Many business leaders and pundits have described this recession as an “economic reset.” For some, that means turning back to slower growth, for others it represents an opportunity for a fresh start. What does it mean for your business?
I see four business models that are likely to succeed over the next three to five years:
High-end design/build, with high margins (35% plus) justified by design excellence and strong brand awareness. Benchmarks include design awards, media mentions, and design-to-construction conversion rate. Good working capital and strong cash management are key to growth and greater market penetration.
Very high-end remodeling, competitively bidding through third-party architects at lower margins (18% to 22%). Benchmarks include number of secure architect relationships and bid-to-contract conversion rate. This is a subcontractor-based model, so field quality control will be essential.
Both high-end models need large offices and administrative staff. Both can use fixed-price or time-and-material contracts; the design/build version, however, requires retail labor rates (two times burdened gross wage) to meet the higher expected gross margin.
Small craft-based outfits, focussed on building a stable company that responds to a particular type of clientele in a relatively small market. The owner will work from a home office or modest commercial space and will control sales, estimating, and production management. Benchmarks are customer satisfaction, referrals and repeat customers, and employee satisfaction.
Specialty operations, including handyman, home performance, home theaters, basement refinishing, and others, all of which require expertise and in-house technicians. These companies will need tested systems to consistently produce a quality product in a given time frame.
In my small practice, I’m familiar with a few successful companies fitting each model and serving their clients well. I’m also familiar with many more companies that mix models in an attempt to survive this roller-coaster economy. I strongly suggest that you resist the temptation to do many things moderately well, and focus instead on the one or two things you and your company can do really well.
Regardless of the model you choose, pay close attention to the new rules of the game.
- Cash is king. It keeps the company in business and enables investment in new opportunities.
- Price is a priority. Clients can research prices, making expertise and perceived value increasingly important.
- Technology changes the game. The need for speed, accuracy, and accountability demands more complex technology. Despite a high initial investment and steep learning curve, technology increases efficiency, which increases profit margin.
- The rate of change is increasing. Products, demand, and technology are all driving the increased speed of change.
- Youth moves things forward. Younger people know how to drive technology more deeply into your organization for increased efficiency. Plus, they understand the younger market — a major new lead source.
- Transparency is a given. To combat homeowners’ online price research, you may need to repackage information that you once used only internally.
- Systems increase efficiency. Standardization improves workflow and reduces chaos, which increases gross profit.
Ask everyone to rank your company on each of these seven qualities using a scale of 1 to 5 (5 being the best). Develop strategies for raising the lowest scores first, and work on one score at a time so you can tell what’s effective and what isn’t.
Use this economic crisis to define what you do well and how that will “reset” your own personal economy.