August, 2009

Profit From Installed Sales

If you’re focused on just selling materials, you may be missing out on a large and growing opportunity to grow your sales, your business, and your brand. THE OPPORTUNITY IS INSTALLED SALES.

By Paul Bumblauskas

If you’re focused on just selling materials, you may be missing out on a large and growing opportunity to grow your sales, your business, and your brand. THE OPPORTUNITY IS INSTALLED SALES. Now, with housing at its lowest level in decades, is a perfect time for dealers to take a closer look—TO DETERMINE HOW INSTALLED SALES MAY FIT INTO A POST RECESSION BUSINESS PLAN. Here, Paul Bumblauskas shares real-world insights and strategies to help you...

DO WE NEED TO CONSIDER INSTALLED SALES?

The simple answer is “yes.” Installed sales are an evolution and not a revolution. The real question is this: How does installed sales fit your overall plan for profitable growth and development with mitigated risk? Installed sales need to be offered when you can profitably meet builder and consumer demand for quality services in your market.

HOW DID WE GET HERE?

We all got to where we are by allowing the business to evolve over time. We found a product that was in demand and we built our arsenal of product and related service offerings based on our ability to supply them in a profitable fashion with acceptable levels of risk. When products fall from grace, become impossible to source or no longer afford an acceptable profit, we drop those products or complement them with products and services that cause our mix of offerings to be profitable. In short, we got here by flexibly adding profitable products or complement them with products and services that cause our mix of offerings to be profitable. In short, we got here by flexibly adding profitable product and service offerings and we must move forward by doing the same. Installed sales are just one example of a service offering that must be continually considered, along with other opportunities.

HOW AND WHERE DO WE START?

In order to be successful, organizations must continually research and develop (R&D) products and services for implementation now, or on the horizon. The goal: have a number of “go to” product and service offerings that we can introduce at the appropriate time for our business. [An easy test for your company is to trace the products and services that you have introduced in response to the recent economic decline. Were they fast or slow to hit your market? Did they have a positive or negative impact on your business? Would it have been better if more product and services offerings were considered when times were good?]

Experience tells us that R&D areas have opportunity and risk dynamics that differ from the core business. Your core business addresses cost and profit, probably tends to be low risk and the leader is typically autocratic. R&D areas are created based on innovation and growth potential, are based on milestones and realized growth (versus cost and profit) and the leader is typically visionary with heavy involvement in the R&D areas. For an R&D product or service offering to be successful, the leader must be heavily involved, must develop the initial plan and must insure that there are resources that understand the differences between R&D and other initiatives. In short, installed sales should be addressed in an entrepreneurial fashion with an adaptive structure that will rely on some degree of experimentation.

So, you must decide if installed sales will be a key R&D area for your organization. Many have said that they tried installed sales but with limited success. However, was the installed sales initiative added with leadership involvement or was it merged prematurely with other established parts of the business? In many cases, we see that installed sales lacked ownership and leadership backing and was added to other offerings on a “we’ll give installed sales a try” basis. Rather than this approach, we suggest installed sales be prioritized as a key R&D initiative or should be abandoned from your current initiatives (but reviewed again in the future).

THE RIGHT FIT

The more that new product and service offerings fit with our existing business, the higher the likelihood of success. Therefore, it makes sense to start with a product matrix and then address how installed sales could address demand in each product area. Items to consider are:

Installation Demand: Ideally, there will be existing demand for the service you’re considering. Your customers should be interviewed to determine what new products and services they would procure from you if only you had them. Too often,  new product and services offerings are developed from supply-based viewpoints (vendors, as an example) and the demand may or may not be validated in your market. Your customers must verify that they would utilize your installed sales offering for each area under consideration.

Installation Dynamics: Complex installation or easy to install or both? Complex installations require a high degree of training and sometimes require certified installers. Easy to install would be the opposite— handyman services is a good example. [Even though complex installations take a higher degree of training and risk, they tend to create barriers to entry that could be useful in blockading the competition from entering the market for that service.]

Availability of Quality Installers: This is constantly changing and requires continual monitoring. Now that the economy has further weakened since we last addressed this topic, there are now many more installer options. We have seen many cases where installers would appreciate a referral or working directly for or with the LBM dealer.

Method of Involvement: Referral method or invoice direct to consumer or builder? This, of course, depends primarily on two factors—availability of proven quality installers and profit potential.

Installation Restrictions: These are selfimposed limitations within a product category based on risk or resource constraints. For example, you might choose to install residential but not commercial roofing. Or, you might choose to replace existing windows or doors but not work on new construction.

Profit Potential: Consider both the profit on the installation and the possible increase in product sales and margin caused by offering a “package.” [Note: it has been shown that a quality installation not only allows for profit on the installation but also allows for additional profit on the material as well.]

Impact on Underlying Product Sales: This could be positive or negative. A positive example would be carpet sales, as most customers expect carpet to be professionally installed. So, providing installation for carpet would tend to increase carpet product sales. An example of a negative would be deciding to install a product and creating a perceived confrontational environment for our existing customers (i.e. competing with builder customers is the best example. This can be overcome and prevented by addressing it with builders beforehand.

Timing, Hurdles and Next Steps: Assign the timetable and next steps to ALL products. This is the area where we see the greatest challenge. We see many installation opportunities that have no next steps and no future review date. This will require us to identify each area of opportunity over and over again. Each possible service area should be examined on a periodic basis.

THE ECONOMY

Has the economy impacted our opportunity for installed sales? The truthful answer is that we do not totally know yet. But, here’s what we do know:

There Seems to be Resurgence of Interest in DIY: However, what seems to be different is that this interest is targeted toward certain product categories (such as hard surface flooring or landscaping). This could be a temporary shift and the trend away from DIY may continue if the economic decline is short-lived. Still, homeowners need help installing certain product categories they are not comfortable installing themselves.

There is Movement from Upgrades to Base Grade: Average tickets are falling. In the event that base grade items have lower gross profit than upgrades (almost a universal truth), add-ons (including installed sales) may be the only way to maintain a profitable sale.

Credit Restrictions Have Reduced Working Capital: Many companies to have less working capital available (lower accounts receivable and inventory and/or forced to raise customer deposits and accounts payable). From an installed sales perspective this is a double-edged sword. If the customer or builder pays us before we need to pay the installer, then installed sales will have a favorable impact on working capital. However, to the extent that terms are extended on installed sales longer than our installer payment terms, there is an unfavorable impact on working capital. In fact, if the latter problem is too pronounced we will often-times recommend the referral system over other options, thereby keeping the accounts receivable away from the company.

Healthy Labor Pool: In the past, a main reason for avoiding installed sales was the lack of available installation talent. In many markets the floodgates have opened and quality installers are readily available. This may be the only opportunity you have to enter installed sales in certain product categories.

Big Boxes are Already Lowering Their Prices: From a product-to-product perspective you may not be as competitive as you once were. By packaging products with installed sales, you may be able to avoid some of the loss of revenue associated with this unfortunate development.

Smaller Projects are in Vogue: Since smaller projects tend to be easier to manage, this may be another reason to consider installed sales now.

Homeowners and Builders are Getting the Message: The big boxes continue to support the “call the retailer first for installation services” objective. We expect this to continue. In effect, the big boxes are marketing installation services for you.

The Market will Rebound: From a builder perspective, we may be able to assemble a strong installed sales team before the next boom—and it will come. It is suggested that there may be a modest rebound as early as 2010.

ELEMENTS FOR ANALYSIS OF INSTALLED SALES

As with any new project, new product or new service (or anything new for that matter) we recommend that you consider five elements during your analysis:

1 Opportunity Identification: Confirm that installed sales appears to be a top candidate for a new or expanded initiative when compared to other options.

2 Risk Mitigation: Consider the risk dynamics of the services that we you will be offering. This often leads to use of a different entity for installed sales. Risk mitigation is a deep area and a full discussion is beyond the scope of this article.

3 Revenue Enhancement: How much will revenue be enhanced (short-and long-term)? Are the installation service providers available and is the service level acceptable?

4 Expense Optimization: Can we optimize installation service expenses and net an acceptable profit? This will help determine the order by which installation services are introduced.

5 Working Capital Impact: What is the impact on the utilization of the four key areas of working capital? Specifically,

     A. Accounts Receivable—invoicing and collecting for installation services.

     B. Inventory—may or may not be significant. [Projects tend to be larger when installer services are provided.]

     C. Accounts Payable—terms from installation service providers. Accounts payable terms should (but rarely do) match the customer credit terms.

    D.Customer Deposits—deposits on installed sales should be the same or greater than special order deposits?

POINTS OF ENTRY

How should you enter installed sales? When asked this question, I almost always answer with the least desirable answer: “it depends.” What does it depend on? Bottom line—it depends on the opportunity in your local market. This can be determined by considering:

• Local product demand and the demand for installation of those specific products. You’ll learn the answer to this through customer interviews discussed earlier.

• Current service levels in your market. If services are of high quality already, you probably should avoid. To the extent that they are lacking, they would be opportunities.

• Changes in the installation services labor market. Many companies have restructured or totally left the market. The void that remains could be a great opportunity for your business.

INSTALLED SALES AND THE INCOME STATEMENT

Installed sales revenue and installation cost of sales are presented in a myriad of ways…generally incorrectly! In some cases, revenue is combined with product revenue but costs are combined with operating expenses. Sometimes, the net installation profit (revenue after installation cost is deducted) is included with regular revenue.

Other times, net installation profit is included with other income. The inconsistency is probably because installed sales were immaterial to the business.

However, once they become material, installed sales and costs should be presented in the same fashion as product sales and costs.

This means that there are installed sales, installation cost of sales and installation gross profit, along with gross profit on installed sales as a percentage of installed sales.

Be aware that if the gross profit on installation sales is small compared with product gross profit, the installed sales might distort the financial information of the full company and give the reader the false impression that all margins are falling.

This is just one of several reasons why we recommend that installed sales be serviced by a separate entity.

STAFFING AND MANAGEMENT OF INSTALLED SALES

Do you need dedicated installation sales and management staff? It depends on your projected installation services market share and projected sales revenue and how fast you need to get there. Be careful before you answer this question as this is one of the key reasons for failure with installed sales. Let’s say for example, that your company has the potential for $1,000,000 in installation labor sales revenue at a 20% gross margin on labor sales and that the installation will positively impact product sales of $1,500,000 by an increase of 5% in product gross margin. We are not assuming that the actual product sales increase—only the gross margin on products we would have sold anyway. It is possible that the actual units of product sold will increase and that would have an added benefit that is not included here.

Based on this scenario, there is a potential positive impact of $275,000 per year computed (see chart below).

We generally suggest that 30% to 40% of gross margin is a good range to invest in sales and management. Therefore, there would be a budget of $82,500 to $110,000 for sales and management of installed sales. One problem that we see is that companies make the investment only to find that they did not meet the expected market share during the first or second year and, when you do not meet the market share there would be an unacceptable profit or maybe even a loss. Entering installed sales wasn’t necessarily a bad decision. The problem is that a realistic ramp-up was not anticipated. As a rule of thumb you can realize your potential market share in three to ten years. So, in most cases there will either be 1) initial low profit or even losses with a three year ramp-up with a large investment in sales and management or 2) initial non-optimized profits will occur with a ten year ramp-up with minimal additional overhead. The choice is yours—but it is a choice that must be made before adding installed sales to your business.

EMPLOYEE OR SUBCONTRACTOR?

The debate continues and, as we expected, the regulatory agencies are firing up their attack on classification as to employee vs. independent contractor. This is not generally an issue if you select a referral method. But when you choose to invoice installation sales to your customer, you must pick between independent contactors or employees. [Caution: combining employees and subs can cause problems. Do not mix the two together without considering the legal ramifications of doing so.] Some issues to consider are:

• The amount of control you expect to exude over the installation service provider. If a high level of control, then hire as employees.

• The amount of cost you are willing to absorb. For example, what if the installer is an employee and is not fully utilized? Will they still be paid? If cost is a concern then consider selecting the independent contractor method.

• Regulatory issues and ability and willingness to comply. If you cannot realistically comply with the local and Federal regulations, then avoid the independent contractor approach.

NEXT STEP: THE INSTALLED SALES PLANNING MEETING

The installed sales planning meeting is a good place to start with your team. Prior to the meeting, we suggest that sales associates meet with customers to identify areas for installed sales. The product matrix should be prepared, and your team should determine which product lines will target which customer segments (homeowner, builder, or both). The goal of the planning meeting is to identify the opportunity for all product lines so that the foundation can be poured for future R&D meetings in the installed sales area.

Remember, as we said before, installed sales must evolve over time. Even if you emerge from the meeting with only a few immediate installed sales opportunities, you will know why you chose to defer certain of the installed sales initiatives and you will also know the constraints and next steps to consider for future meetings. Trust me: you will be happy that you have this information.

SOME FINAL THOUGHTS

From my work with LBM dealers and home improvement retailers from across the country, I view installed sales as one of the best opportunities for your business. Even so, installed sales must be considered along with other opportunities. The key is to identify those initiatives that will contribute to the profitability of your business and allow your company to grow in a rational and systematic way.

Lastly, if you do move forward with launching (or expanding) an installed sales effort, have fun with it—and be sure to get your associates excited and involved in the planning process. We often spend too much time playing in the game (sales and service with a smile) and not enough time planning for the future. Now is an excellent time to create an environment for your business to evolve by considering installed sales.

Armed with more than 25 years of experience in retail, wholesale and light manufacturing, PAUL BUMBLAUSKAS is a business advisor, facilitator and speaker whose skills range from sales, staffing and store presentation to accounting, human resources, operations and administration. Paul is president of PFC Services, Inc. (www.pfc123.com), a Georgia based consulting and facilitating firm. Paul can be reached at 678.560.6725 or info@pfc123.com.