Download the 2008 Replacement 100 list (PDF).

Rick Edwards has so many samples in the trunk of his Mercedes that he has taken to stashing them in the back seat. He has sample kits for awnings, basement finishing, replacement windows, garage organization, and sunrooms. “The other day I sold a basement” — his first — “for $37,000,” he says. The homeowner, an engineer, had already seen four other companies and was ready to bag the whole basement idea when Edwards showed up to tell him that though he didn't know that much about basements, he was certain he had the best product on the market. He walked away with a deposit check.

Edwards has been in the home improvement industry for a long time but, as of last fall, it had been five years since he actually sold a job. He didn't need to. His company, Custom Patio Rooms, manufactured sunrooms and distributed its custom product through a network of 12 dealership showrooms in Ohio, Pennsylvania, and western New York.

As recently as 2005, Edwards would have described the business he founded in 1983 as “bullet-proof.”

Then the sunroom market began to soften and the banks that offered the kind of secured lending needed to finance large-ticket items began to back away. Last winter, facing a plunge in sales — the company, which once fielded 45 sales reps, now runs eight — Edwards radically restructured “from the top down.” He added new products, changed the name (“Custom Patio Rooms and More”), hired a crew of tried-and-true salespeople and started running leads himself. Right now, he says, “I'm the marketing manager and the sales manager”. He is also his own top salesperson. By mid-July Edwards had sold $600,000 worth of projects for the year. “Everybody knows that businesses go through cycles,” he says.

FLAT LINING Owners and managers at many of the companies in the Replacement 100, our list of the top home improvement operations in the U.S., based on volume, have found themselves facing similar challenges, though none perhaps as extreme. Some project declining sales this year. Many foresee small increases. Few are bold enough to proclaim that this will be a year of double-digit growth.

“Our business has flatlined in 2008 compared to 2007,” reports Larry Judson, founder, president, and CEO of K-Designers, the nation's largest siding installer and fifth-largest home improvement company, headquartered just outside Sacramento, Calif. “We have to work a little harder at it,” he says. K-Designers, which celebrates its 30th anniversary this year, has also added to its menu, which currently has 28 products and services, including entry doors, garage organizing, and spray-on siding.

What kind of year companies expect has everything to do with where they are, geographically, and what they sell.

“For the last 30 years, we've enjoyed the luxury of being a 100% window company,” says Nick Cogliani, owner and president of Newpro, in Boston. Now Newpro offers vinyl siding and basement finishing as well. “We're a true home improvement company,” Cogliani says.

Many companies with big-ticket projects have hurried to add products that cost less and move fast or which can be readily marketed to a database of past customers. No question, it's the larger-ticket products, catering to discretionary dollars and luxury appetites, which are more difficult to sell. “We benchmark all our products separately,” says Don Jones, president of Cincinnati-based Champion Window and Patio Room Co., the nation's largest home improvement company, with 70 branches and $344 million in sales. “The only one we've seen slippage on is patio rooms because people can put off that purchase.” That has forced companies to re-examine or re-tool all aspects of their operations. “You have to be sharper,” says Sam Flory, owner of Home Comfort Now, a sunroom company in Hartford, Conn., which has started selling TEMO's basement finishing system.

With stocks off and dwindling 401(k) plans serving to remind people of the fact; with houses worth 16% less than they were a year ago; and with several of the country's largest banks taking big write-downs on subprime mortgage losses, the retail home improvement business has gotten tougher. And it's not that things are bad, it's that they could become bad that holds homeowners back. “I think people are afraid to spend money right now because they don't know what will happen,” says Chris Cardillo, president of Castle Windows, in Mount Laurel, N.J., who is planning for a modest sales increase in 2008. “It's harder to get an appointment, and our marketing costs go up because it takes more advertising to get the appointment.”

Cogliani agrees. “This is a different animal,” he says, comparing the mindset of today's consumer to that of past recessionary periods. “They're paralyzed and afraid to move because they don't know what the future holds.”

HOLD THE BELL SAND WHISTLES What some company owners see this year is consumers tightening their belts when they do actually make the decision to buy. “Right now, our close rate is up slightly from a year ago, but our revenue per sale is slightly down,” says Mark Tiffee, owner of A Cut Above Exteriors, in Portland, Ore. “‘Why?' is the million dollar question around here.”

Tiffee, who, in addition to being the founder and president of his company, also runs leads, says that he has seen a marked conservatism in the buying psychology of prospects. “They hold back on the bells and whistles,” he says, going to lower-cost widow hardware, for instance, or replacing 10 of the home's 20 windows instead of all 20. “We're doing more partials,” he adds.

For Don Bruce, owner of American Home Design, in Goodlettsville, Tenn., that conservatism means screen rooms built for customers who might, in more flush times, have ordered a sunroom. Added to the consumer's reluctance to spend, or to spend as much, is the difficulty of getting jobs financed. In parts of the country where home equity has eroded, secured financing wore down right along with it. So home improvement companies that might have sold a sunroom, basement, or big-ticket window job through a home equity loan or home equity line of credit have found those sources scarce, and have been forced to turn to unsecured lending, a more rigorous and expensive proposition.

EYE BALL-TO-EYE BALL MARKETING The scramble to produce leads at a cost that still allows for profitability remains the No.1 concern for home improvement companies. Many are seeing fewer leads as competition intensifies. And those leads cost more. Five years ago, when we published the first Replacement 100 list, the average cost of a confirmed appointment was $178.29. This year, it's $246.88. Five years ago, companies indicated an average 11.3% marketing cost. This year that cost is 11.8%. In 2003, 41% of the companies on the Replacement 100 list said that their marketing costs had gone up in the past three years. In 2008, 65% say it has gone up. “It's costing more to get them and it's costing more to sell them,” says Bruce, whose 30-year-old company typically sells anywhere from 1,300 to 1,500 jobs a year, the majority of them windows or sunrooms.

The fact that many companies are getting less bang for their advertising buck via newspapers, radio, or television has made for a growing interest in so-called direct marketing, such as in-store demonstrators, shows and events, and canvassing, where companies come “eyeball to eyeball” with prospects and where lead generation depends on a trained, determined, and well-scripted demonstrator.

“Our initiatives this year are focused on shows and events and canvassing,” says Rick Wuest, president of Thompson Creek Manufacturing, in Landover, Md., one of a handful of Replacement 100 companies expecting double-digit growth this year. “We have been a pretty heavy media company. But you have to throw more dollars at it to make that work, and people aren't as quick to take action.” Thompson Creek is currently looking to intensify its canvassing and event operations, and, toward that end, recently hired new managers for both. More companies of all sizes are showing up to market at events, which some say is a reflection of smaller contractors failing to capture the stream of referral leads they were accustomed to, thus seeking new venues. Two or three years ago, Flory says, Home Comfort Now might have been the only home improvement company at fairs or chamber of commerce events. Now “there are a lot more companies in the smaller venues,” he says.

Fewer leads to be had and more intense competition for those leads has also led many companies to turn toward rehash, past customers, and referrals. On Dec. 1 last year, K-Designers issued a direct mail piece to 34,000 previous customers, using a database that the company has been building since the late '90s. Customers had until Dec. 31 to respond to the company's offers of substantial rebates. The campaign proved to be a startling success, resulting, Judson says, in $5.5 million worth of installed business. Companies need to get creative, he points out, to generate the cash flow they require in this kind of environment.

This year Custom Patio Rooms and More, which previously generated leads either from telemarketing or shows and events, turned to its “sacred” list of 50,000 past customers, prospects, and sit/no sales. They'll be contacted first by mail, then by telephone. “I went on a lead last night that was two years old,” Edwards says. Not long ago, he sold one that was four years old.

Canvassing is more popular — 55% of companies on the Replacement 100 list do it — and would be more popular still if it were easier to mount canvassing campaigns.

“You're going to see a swing back to canvassing,” Cardillo says. “Because the lead costs from your print ads are through the roof, and nobody reads newspapers. Canvassing is going to be more effective as a marketing percentage in the long run.”

Referrals — the least expensive leads and those most likely to close — remain the lead source of choice for home improvement companies. But companies have to work harder to get them. Lee Wegner, secretary and treasurer of ABC Seamless of Fargo, N.D., for instance, says that his company has always worked diligently to ensure that the job is done right and the jobsite is cleaned up. Now ABC Seamless takes the time and trouble to make homeowners aware of its process and to ensure that they're satisfied at the end of it.

More and more home improvement companies — three out of five of the Replacement 100 — offer incentives to installers, and that can be for the quantity of work that they do or for producing a job that results in measurable customer satisfaction, with surveys as evidence. To get referrals, Wegner says, the customer must “really understand that everything was done to their satisfaction.”

PERIOD OF ADJUSTMENT The silver lining for many companies comes down to this: With fewer homeowners moving, more people want to invest in making their homes weathertight or energy efficient. “You can save serious bucks by changing out your windows,” Tiffee notes. “So you will see certain parts of the home improvement industry benefit from the rising cost of energy.”

As energy prices surge, owners see a strong market for products that can help hold down those costs. That would include not just windows, or roofing, but solar systems to supply homes with power and hot water, or products to protect the home from nasty weather.

“People still need roofing, impact-resistant windows, hurricane shutters ... But you have to let them know you're there,” says John Murray, owner of AMS Inc., in Pompano Beach, Fla. Many owners feel that when the economy gets stronger, their companies will be well-situated to benefit.

Edwards, for one, is confident that when it does, he and Custom Patio Rooms and More will be leaner but better positioned from all he has learned. “Everybody is selling up a storm,” he says, of the salesforce he's recently hired. “It's a fun business, if you do what you're supposed to do: turn that homeowner into a customer who recommends you.”