Don't cheapen your services in a slow economy

It's no secret that business is tough today, due to the economic slowdown. But too many contractors attempt to compete in this environment by cutting back. For example, they cut back on overhead - job supervision - to keep costs down in order to compete on price. Or they go after lower-cost subcontractors even though this may sacrifice quality.

This may appear to be the only choice because bid prices are dropping. But it's a mistake. You will lose a step and wonder why you can't compete after the slowdown is over. After Sept. 11, the airlines tried the same thing. They cut back on services to cut costs, and people decided to drive instead of fly because of the hassle. Of course, if you are going across the country you will still fly, but the distance that most people are willing to drive has increased.

In construction, it's no different. Make the experience so unpleasant and customers may put off building until they are forced to - which won't happen until after the slowdown is over, which just makes it worse.

Instead of cutting back, try increasing services. Find ways to add value for the client. For example, increase your warranty from one year to five years. Learn what extra services you can provide the prospect that no one else is providing. Keep in mind the prospect may have cut back his or her staff, so they can't do things they used to be able to do in-house. In other words, get creative. Stop complaining about the economy.

Increasing your handicap

Also, when you cut back on staff, you further handicap yourself. The reason is that once the economy picks up, you won't have the people to run the projects. Statistics indicate that companies that lay off people during a recession trail those companies that didn't in the recovery.

In essence, you will lose market share. Besides, the real savings from reducing staff is never as great as people think.

One of the best times to differentiate your company is when everyone else is cutting back. It's a great opportunity to increase market share and profitability. Don't blow it.

Now let's talk about prospects. There are four types of prospects: "Knowledgeable OK," "Unknowledgeable OK," "Knowledgeable Not OK," and "Unknowledgeable Not OK." Knowledgeable prospects understand the construction process. They know how to negotiate and they understand what they are buying from you. Unknowledgeable buyers don't understand the construction process and need to be coached - a great opportunity for the consulting-style selling process.

The OK and Not OK are more important. The OK customer pays his or her bills, values your services, has good managers, understands value and is growing. The Not OK customers are difficult to deal with. They are often rude, can't make decisions, argue over every cost and change order, are expensive to deal with and tend to never be satisfied.

Ready to deal

Whom do you want to deal with? Forget the Unknowledgeable Not OK prospect because the cost is too great to deal with this customer. Besides, they will never be loyal. And you probably will end up in litigation. Send these prospects directly to your competition. While they are going crazy with these prospects, you can seek out the better customers.

The Knowledgeable Not OK customer is not much better. They are a little easier to deal with because they understand the process, but they hammer you in order for them to get the lowest price. Yet, their service demands will be extensive. The process will be arduous, resulting in employee burnout and low profit margins for the firm. But this client will probably never be loyal, except to low price. So why invest in this type of client?

But there is hope. The Knowledgeable OK customer begins to show signs of opportunity. Although they will typically demand very competitive prices (not necessarily the lowest), they are relatively easy to deal with if you accept the fact that margins will be lower. However, they do offer volume. A prospect that falls into this category might be a developer. If you really build a strong relationship, you will get most of their work. The cost of acquiring work goes down, so some reduction in fees might be justified. The line here is being tough but fair. If the prospect wants a price that's so low it's unfair, you might want to reconsider. The real opportunity here is to find ways to add value, which is something this client respects.

I'm OK, you're OK

Last (not least) is the Unknowledgeable OK client. This customer relies on the contractor for advice and other support and is willing to pay for it. This situation provides the greatest opportunity for the true consultative selling process. In order to take advantage of this outstanding opportunity - you must really understand their business. IBM was able to sell computers to the banks at very high markups because they understood the banking business better than banks and more importantly, how to solve the bank's problems.

If you do this with your clients, your fees will not be the primary consideration. This type of prospect offers the greatest opportunity, because it offers you the opportunity to deliver the greatest value. But to thrive in this area you really need to wow your customer by exceeding their expectations.

Develop a net return on every client. Charge corporate overhead whenever possible to a particular project. This includes the CEO meeting with the customer. The only costs that should be corporate overhead are costs that can't be applied to a particular project.

You must know what it really costs to service a client. You may have projects that look great when you examine the project-cost statement. However, that project may have consumed a disproportionate amount of corporate time, and really lost money. What's worse than the executives spending all their time on such a project? What are the lost-opportunity costs because they are doing that?

This process might reveal some lemons within a great niche, maybe because that client is a Not OK customer. But equally important if you track all your projects - you might learn that certain niches just aren't very profitable. It's critical to focus on your most profitable niches - that's the heart of the so-called 80-20 rule, which says 20 percent of your clients generate 80 percent of your profits. Be sure to focus on those customers.