connect with other members and find the sweet spot of personal relationships within the group.

These four marketing approaches should not require more than five percent of your total budget, so they are virtually "must dos" for any construction business.

When you go beyond these initiatives, you enter the space of hiring or contracting with sales representatives, using print or paid electronic advertising, establishing significant paid referral programs, participating in trade or home shows, paying for keyword advertising or the Yellow Pages, or other marketing approaches.

Each of these approaches costs money, and often takes time to succeed. The individual approach you elect will depend on your business so I cannot suggest one-size answers here (but you can call or email me if you would like more personalized recommendations.)

Generally, I advocate you should:

• Avoid commercial leads services, but you could work with local and competent referral leads providers if you know them (usually these operate on a personal level, within your community.)

• Avoid businesses or services which bother you with in-bound telemarketing or spam (usually their marketing costs are way too high to deliver real value.)

• When your marketing can be "in kind" or requires your sweat/time equity rather than cash, you should give it priority, especially if cash is short. This is especially relevant if you want to get closer to your current and potential clients;

• Listen to your current clients to find what they like and respect;

• Use your trade associations to speak with successful marketers in non-competitive but similar markets;

• Use Internet forums (such as contractortalk.com) to gather ideas and bounce off your thoughts. Don't worry about "secrecy" -- your bright ideas are generally not unique or original, and if they really are, few will rush to copy them right away, anyways.

• You should be able to put these ideas into a simple plan; not requiring more than a page/spreadsheet where you project your expenses and set up tracking columns for leads and business. This doesn't need to be overly sophisticated. You just want to be able to measure your results.

Add up your costs, figure out our revenue, and determine the best way to build a marketing strategy within your budget. The go for it.

How much should you spend on construction marketing -- and where?

If you think I will offer a simple and fast solution to the question posed in this thread's title, you will need to be patient, or truly believe that superficial answers can apply to all businesses, in all circumstances.

Nevertheless, I'll suggest some general guidelines here which may help you as you start framing your marketing budget (which you should co-ordinate with overall resources and capacities.)

(For this blog, I'm including "marketing" and "sales" expenses in the same rubric. You can be more specific in the allocations -- in which case, you would put the cost of lead generation and indirect supporting activities into "marketing" and the actual commission and direct sales salary costs into "sales". The challenge here is that I think the best salespeople are most effective if they think and act like marketers; in essence they need a marketing budget for themselves, as well as direct compensation/commission.)

As a rule, marketing expenses range from 5 to 25 per cent. The "five per cent" marketers have mature products/services in clearly defined niches, you aren't worried about growth, and you have a stable and solid business operation, generally selling high ticket, repeat purchases.

If you are fortunate to have a business, for example, providing maintenance and service for several large (and unrelated) organizations not all of which would suddenly be affected at the same time by an economic downturn, you could handle 5 per cent quite comfortably. This would pay for basic support, relevant association membership, and a little promotional activity to prime the pump.

As we go up the ladder, 25 per cent is near the high end. This is common for businesses with relatively high transaction costs, often selling intangibles, and where the unit cost is relatively small, at least in the business-to-business space. Yes, advertising-selling businesses fit in this category, which suggests one reason why it is challenging often to find real value when you purchase advertising; you need to pay the (very real and valid) overhead and operating costs of the organization selling the advertising, as well as its hard costs in actually delivering the service.

If marketing costs are higher than about 25 per cent, you are heading into scam territory. Here, the promotional and sales costs are so high that it is virtually impossible for the vendor to truly give value to you. Realistically, if there is no substance behind the business (in other words it is a scam), marketing costs can be 50 to 60 per cent or more of revenue, since the remainder just falls into the criminals' pockets!

Three other factors may influence your marketing budget:

• Your growth vision or plans. In early goings, you will need to "spend" more on marketing than when you have a mature business. Of course, you most likely wont' have the money (and if some sugar daddy has large pools of capital available for you, I recommend you decline it -- you will burn and waste that money really quickly if you use it.) At this stage, marketing budgets should be in sweat rather than cash. "Pay" yourself a commission rather than a fixed salary, and find the business!

• The economy may decline and you may need to spend more for less. This works generally if you have a solid marketing system and strategy, and rarely is effective if you've "never marketed" but are desperate for business. But if you have a regular plan, reliable advertising sources, and the like, you can manage your lead flow by increasing your budgets within your effective media. However, I also think you would be benefit by testing some alternatives because new media can often save money.

• Your competition may be stepping up the fight in your space. You may have to respond to increased pressure on your 'mind share' because of competitive behaviour. I think you should be wary about knee-jerk reactions, however.

In the next posting, I'll offer some ideas about how you can allocate and spend your marketing budget.

Painful (but necessary) choices

Today, I'll take some hard and painful business decisions.

It is never easy to reach the point where you know you must hunker down and reduce costs drastically in line with much reduced sales projections, but every business knows there are red lines which must not be crossed, without dire results.

These circumstances of course have affected many of you over the past year. Architects and engineers, early in the construction cycle, were the first to feel the pinch (after many residential contractors and sub trades). Now, as backlogs disappear within the non-residential environment, general contractors are feeling the pinch. Surety brokers tell me that bonding companies generally run into problems about 18 months after a recession begins -- as some contractors default, pushing them into losses.

Well-managed companies either have reserves and/or contingency plans for hard times.

What about the marketing budget?

Our major marketing expenses is association membership and dues, and we'll review the "value for money" in these. We are also curtailing our travel costs for events and conferences. However, we won't overall reduce marketing resources and, when we are satisfied there will be a return on investment, will increase our marketing commitments.

Successful contractors with solid marketing strategies increase their marketing budgets in hard times. Unfortunately, few businesses and professional practices within the AEC sector have really good marketing systems, closely tied to lead development and sales.

If you have trackable and measurable systems, you can simply increase your advertising budget to maintain your lead flow. But you can't do this by the seat of your pants.

Your marketing budget and plan

Sometimes the simplest and most common sense ideas fail to receive the attention they deserve. Here is one: You need a marketing budget and plan.

Checking this blog's archives, I find I haven't discussed this rather important and obvious element of construction marketing, at least in recent months.

You can choose to make the planning process complex, expensive and sophisticated -- and you can (as we do) engage all of your employees in the decision-making through open meetings and discussions.

But you can also keep it simple. And simple is often best.

Here is an easy-to-implement strategy which will allow you to pull together a marketing plan and budget within a few hours, at least in rough form. (You may need to investigate the details and that will take more time -- but certainly not so much time and effort that you will be distracted from your other responsibilities.)

Estimate your total desired volume of profitable business over the next year, and allocate 5 to 10 per cent of that sum for marketing. (The higher number applies more likely in a start-up, recession, or when you wish to plan an aggressive expansion.)

Add another 5 to 20 per cent for sales costs, depending on your margins, size of sale, and industry norms and traditions (if you aren't certain of these, check with your peers through your industry associations.) If your business is small, the sales component here may be your salary!

Your marketing costs ideally will be fixed, your sales costs should if all goes well be variable depending on results. (Commissions, referral fees, and the like are part of the sales budget. If you have salaried employees, you need to be satisfied your projected sales will at least cover their costs within the budget.)

Next, you need to determine how to spend this money. This is where you need to think for yourself, combining previous experience your own imagination and objectives. You may want to put all your eggs in one basket or allocate resources based on a variety of options. I would advocate focusing your efforts in a few places with a small 'slush fund' for experiments.

First priority

Internet/web presence/website with (effective) Search Engine Optimization -- 1 per cent or less.

You don't need to spend much here, and your results can be truly impressive. The cheapest approach is to study successful businesses in non-competitive markets and borrow their template, either perhaps by purchasing it from them, or reverse engineering using inexpensive offshore providers.

(Or you can use reference points such as your relevant trade associations or Internet forums such as contractortalk.com to learn who can do the job. For example, although the design concepts originated locally, we built the Ottawa Renovates! site for approximately $500.)

Second priority

Structured and organized referral and repeat business initiatives. See the references here to how Toronto renovator Paul Danys turned a $5,000 dinner/client appreciation evening into $749,000 in businesss. Clearly, some thoughtful and programmed mailings and events, and possibly some referral commission systems, can generate plenty of business, at low cost.

Third priority

Other marketing and advertising options

This is where things get more difficult and challenging. Some contractors use flyers, some use radio, and some use association memberships and organized community activities. You may also consider trade and home shows. Some pay for leads services. (If these are paid in advance leads, I would put them as marketing costs; if they are commission-based leads, they might more accurately be put in the variable sales cost budget.)

Your strategies will depend on a variety of components, including local market conditions, your demographics, what has worked in the past, and (perhaps most useful) what your best current clients suggest. For example, while I would not recommend the Yellow Pages to most contractors, if they provided enough profitable leads for you last year, why not continue?

Now that you have a budget, you can spend the money. Obviously you may change things as the year progresses. Track your results. Don't worry about a day or a week (unless you know from experience that you should be able to measure your results for a particular medium or marketing approach quickly), but at least quarterly, assess the results from your media -- and if you aren't satisfied, be prepared to change.

Some additional notes:

1. If you've been "relying" on repeat and referral business, these marketing costs may seem truly scary -- especially if you are just getting by. You of course need to price your services properly; build into your plans a price increase to more than cover the additional marketing costs. Then focus on the first and second tier activities because these will provide the greatest and best results.
2. Maintain your discipline in your marketing budgets; If you need to cut, look for the fat in your discretionary (non marketing) expenses. Are you taking any 'extras' out of the business you can defer, and do you have employees not pulling their weight? Cut them first. Successful businesses actually increase their marketing budgets in recessions.

How much do you spend on marketing?

The question: (in a survey of about 100 architects in the U.S.) from The Whetstone Group in Iowa.

Approximately what percentage of your annual fees do you spend on marketing and sales each year?

When asked this question, 11 respondents (11 per cent) replied that they didn't know. Of those that answered, the average percentage of annual fees reported was 4.84 per cent. Larger firms (those greater than $15mm in annual fees) tend to spend a little more: 5.9 per cent of annual fees vs. 3.93 for firms under $15mm annual revenue.

There does not appear to be a correlation between the size of the marketing budget and annual growth rates.

This is interesting on several levels. First, if you are looking for benchmarking 'norms' on marketing budgets for an architectural practice; you now have a starting number. The suggestion is if you are doing say $20 million in annual billings you would spend on average $1.18 million on marketing and sales. Of course, note that more than 10 per cent of the firms surveyed don't even know how much they are spending on marketing.

But the remark "there does not appear to be a correlation between the size of the marketing budget and annual growth rates" is especially important. If on average there is no advantage in spending more on marketing and business development if you want to grow, then how valid is the expense?

My thought on this topic is that it is clearly what you do more than how much you spend (but if you are spending less than four per cent of current annual billings on marketing and business development you are either doing something brilliantly or may be restraining your growth -- possible, for example, if you are a one-person band with a solid client list and ability to drum up new business when you need it.)

Possibly larger firms spend a lot of 'wasted' money on things like paid sponsorships, brand development and image management -- of course they have the profits/retained earnings for this type of stuff; and once you’ve built a department/budget, you are typically loathe to see it reduced. So you find work for yourself/team to justify the numbers.

Maybe architects (like other businesses within the AEC sector) should look at another question within the survey for the answer. In order of effectiveness, the top five marketing resources are Referral Sources, Client Referrals, Speaking, Articles, Industry Groups, Social Events, and Seminars, with the first, "Networking with referral sources" ranked significantly higher than the others. So it seems you should spend most of your budget on:

a) Cultivating your referrals;

b) Keeping your current clients happy -- so happy they refer others;

c) Developing a solid PR/communications strategy to achieve recognition as the leader of expertise within your area, connecting writing and speaking with industry groups within your market area.

Thanks to Lisa Rhatigan, a shareholder and senior vice president of he Whetstone Group, for providing her survey results. She published her findings in The SMPS Marketer and can be reached at 319-447-6403 or lisa@thewhetstonegroup.com.

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.)

How much?

This contractortalk.com thread, Marketing and Advertising budget . . . gives some ideas about the percentage of gross revenue that construction businesses (mostly in the residential/renovation sector here) are allocating -- with some other interesting gems.