The Logic of Counter-Cyclical Marketing
Something similar seems to be going on in our business brains when it comes to advertising and promotion. When times are good, we see it as a time to gorge, and when business drops off, we go on a marketing diet.
It seems that at least 90 percent of all businesses budget their marketing/advertising expenditures as a percentage of revenues. This isn't limited to the construction industry. I've spent more than a quarter-century watching the ebb and flow of magazine advertising. When the economy is booming, advertising sales reps can hardly keep up with all the incoming calls. Then when it slows down, it's like pulling teeth trying to get clients to loosen the purse strings. I've seen situations in which manufacturers were operating at full capacity and unable to fill all their orders, yet were still running full-page ads in trade magazines. Conversely, when production lines slow to a crawl and they lay off people, that's when the bean counters crack down and scale back advertising.
This makes no sense at all. Shouldn't it be the other way around? When business is easy to come by, that's the time to cut back on business promotion. When it's hard to rustle up jobs, that's the time to step up the promotional efforts. Let's call this concept "counter-cyclical marketing," or CCM for short.
Rainy day planningThis is not rocket science. CCM is so logical, so full of common sense, it's mysterious why almost nobody practices it. The only explanation I can offer is the instinctual one-our minds are geared to gorge during times of plenty.
However, the ability to think ahead and plan is one of the things that separated our ancestors from wild beasts. Over tens of thousands of years, this gave rise to countless inventions and strategies that led our species to enjoy all the creature comforts of today, while lesser animals still must spend almost all their waking hours finding ways to dine without becoming some other creature's meal. It's time for humans to apply such progressive thinking to business.
A rule of thumb for construction firms is to budget between 5 to 10 percent for marketing expenses. This would encompass Yellow Pages advertising, direct mail, brochures, TV/radio (rare but not unheard of for people in your line of work), client entertainment and everything else that goes into business development. Companies such as home service firms that rely heavily on YP advertising and perhaps broadcast media might need to budget more than 10 percent of revenues, but for most companies in your field, 5 percent ought to suffice. If you spend little or no money on marketing, you're making a big mistake and probably struggle mightily whenever the market turns sour.
Implementing a CCM plan requires "rainy day" discipline to set aside money that comes in during the good times. Keep budgeting 5 percent or whatever of revenues for marketing purposes, but instead of spending it on an ongoing basis, put it in a dedicated interest-bearing bank account to tap into when work slows down.
Even better, keep a close eye on your job backlog. Put the marketing dollars into play at a time when you might be keeping pretty busy, but future bookings look worrisome.
By the way, notice that I keep using the term "marketing," as opposed to "advertising." They mean different things. Advertising is a component of marketing, but marketing encompasses everything you do to promote your business, including entertaining potential clients, charitable donations and so on. Many companies in your field do very little advertising, per se, and that's not necessarily wrong. Depending on the type of clientele you pursue, it may or may not make sense to spend dollars on YP advertising and the like.
However, every company needs to market itself in ways that make customers aware of your business, and constantly remind them of your presence. Even "word of mouth" is a form of marketing, and there are things you can do to promote word-of-mouth awareness. I can accept some of you saying you don't need to advertise. But if you claim you have no need of marketing, I say you are deluded.
Be discriminatingThere's another benefit to CCM. Not only will you spend the dollars when they are apt to do the most good, there's a very good chance you'll get better bang for your bucks. That's because most competitors will have cut back, which means your efforts will stand out more.
The CCM concept doesn't apply just to advertising. Construction firms also tend to capitalize on business booms by taking on as much work as they can handle-and frequently crossing that line.
When business is slow, desperation often causes contractors to take on jobs with little profit just to keep your people busy and generate some cash flow. There's a certain logic to this, and in many cases it's a better alternative than laying off high-caliber employees.
The big problem is this can become habit forming. Before you know it, low margins become the norm whether business conditions are up or down. Almost imperceptibly, the market starts turning up and you've suddenly got more work than you can comfortably handle, yet you're not making any money. That's when many contractors start cutting corners, which diminishes the quality of their work, which down the road will make clients think twice about hiring them in the future at a time when jobs are scarce. "Anti-marketing" would be a good term to describe this phenomenon.
When workloads are peaking, that's a good time to start concentrating on quality rather than the quantity of work. It's time to say no to certain jobs that have:
• Too many bidders
• GC/owner of questionable reputation
• Stretched geographic boundaries
• Unfamiliar requirements
• Onerous contract language
• Anything else that makes you uncomfortable
One of the most intelligent mechanical contractors I've ever met once told me that the hardest lesson he ever learned in business-acquired by trial and error too many times-was knowing when to say no to a job. The factors enumerated above provide some guidance, but it's as much a gut feeling as anything that can be quantified.
Most construction firms earn less than 5 percent net profit on the revenues booked. That means you have to do $1 million worth of work to put $50,000 or even less in your pocket. Yet, it could take only one project gone sour to eat up the earnings from 10 jobs done profitably-especially if litigation is involved.
Many contractors look at good times as the opportunity to stretch their horizons and to grow by taking on new kinds of work, new customers, expanded territory. For some, this may hold true.
But it's also a great time for business contraction. When business is booming you can be more selective about the work you do, focusing on profits and building solid client relationships that will carry through the rainy days ahead.
For these contractors in particular, it would be the worst time to step up advertising spending.