In the face of a slowing house market, ongoing labor shortage issues and a difficult supply chain, it is essential for custom home builders to implement best practices that maintain profitability during market booms, as well as in times of economic uncertainty.
The Association of Professional Builders (APB), a business coaching service for custom home builders throughout the US, Canada, ANZ, commissioned the 2022 State of the Residential Construction Industry (SORCI) report to gather deeper insights from 720 builders into the residential construction industry and spot emerging trends to help the owners of residential building companies see how their own businesses measure up against industry benchmarks.
What were insights of the SORCI report?
The results are in: marketing and advertising are here to stay as major needle movers for profit margins in the building and construction industry. Given that 75% of building businesses operate on a net profit margin of 3% or less, business owners would do well to begin strategically allocating budgets towards these core business initiatives if they haven’t already.
Marketing vs. Advertising: What’s the difference?
Marketing is the ongoing and overall process of making sure your product or service is compelling to your potential market and buyers. Advertising ultimately supports the core goal of marketing with various activities and initiatives such as Facebook ads, website banners and sponsored posts to increase your business’ visibility, appeal to customers and grow revenue.
And even though they are synergistic, one cannot happen without the other: you will need to complete a number of marketing activities—such as branding, market research, positioning, and pricing— far before you can consider beginning any advertising.
Why invest in either?
Margins are inextricably linked to marketing. The basic law of supply and demand dictates that when demand exceeds supply, prices rise and when prices rise, margins follow not shortly behind. As an inevitable result, businesses become more profitable.
More simply put: when marketing and advertising are done well, they generate interest from consumers and, demand for services—demand that would not otherwise exist had the business decided not to invest in marketing and advertising at all. Builders that effectively invest to generate more demand than they can service are able to pick and choose their clients as well as hold a stronger negotiating position during contract negotiations.
Conversely, builders that do not make the same investment end up clinging on to every opportunity, which results in them not only compromising their margins, but also dealing with consumers who are only interested in finding the cheapest quote.
Builders that use paid ads to increase demand for their services can continually increase their markup until they reach the industry benchmark of 33.3% for homes resting in a 10%-15% net profit margin, compared to a mere 5.4% markup for those who choose not to invest.
No Longer Just About Referrals
Generating quality leads via referrals will always be a building business’ bread and butter, and for good reason: 60.9% of SORCI survey respondents attributed over a quarter of their sales to referrals throughout 2021, and the conversion rate of leads to clients when the opportunity is created from a referral remains extraordinarily high at thirty-three percent.
While referrals remain invaluable to continued profitability, it is difficult to grow a building company by relying solely on these opportunities. Instead, business owners should prioritize maximizing referrals as a marketing channel in conjunction with a paid advertising strategy.
Three is a Magic Number
The report identified that allocating at least 3% of a company’s total revenue to marketing and advertising is what enables successful businesses to enjoy net margins of at least 10%, while builders that spend less than 1% of revenue on marketing have the lowest margins.
Opportunities Abound and Where to Start
Though we live in a fast-paced world of appointed social media managers and expansive digital campaigns, social media doesn’t have to be difficult. Most builders prefer to keep it simple, posting at least once a week to key platforms such as Facebook and Instagram.
The usage of YouTube remained stagnant with a minimal number of builders utilizing the video platform, presenting a significant and unique opportunity for those willing to invest the time to create content since there is little to no competition for consumer attention on the platform.
Search Engine Optimization
Search engine optimization (SEO) is, in short, the art and science of matching your information—your webpages, products and services—with what people are searching for online. Though fewer builders report utilizing services such as Google Ads as a component in their marketing plans, SEO is always handy to have in your business strategy toolbox.
Google Ads is the first step before investing in SEO because the paid traffic from Google provides valuable insights into which keywords you should be targeting in an SEO strategy.
Blog articles have been a game-changer for builders that publish them on their websites because they’re simple, cost-effective and get important messages out—in fact, this medium is where even an elementary understanding of how SEO works can help firms thrive online and stand out the most. It’s encouraging to see that the number of building companies implementing our content marketing strategy increased by 63.3% in the past 12 months.
Despite the increase in the number of builders now producing content, still only 5.6% of building companies surveyed are publishing blogs monthly, leaving open a significant opportunity for the remaining 94.4% of building companies surveyed to increase their margins and reduce their advertising costs by implementing this simple marketing tactic.
CRM and Email Marketing
The CRM market offers a huge choice of solutions for builders, like powerful email marketing services that allow additional opportunities to nurture and expand their existing database of contacts. To suggest that the remaining 63% of builders who choose not to leverage these powerful services to their fullest extent are missing out would be a great understatement.
Strategy is Key
Know Your Numbers
Despite the positive trend of more builders investing more money into generating demand for their services, a big concern is the fact that more than half of builders reported not having a targeted budget for each lead they generate. This is a key metric for every builder to understand, as knowing the cost per lead along with the conversion rates of those leads allows building firms to plan their marketing strategies and costs with increased accuracy.
Some builders surveyed reported generating quality leads to be their most significant challenge in marketing, though that percentage decreased significantly from 17.2% in 2020 to 6.8% in 2021—a marked decrease given current market conditions.
This in turn may be demonstrative of builders’ understanding that there is little chance for reward without some risk: though they may encounter several consumers who are unlikely to ever become clients, the reward of increased exposure and potential business is greater than the perceived risk of a less-than-effective advertising spend.
Invest in Marketing to Invest in Your Business
As the industry and market evolve, an increasing number of builders are implementing ideas and evolving their businesses strategies in ways that enable them to become better business owners and deliver better experiences to clients. Marketing and advertising are core components of these expanded strategies and will ensure success in the long term.
Russ Stephens is the co-founder of APB. The Association of Professional Builders (APB) is a leading business coaching service for custom home builders, with members in the United States, Canada, Australia and New Zealand.