Episode Transcript
[00:00:09] Speaker A: Have you noticed how consumers expect everything to be customized now? They want things personalized, they want things tailored. It sounds really great for marketing. It's terrible for margin.
[00:00:21] Speaker B: Right?
[00:00:22] Speaker A: Right.
So this episode is sponsored by Performance Margin Software.
And that is really what we talk about with small business owners is how to increase their profit margin. Not necessarily by applying more energy, but by being more organized about it and providing some clarity and visibility into their real numbers.
So competition is fierce right now. Fierce. Owners feel a lot of pressure to say yes to everything.
So what happens when businesses chase that customization without pricing for that complexity?
[00:00:59] Speaker B: Oh, my gosh. That's like the huge potential for profit leaks. If you aren't knowing your numbers going into this rat race, you're going to suffer exponentially.
[00:01:14] Speaker A: Custom work introduces things like scope creep.
Right. Your scope sort of expands. The client says, oh, by the way, can you do this? Oh, by the way, can you do that?
Change order delays. Those change orders cause delays in your timeline, which is costly for you, makes all of the costs go up. Labor overruns when those things happen. Materials variances, estimating inaccuracies from your estimating team.
So most companies do not adjust their margin targets to compensate for those things.
[00:01:49] Speaker B: Right?
[00:01:50] Speaker A: Right.
Maybe there was somebody that they hired that ended up being more of a drag than they were a relief. Anybody can look great in 30 minutes in an interview.
They're putting their best foot forward, you're seeing the best version of them, and then later you find out who they really are.
So when we measure custom work inside the profit zone, we see an average margin compression of anywhere from 5 to 12 points compared to the standardized work that clients are doing. So five points on $4 million is a $200,000 compression. That's a big number.
Is customization worth $200,000 is kind of the million dollar question. So what I want you to answer is why do owners fall into this trap even when they know better?
[00:02:50] Speaker B: Yeah, I think there's a lot of different attractions to that work. Usually the work's really sexy, so they can tie their name to it. So there's a sense of pride. But if you're not prepared for how to get to that successful job, it could cost you a lot.
Your $200,000 mark is pretty accurate. So the way to look at that, if you feel prepared that that $200,000 you get to keep, if you know how your job should be costed properly. And a lot of the customization is just the consumer. They want everything and they want it now. So, you know, the Convenience stores popped up through our generation and bread was twice of what it was in a grocery store because you could get it without having to drive across town to the grocery store. So these are some of the things that convenience costs the end user.
[00:03:49] Speaker A: So don't forget that there's psychology behind it too. You mentioned maybe it's a big sexy project that the owner wants their name attached to and they want bragging rights around. That's fine. Just go into it with clarity. Go into it knowing that it's not going to be.
That it might end up being a loss leader for your company, that that folds into your long term strategy of attracting more of that type of client. Like you need to prove to future clients that you can do that type of work, that you're good at it. And so you need an example in your portfolio to be able to showcase. And so that's fine, just go into it with clarity. But there's other things that play into this where a business owner might fall into this trap.
They might be afraid of losing a sale or they might be afraid of losing a client.
They might have emotional attachment to something. Maybe it's aligned with a cause that they feel strongly about or maybe it's something in their community that they really want to do.
Those things are noble, but they're not good for your margin.
[00:04:56] Speaker B: No, they're not. And all of this adds up and it goes back to costing your jobs in the right work types and what those margins look like.
Yeah.
[00:05:08] Speaker A: And maybe the business owner consciously makes a decision to say, hey, I'm going to have one work type that is almost pro bono, just almost charitable donation, because I have a deeply held value around that.
Maybe there are some legacy relationships, like there's, you know, I don't know, you know, they're deeply involved with their local rotary or something like that, where they're doing lots of charitable type of initiatives that they want to be involved in.
And that's fine, but let's just do it with clarity. There also might be some competitive bidding pressure. Most people pay attention to what their competitors are doing and they're trying to keep pace. Keep in mind that your competitors have got eyes on you too.
[00:05:58] Speaker B: Right.
[00:06:00] Speaker A: But again, we've said this multiple times, a competitor's pricing should not be exactly the same as yours.
[00:06:09] Speaker B: No.
[00:06:10] Speaker A: If you're looking at what their pricing is and you're just trying to undercut them a little bit, that is not the right pricing strategy. They might be paying their employees less than what you pay yours.
[00:06:21] Speaker B: Right.
[00:06:22] Speaker A: And so they can afford to go low. They might have a specialized vendor relationship that is very low cost for them, that can make them go lower than what you can go.
So these are all things that you have to keep in mind.
I just really want to emphasize that business owners need the clarity going into it so that you make those decisions. They're educated, informed decisions. You might still make that decision for your business to take on a project that is low margin.
And that's up to you as the owner. But just do it armed with the right knowledge and control the chaos. Otherwise that chaos will control you.
[00:07:03] Speaker B: Absolutely. And these customized jobs are going to take more of your time to make sure that everything falls into place.
And you don't get 25% into a project and something was off back at like a 10% mark. And you need to redo some of your work.
[00:07:22] Speaker A: That's a great point. These custom projects need to be managed much more tightly.
[00:07:26] Speaker B: Correct.
[00:07:26] Speaker A: You cannot do that as any kind of a loose cannon. So the framework around the solution there is to define your core offers, what you're going to be good at. Really, what your core offers are those standardized pricing tiers.
And then track those custom jobs separately.
They are completely different and they deserve a whole separate treatment.
And then enforce your minimum margin threshold. You might have a different margin for custom work versus your standardized offers, but if that custom job cannot clear the floor that you've set, then you don't take it.
That is margin discipline.
[00:08:12] Speaker B: All this falls into the performance margin zone. How we walk our clients through each piece of their business.
It all goes back to knowing your overhead. What can I afford?
How does this fit into covering my costs?
How do these work resources or work types fit into our margins? So it's all in the processes.
[00:08:35] Speaker A: So, yeah, you don't need more work, you just need better work.
[00:08:40] Speaker B: Exactly.
[00:08:40] Speaker A: And that's a relief for a lot of business owners to hear. You don't need more work. You just need to be doing what you're doing. Better and better work starts with enforceable, disciplined margin rules, right?
[00:08:54] Speaker B: Exactly.
Again, all this comes down to picking up the phone, going to our website, totalprofitmanagement.com and book a free consultation. We're happy to have a conversation and see what's making your pain. And at the end of the day, take her cool. It's all going to be fine.
[00:09:17] Speaker A: It's all going to work out.
