I was on the phone with one of our customers who is trying to grow his BAS business to $20M in revenue by next summer. As he and I were talking he asked me "Phil if you were in my shoes how would you build and grow a contracting business?".
That was an interesting question, I paused and thought to myself, "Man, there are so many different things I would do and so many interrelated areas I would need to cover."
So, I told him this is not a quick answer and that it would take several conversations to really flush out the topic.
He agreed and we set up a reoccurring weekly call to really dissect the topic.
I asked him if he was okay with me turning this into a weekly blog post that I could update as we moved through the calls and he agreed that would be useful to others in the same position.
What follows is a summary of the strategies and actions we are discussing over the next several weeks.
Call # 1 What Business Are You In and Who Do You Serve?
The first problem any business owner needs to solve is one of clarity. I by nature am an idea person and because of that I have more ideas then I could ever expect to execute. In my experience most business owners are idea people.
John (not his real name) was also an idea person. After years of working at a large building automation company John got tired of his solutions being shot down. "I knew what was happening in the field and yet I was being told I was misaligned with the market. How could I be misaligned when I live in the market?"
You see John knew his market, he knew all the players, and his customers loved him and his ideas. And this is what had gotten John in trouble. Just this year alone he grown his business to just over a dozen analytics customers, 10 service customers, and he also was working on 13 plan and spec projects and 2 design build projects.
They say diversity is good and I would agree but diversity can also kill your team when you are just getting started.
"John", I said "one of the best pieces of advice I got early in growing my business was that you cannot be everything to everyone." John's voice lowered almost to a whisper and he said, "I get that Phil, but which horse do I bet on?"
That's a really good question, from the outside looking in John's customers were satisfied and he knew that he could grow each line of business. But, the problem was that as he grew each line of business his challenges increased. He would have to take technicians off projects to service customers and then would have to take the same technicians into the office to produce his analytics reports.
If John was going to grow his business he really needed to focus. He could be good at a lot of things now but was it reasonable that he could he continue to grow and remain good? The current growing pains he had were indicating that answer was no.
As a business owner it's counter intuitive to take a part of your business that is profitable and abandon it. But it's all a numbers game. John's greatest source of profitability came from his analytics practice not only could he charge high margins for the work but he could also create service tickets and retrofit opportunities from the data he was gathering.
That was the first concept I would teach John. Synergistic Revenue Streams. When I first used the phrase Synergistic Revenue Stream with John he was intrigued, after all what business owner wouldn't be? A Synergistic Revenue Stream or (SRS) is any two or more revenue streams that build upon one another.
Analytics and Service work is a great, and very often under used SRS. "You see" I said, "as you increase your service customers you offer the base analytics package at cost, with an add-on analysis summary that is pure margin and the results of that analysis can be turned into actionable service and retrofit opportunities."
"So I'm getting paid to create sales opportunities at my customers sites?" John asked. "Pretty much" I said.
That's the beauty of SRS the solutions themselves are valuable to the customers so you aren't just selling snake oil, but the real magic comes when the solutions are combined.
It’s then that the solutions can build upon one another to generate significant profitability and customer growth.
But the services you provide is just part of the equation. You also have to ask yourself who do you provide these services to. One of the biggest mistakes I made early in my company was targeting the wrong buyer profile.
I thought to myself that my ideal customer would be individuals who would purchase training solutions for themselves. I was so wrong. You see I did what most business owners (especially those who used to work in the field do) I assumed my customers would be and think like me. The reality is many individuals had no desire to invest in training, and those who did only purchased once.
It took me a full year to discover that companies purchase multiple times, either through growth or churn a company’s demand for training is constantly changing. This means that all things being equal the customer lifetime value of an individual was substantially lower then a company. Once I discovered this I was able to adjust what solutions I offered and how I offered them.
That was John’s challenge. Up to this point he’d been focused on selling services to anyone who would buy them. While this made for a lot of sales, this also made for unpredictable revenue. “It seems like every month I have to be out prospecting and refilling my pipeline of opportunities” John said.
Now of course there is always a need to have a healthy pipeline of opportunities but when your pipeline is 85 to 90% new customers you are working extremely hard. This has to do with the initial cost of customer acquisition, something John and I will cover on a future call.
“John, you need to decide what companies or markets have enough capital to support your growth.” I said.
This is a common problem faced by many business owners, they don’t know how much they need in revenue to grow their business and they can’t explain how those revenue numbers equate to sales volume and ultimately selecting their customer base.
John understood P&L, cashflow, TWC, and the like, so I didn’t need to explain to him how this all worked but for the sake of you my reader I will give a brief description.
Essentially you need revenue to come in the door, what is left of that revenue after the work is executed is profit. Your goal as a business owner, if you are growth minded, is to produce enough profit to reinvest in your business for expansion purposes.
However, if you are only serving small companies that have very limited capital and operational budgets then you will need to serve A LOT of companies to meet your revenue goals and this is where cost of sales and cost of customer acquisition (they are different come into play).
“Ok Phil but how do I decide what companies and markets to focus on?” John Asked.
I looked over at my clock, we had already exceeded the 15 minutes we had allotted for the call.
“John”, I said “this is something we will have to discuss next week but let me leave you with this. If a customer is most likely never going to build a new building or majorly retrofit their existing building, then most likely they will not be a good customer.”
I could tell this bothered John as his face contorted a bit when I said that. I understood what he felt, one of the hardest things in the world is for a service minded person to outgrow their customers. But the reality is if you want to grow and expand your business then you need customers who can support that growth.
So how do determine the customers that can support your growth? John and I will be discussing that in next week’s call.
Key Points
Here are some questions I would ask yourself. Note, this are valuable even if you are not a business owner.
What business(s) am I in?
What service(s) are profitable? Which ones are most profitable?
Do I have any Synergistic Revenue Streams?
Call # 2 Deciding What Market you will serve
I had just about given up on hearing from John, it had been 4 hours since John and I's scheduled call and John had gone radio silent. This was unusual for him since he was normally so responsive. I was just getting ready to wrap up for the day when my phone rang, it was John.
“Phil, I almost didn’t call you, today” John said.
“Why...” I began to ask but John talked over me “You see, I really struggled with the idea of outgrowing my customers, I want to serve everyone. But as I thought more about it, I realized that if I try to serve everyone am I really providing the best service?”
John is very cerebral, so I let him talk himself through this thought exercise.
“Phil, I just don’t know which customers to keep and which customers to let go?” John asked
“Well before we get to talking about letting customers go, let’s consider how we move them up the value ladder and their capacity for future work.”
[Authors Note] Last week we discussed Synergistic Revenue Streams (SRS), a SRS is any two or more revenue streams that build upon one another.
“Remember the Synergistic Revenue Streams we discussed last week?” I asked John.
“Yes, that’s when two or more services work together to produce greater results.” John said
“Exactly, the trick to deciding what market you will serve has everything to do with the capacity for the market to support your SRS. Many business owners look at growing revenue streams by pursuing the same work and simply adding more people. The problem with this is you will be stuck at the same margin percentage which will limit your ability to grow.” I told John.
“Phil, I’m confused, if I’m growing revenue with the same amount of margin isn’t that good?” John asked.
“Of course, that’s good” I said “But is it the best option? In my experience the biggest barrier to growth is driving enough profitability to have excess cash-flow that will enable you to pivot your business to more profitable revenue streams.”
“For example, you are currently at 12M in revenue with an average of 15% margin. If you continue down the path to 20M in revenue at 15% you will have basically 3M in profit. However, if you are able to expand your profit margin to 20% on the same revenue number you will have 4M in profit.” I explained
“So how do I do this?” John Asked.
“First you need to evaluate the total addressable market of the verticals you serve in your area. Then you need to look at the available market in your area. From you will be able to look at the verticals you serve and understand how much more potential there is to grow your different lines of revenue.” I said.
“Ok, that seems doable. Difficult, but doable.” John said. “But what do I do with this information?”
“John, you see most people focus first on their services. They immediately decide based on past performance what services they will provide. I however like to focus on the available market. Once I understand the size of the market, I can then begin to look at how I position my services to best capture share of wallet.”
“Alright so how do I calculate the available market?” John asked.
“That’s the hard part,” I said “if a company is publicly traded or a governmental agency you can usually find this information online. Remember though, the building automation budget is usually just .5% to 1% of the operational budget and sometimes it’s not even that high. As for capital budgets those are usually announced in shareholder/public documentation.”
“For the companies that are privately held you can project their market availability, budgets, and available cash-flow based on comparable publicly held companies.”
“Alright, it sounds like I’ve got some work cut out for me, but it seems doable. “John said, “But what do I do once I have this information?”
I explained to John “Now that you have the size of the available market, and an estimate of the cash-flow/budgetary potential by vertical market you can then begin to look at what services you can provide customers to consume the available budget.”
John chuckled, “And to think I almost didn’t show up to this call.”
I told John, “Look I get it, I started Smart Buildings Academy to help people, but the first thing I realized is that I can’t help anyone if we can’t stay in business. The reality is greater profit margins and revenue enable you to invest in your team and services therefore providing a better customer experience.”
“So now John, we need to build out a value ladder.”
“What’s a value ladder?” John asked
“A value ladder is a list of your services usually by price that ascend in value (and cost) as the customer ascends the ladder. The higher the ladder the higher the lifetime value of your customer. The purpose behind researching budgets and available market are to identify customers and verticals who can support the tallest value ladder.” I explained
“For example, how many times have you quoted a service contract after a plan and spec project, even if the specification didn’t call for it?” I asked
“Every single time!” John excitedly shouted.
“John,” I said “you’d be surprised how many people never even let their customers know that they have a service team. They spend months on site and never once communicate to their new customer that they could continue serving them.”
“They aren’t maximizing the share of wallet…” John thought out loud.
“Exactly! And this is how you can outperform your competition. Competing on plan and specification work is important it gets customers in the door. But it is not what will grow your business. The value ladder on the back-end of the project is what will grow and retain your customers.” I said
“This is why it is so important that you identify the capacity of your local market to bear your services…”
John interrupted me again, I could tell he was getting excited “Even if I don’t know what they are yet?”
“Yes, because here is the reality, if you identify and deliver business value customers will find the budget. But they can’t find the budget if they are already losing the capacity to purchase.”
“What do you mean the capacity to purchase?” John asked
“Just because a vertical or business is addressable, does not mean they have cash-flow to purchase solutions. For example, think of Commercial Real Estate. Right now, so many people are trying to recommend technology solutions for Commercial Real Estate, but a lot of these property owners do not have any cash-flow.”
“So even if they wanted to buy, they couldn’t…” John stated
“Yes, that’s why you must evaluate the market conditions. Along with capacity, availability, and current business cash-flow. That’s also why you must diversify the verticals that you serve.”
Right about this time I heard a large crash above my office and the dog started barking like crazy. Shortly after I heard the sound of little feet and my daughter explaining how my son was doing barrel rolls upstairs and trying to do rolling Nerf gun shots at water bottles on the kitchen table.
“I guess I should let you go handle that” John said with a big smile on his face.
“Yep sorry about that, they can’t get back in school fast enough. But hey John before we go, I want you to really think about your available market. Consider what verticals you could serve and how current market conditions are affecting their ability to fund your solutions. Next time we talk we’ll begin to map out your value ladder.”
“Thanks Phil and enjoy them while they’re still young.” John said
Key Points
A lot of people, myself included have had the strategy of I'll just keep doing what I'm doing and that will deliver growth. The problem with doing that is that action without awareness does not always deliver results, actually it rarely does. Just because a sales campaign or service offering sold last quarter does not mean that it will deliver results in the next quarter.
There must be a market need supported by an available market with the appropriate amount of capital/operational budgets. I encourage you to ask yourself:
What is the current available market of the verticals I serve in my area?
How much do I currently capture of the available market?
What is the capacity of customers (or potential customers) in the market to pay for my services?
What market conditions may be decelerating or accelerating the purchase of my services?
