“Whenever you see a successful business, someone once made a courageous decision.”
The kitchen and bath industry continues to boom out of the pandemic though financial experts say there could be a recession by the summer of 2023. Many kitchen and bath firm owners miss the fundamental importance of running their businesses, inadvertently bypassing opportunities to better their bottom line. While bettering the bottom is thought of as meaning increasing your gross profit margin – the other half of it is cutting expenses. In this advisory, we talk about two areas to cut operational costs which can guide your firm to greater profitability.
Buy low and sell high to drive up your gross profit margins
It’s a myth that a high sales volume alone is enough to raise a business’s profitability. The widely known axiom buy low, sell high is still good advice. Ironically, it’s rarely followed in the kitchen and bath industry.
Most kitchen and bath firm owners consider top-line revenue growth the most important goal for their P & L statement – but that’s not it. Owners must be most concerned with how the cost of goods impacts their business. Your goods’ cost usually accounts for 60% to 70% of the price of taking on jobs. However, this burden can be remedied with some tweaks to your sales operations.
If your firm reduces its cost of sales by 1%, the difference drops directly to your bottom line, and you can expect an increase in your net profit margin by 1%. That’s why being part of a buying group makes good sense, yet fewer than 600 kitchen and bath firm owners in the United States belong to one.
However, this same impact isn’t valid with a 1% sales increase, where a mere fraction of that increase falls into a kitchen and bath dealer’s bottom line. That’s because the more you sell, the greater the likelihood of errors made in product planning, ordering, manufacturing, shipping, and installation. All of this contributes to lower gross profit margins for the dealer.
The 1% sales increase also has associated personnel costs – like commissions, payroll taxes, and benefits tied to compensation. So an increase in your business revenue can be wholly nullified through additional production and personnel costs.
But bold kitchen and bath firm owners can use a two-fold strategy to increase their gross profit margins, leading to exceptional net profitability.
Increased personnel productivity
The first strategy is leveraging the most outstanding production out of your team. After all, personnel compensation is the second biggest expense on an owner’s P & L statement. To your customers, the most critical function of your business is to deliver organized, fast, accurate, excellent friendly service.
The crucial component to making this happen is staffing personnel who maintain high consistent production and are happy in their position. Fair compensation and treatment in the workplace all factor into the quality of your business’s representation of your employees.
Team productivity ultimately drives your company’s earning capacity engine. A simple formula can measure this single, most important economic driver.
Gross Profit Dollars ÷ Gross Payroll Expense
(Gross Payroll Expense includes owner’s salary and payroll taxes)
SEN recommends selling your team on the value of market-rate compensation at the lower end of the scale, along with a generous retirement benefit. It’s expensive to retire and keep up a comfortable lifestyle. Most kitchen and bath firm owners haven’t yet started budgeting funds for their staff’s retirement expenses. By creating an attractive retirement package for your team, they can leverage the magic of annually compounded interest over a long period of employment and yearly investment. This combination helps the average person meet their retirement objectives even when pulling moderate incomes.
Another option owners have to improve productivity is to cut costs without affecting the quality of their service simply by turning their payroll installers into subcontractors. Such a move requires having an effective project manager on board to maintain a high level of customer service and satisfaction with the end product. The net savings can be substantial.
Leveraging a superior sales process creates the opportunity to charge higher prices
The second strategy involves the adoption of a streamlined, client-loving sales process. Owners can leverage both points of the mentioned axiom by charging more for their products and providing better service in delivering them. Today, kitchen and bath firm owners can “sell high” by standardizing their selling operations. This is a two-part process achievable through a Good-Better-Best selling platform and a transparent budgeting model.
By being selective with the products you carry and offering your prospects three distinctive groups of product quality – Good-Better-Best – options to choose from, you’re increasing your firm’s value by providing the consumer with choices built into a high standard of quality.
Then, by transparently budgeting kitchen and bath projects with your prospects, your clients will learn the benefits of doing business with your firm. We believe this budgeting process will engrain an impression of superior service in your customers’ minds so you can:
- Charge up to 40% more for your products and services
- Save up to 75% of time gaining client commitments
- Increase closing percentages upwards of 75% on opportunities
- Increase your annual sales by at least 100%
- Improve your returns by at least 200%
As Jim Collins discusses in his bestseller Good to Great, when you combine (a) what you are deeply passionate about with (b) what you can be the best in the world at and (c) what drives your economic engine, you have your “hedgehog” in place – the modus operandi of achieving an exceptionally profitable enterprise that outperforms all competition by a considerable margin.
Owners unafraid to sell high and back their prices with excellent, transparent, streamlined service that shows their clients value at every step will see tremendous success in the kitchen and bath industry.
—SEN Leadership Team
Master strategic planning, selling more into each job, leveraging technology, Good-Better-Best selling, and other intelligent implementations at one of SEN University’s valued online business courses. Or contact us to attend our in-person schools.