Episode 004: What Level is your contracting business?

00:01:18 Janet: Oh, yeah, I love this topic. It’s at the heart of what it means to be an entrepreneur and what it means to be on that journey from having the seed of an idea to being successful to then growing out of one stage to the next. It’s good stuff.

00:01:33 Don: Absolutely. Well, all right. Before we jump into the topic, I want to let you guys know that we have a resource available for you to download. If you’re just trying to figure out how to improve your overall online presence and you’re wondering, “What can I do to make it better?” we’ve got a resource called “Five Reasons That Homeowners Don’t Choose You Online” and what you can do about it. If you want to go to fatcatstrategies.com/homeowners, you can download that resource right there. It will give you some great tips on how to improve what you’re doing online and make a difference right off the bat. That’s fatcatstrategies.com/homeowners. Okay, Janet, let’s dive into this topic about levels of a contractor business. When we talk about levels of a contractor business, what kind of levels are we referring to?

00:02:28 Janet: Well, we’ll let some magic show through here. Don, I, and the rest of the staff brainstormed on how we could come up with something kind of cute and catchy that wasn’t “level,” and we failed.

00:02:43 Don: No luck.

00:02:44 Janet: No luck. So let’s just call it what it is, something really basic. Levels. Level one, level two, level three. A level one contractor is someone who has that entrepreneurial urge to work for themselves and has started doing it. Level two is when you’ve kind of pressed on to the next stage of your business. And then level three is that rarefied air. So that’s my highest level definition of what these levels are. In the rest of this podcast and the next two episodes, we’re going to peel back those layers and talk about what that means and what each level is.

00:03:24 Don: Okay, so we’re really just kind of taking a look at the phases a business goes through, from beginning to end, whatever the end might look like. Whatever the end game plan is for the business, we’re trying to provide a roadmap of how we see contractors progress through the different stages of their business. Really, with the intent of wanting to help, saying, “Hey, it is hard work to get from one level to the next.” We’ve worked with a bunch of people who have made that journey, and they’re at different stages of that journey, trying to get to the next stage. We just want to give some insight on what we’ve seen that’s been helpful, what’s worked for other people, and how to help you think about what your next steps might be.

00:04:10 Janet: Yeah, so maybe the first thing we should do is define these levels and what we mean by them. You said something a minute ago, Don, that I wanted to come back to. You said whether you’re just getting started or towards the end, I actually really like thinking about starting with the end in mind. In fact, there are a lot of books that have been written about it. There’s a book called The Right Excerpt that’s all about growing your business with an end result in mind. So let’s start with level one, but I’m going to come back to this idea of starting with the end in mind because I think it can give business owners a lot of clarity all along the way, especially when things get really tough, and they do get tough and challenging. So, what does a level one look like? You’ve probably worked for another contracting company. I talk to contractors all the time, and that’s the most common story I hear. “I was working for a window installer. They had high volume and a sales team. I was on the sales team or a project manager, and I reached a point where I thought, ‘I could do this myself. Why am I working so hard for somebody else? I could do this for myself.'” That’s a level one. You have that urge to break out, be your own boss, and be an entrepreneur. That level one goes from that day one where you decided to do it on your own up until you start to feel the tension between level one and level two. We’re going to get into that topic in just a few minutes. But it’s that whole journey from the first day after you quit your last job up through bumping up against the pressures of “You can’t be the one to do it all anymore.”

00:06:09 Don: So when you’re working with some of your clients, what do you think are some of the characteristics of a level one contractor?

00:06:13 Janet: Yeah, I think one of the things you just said at the end is probably the most defining characteristic, which is that a level one contractor is wearing all the hats. They’re doing everything there is to do in the business. They are the answering service. They are the full-on contractor. They probably have a team of subs they’re working with, but they’re still up on the roof or in the bathroom, doing the work alongside their team at night. They’re doing all of it. They’re both loving what they do and burning the candle at both ends. It’s that sense of knowing this is what they want to do and also knowing they can’t keep doing it the way they are forever. It’s an exciting stage because you’re getting off the ground. You’re building something. The guys I see in this phase who are really enjoying it are making a decent living at this point, paying their own bills, maybe even a little beyond that. But they know this isn’t sustainable forever. It’s certainly not scalable. They can’t get much bigger just by doing what they’re doing because they’re wearing all the hats and can’t wear any more. It just won’t work that way.

00:07:26 Janet: You’re answering the phone, going to the homeowners, climbing up on a ladder, taking all the measurements. Then you’re running around in your truck and supervising maybe two other crews of subs somewhere else. And then at night, when you finally get home after dinner, you have to sit down and do the paperwork. That’s a level one contractor.

00:07:46 Don: And I think too, just because we’re a marketing agency, we pay a lot of attention to the marketing side of things. I think there are some real defining markers there with the marketing aspect of a level one contractor. In that first level, we see a couple of things at play. One is we see a lot of word-of-mouth and referral marketing. You’re getting your leads from friends and family, people in the neighborhood where you just did a job, yard signs. You’re also seeing a lot of lead aggregators, things like Angie, HomeAdvisor, Modernize, and Quinn Street.

00:08:32 Janet: Yeah.

00:08:32 Don: So you’re speed to lead, competing with a bunch of other contractors in your area for these leads being sold by these lead aggregators. Those are usually the primary places we see level one contractors getting their leads and focusing their marketing dollars.

00:08:51 Janet: I would add a third category to that.

00:08:53 Don: Okay.

00:08:54 Janet: Those level one contractors, just like you said, are getting business from word-of-mouth and buying leads. Depending on the product they’re installing, we’ve also seen those level one contractors get a fair portion of their leads from their manufacturer.

00:09:12 Don: Yeah, sure. Depending on the industry, that can definitely be the case.

00:09:16 Janet: We’ve worked in different segments where some manufacturers will sell the leads to the contractors, and other manufacturers will send them to the contractors based on a homeowner going to the manufacturer’s website, typing in their zip code, and saying, “Find an installer of this product near me.” But yeah, Don, when I encounter a contractor that’s really wanting to scale, I’m usually the first person prospects talk to before they decide whether or not to work with Fat Cat. We have a conversation, and I learn about their goals. A classic thing for a level one contractor to say is, “Man, I want to break this addiction to Angie or HomeAdvisor.” It got you where you are, but you’re not going to be able to really scale. You’re always going to be competing with three, four, or five other businesses because those leads are typically looking for the lowest cost estimate.

00:10:21 Don: Yeah, that’s right. Okay, so I think that’s maybe a really good segue as we think about moving towards level two. One of the things we talk about that I think is helpful for contractors to recognize and feel the weight of, whatever stage they’re in, is that growth through these three different levels of the contractor business isn’t linear. 

00:10:46 Janet: Lord, no.

00:10:47 Don: Meaning you don’t just go up into the next level by doing the same things over and over again or doing more of them or getting more efficient at them. As you move from one level to the next, your business really starts to change. The things you do, the things you focus on, the things you spend your time and money on, all of that changes from one level to the next. What we’ve found helpful is to help people think about the telltale marks of the transition season. When you’re at the edge of level one and needing to move into level two, there are typical tensions that begin to surface. A contractor can say, “Okay, I think I’m beginning to see that the things I’ve been doing to be successful in level one, I just can’t do those. I can’t do more of those to get to level two.” And I think what you’re highlighting are good examples of that. So, we talked about one already, which is you’ve been wearing all the hats, and you don’t have any more headspace to put on any more hats. That’s one of the biggest tensions.

00:11:56 Janet: So maybe one of your first concrete steps to make that transition from a level one contractor to level two is likely going to be staffing. Some of that really falls outside our expertise as marketing partners, but we’ve been along for this ride with so many contractors that we see how it works. A staffing choice you might make is hiring someone to answer your phones. It sounds kind of silly, but we’ve seen contractors grow to that one to three million phase where they don’t have a dedicated person answering their phone. They’ve either outsourced it to a call center that answers for various clients, like doctor’s offices, or they answer their own phones, which can be comical, disastrous, all of the above.

00:13:07 Don: Oh gosh.

00:13:07 Janet: I mean, I paused because what word do you want to call that? Some of those tensions are because you’re tired. You’ve got opportunities you’re not able to take advantage of because you are stretched so thin. So you’re starting to look around. Can I get someone to answer my phones? It might be time to hire a sales rep and train a sales rep to start doing some of the estimating. That might be the point where if your unique skill set is managing crews, you might look around and think, “How can I duplicate myself and get another project manager in here so I can run more than the crews I’m running now, whether that’s one, two, or three?” You can double that if you get someone else in there.

00:13:55 Don: Those are great. All are good indicators and tactics for thinking about making that transition. I think on the marketing side, some of what we already talked about with hitting a ceiling with your pay-per-lead aggregators, getting to the place where pay-per-lead and word-of-mouth aren’t yielding more leads. You’re buying every lead you can get, you’re Johnny on the spot with answering the phone, you’ve got the speed to lead thing down as best you can, but that well only goes so deep, and you start to feel like you’ve hit the bottom. You realize you need other strategies to get more leads. That is the best segue into talking about level two. The best indicator of transitioning into the level two stage is maxing out what you could do with word-of-mouth, lead aggregators, and maybe leads from your manufacturer.

00:15:11 Don: Okay, so let’s talk about a level two contractor. What does a level two contractor business look like?

00:15:19 Janet: Don, I think you came up with this metaphor: going from being a quarterback or a player on the field to becoming the coach. You’re starting to build a team, bringing your expertise across the whole organization, and leading other people. You’re giving your call center manager direction and input. You’re giving your salespeople direction and input. You’re starting to nail down standard operating procedures. From a lead perspective, you have started to generate some of your own exclusive leads that are not coming from a lead aggregator or word-of-mouth.

00:16:01 Don: Yeah. What other ways are there to get leads?

00:16:05 Janet: Oh, what a great question. There’s SEO, PPC, offline methods like television and radio, and referral and incentive programs. All your marketing campaigns focus on generating a lead that wants a quote from your business, not just from any business. When we say exclusive leads, that’s what we mean in our world of digital marketing. An Angie’s lead, for example, is someone who filled out a form on Angie’s website to find a painter or a roofer in their town. They don’t care who responds; they just want paint on their walls or a new roof and will get four quotes. That’s not an exclusive lead. An exclusive lead is someone who has done some research, found you online, knows you’re a local business, looked at your website, maybe checked out your social media profiles, and now wants a quote specifically from your business. Those leads may not have gone out and found two other contractors to get competing bids from. That’s the real sweet spot.

00:17:25 Don: Yeah. That’s the hallmark indicator of a level two contractor. The bandwidth of a level two contractor or what gets encompassed in level two is pretty broad. At the beginning of level two, you’ve got someone who is just starting to add some additional lead sources into the mix, starting to add some additional staff. But at the tail end of level two, it’s a really different picture. It’s still level two, but you’ve got multiple staff, multiple lead sources going on. The revenue picture from the beginning of level two to the end of level two is dramatic. It could be multiple millions of dollars, a significant difference. In this level two phase, you as the owner are focused on growing the business and doing the work to make the business grow.

00:18:32 Janet: Yeah. The spectrum of this level two contractor, in terms of revenue, is wide. It’s kind of hard because we’re talking to a wide audience. We don’t know if you’re a bathroom contractor, a roofing contractor, or a siding contractor. But big picture, a level two contractor could be from $3 million to maybe $20 million. A $3 million roofing business is very different from a $20 million one.

00:19:06 Janet: In our mind, these three levels we’ve seen and are sticking to. That level two contractor is maturing. They’ve got multiple channels of leads. They may still be buying leads from lead aggregators, but they’ve developed their own exclusive leads. They’ve got strong word-of-mouth, referral programs, review programs. They’ve built out staff and have department heads at the top end of the spectrum. It’s really a beautiful thing to watch a contractor go from that $3 million mark to, say, the $15 million mark. I’ve personally been in the front row seat of that more than once, and it’s a fun ride.

00:19:57 Don: It’s exciting.

00:19:58 Janet: It can be an exhilarating and stressful ride, but it’s a fun ride.

00:20:03 Don: Okay. You mentioned a revenue mark, but what are some of the other tensions we see at the end of level two? When a contractor or business owner starts to recognize they’re pushing the top end of level two, they can’t keep doing things the way they have been to get into level three. What are those tensions?

00:20:33 Janet: I’m going to go back to a metaphor, a framework of thinking about it, that Don, you’ve brought up. We go back to these sports analogies. At level two, the owner of a contractor business is really that coach.

00:20:48 Janet: When you reach the limits of what you can do as a coach, you need to look at moving into a general manager mindset. I’ll give you a short story of a contractor I was talking to last week. Their revenue goal this year was $11 million. They are going to end at $18 million this year, 2022. They have blown all their goals out of the water. I was talking