624: Trading For Sales Vs. Trading For Profit In the Construction Business

This Podcast Is Episode 624, And It's About Trading For Sales Vs. Trading For Profit In the Construction Business

Times were tough, so Remodeler John decided to lower prices below those of his competitors. He promoted a charge-out rate 20% below the industry average, explaining that his overheads were lower than those of larger companies.

 

The turning point came after advice from his mentor. "You're selling yourself short, John," said the mentor. "With your qualifications and experience, you should charge at least as much as other businesses – if not more. I understand your marketing strategy, but I don't think clients see it that way. They are more likely to interpret lower costs as lower value and quality. In your industry, confidence goes a long way, so you shouldn't be afraid of marketing yourself at a price that reflects your expertise and experience."

 

Then came the call from his accountant. "Aren't the sales figures great?" said John, getting his bit in first. "Yes," said the accountant, "impressive sales indeed. That's the good news. The bad news is that the business has actually lost money over the last quarter."

 

This was how John learned that trading for sales and trading for profit could be different. Chasing sales revenue is fine, provided your prices give you a sustainable profit. John hadn't checked his costs for some time, so the unwelcome news from the accountant came as a shock.

 

In the construction industry, business strategies can vary significantly, particularly regarding the goals of trading for sales versus trading for profit. Understanding the distinctions between these two approaches is essential for contractors and construction businesses aiming for long-term success.

 

Trading For Sales

 

Trading for sales focuses primarily on generating revenue and increasing the volume of work undertaken. Businesses adopting this approach often prioritize:

 

1. Volume Over Margin: The goal is to secure as many contracts as possible, even accepting lower profit margins. This strategy can be beneficial for establishing a market presence and building a portfolio of work.

 

2. Winning More Contracts: Construction companies may aggressively bid to win contracts, often underestimating costs to make their proposals more attractive. This can lead to an immediate revenue influx but risks squeezing profit margins.

 

3. Short-Term Focus: While generating sales volume can provide immediate cash flow relief, it may divert attention from long-term sustainability and profitability.

 

4. Increased Risk: Accepting low-margin projects can expose businesses to more significant risks, especially if unforeseen costs arise or projects exceed budgets.

 

Trading For Profit

 

In contrast, trading for profit emphasizes the importance of maintaining healthy profit margins and sustainable business practices. Key aspects of this approach include:

 

1. Cost Analysis: This strategy involves thorough cost assessments to ensure all expenses are covered, and a reasonable profit margin is included in pricing. It prioritizes profitability over sheer sales volume.

 

2. Selective Contracting: Businesses may focus on projects that align with their capabilities and offer the best profit potential rather than simply accepting every available job.

 

3. Building Long-Term Relationships: