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Two Concepts Concrete Contractors Must Know

As concrete contractors, we have to know and understand a lot of things, and it can be challenging to stay focused on the things that move our company forward. Here are two concepts that can help contractors be more profitable and make better business decisions.

1. Lifetime Customer Value

The value of customers is determined by how much money you make from them throughout the entire time they are your customers. This is called Lifetime Customer Value, or LCV. One customer can be very valuable over the course of their time with you.  

For example, if you have a homebuilder customer that builds four houses per year and his average foundation is a $25,000 sale for you, then we can figure the following:

Revenue $25,000

Direct Costs 75% $18,750

Gross Profit 25% $6,250

Overhead $5,250

Net Profit 4% $1,000

In a year, the builder builds four houses. This means in one year you will make $4,000 net profit on his jobs. His four jobs will also contribute $21,000 to your overhead that year.

If your average homebuilder stays with you for five years, then the lifetime customer value of this builder equates to $20,000 net profit, and $105,000 in overhead expenses paid.

You begin to see the Lifetime Customer Value that a customer like this brings to your company. When you know the LCV of a customer, you can make better decisions in the following areas:

• Sales & Marketing
Most people get a customer in order to make a sale. Smart people make a sale in order to get a customer. A good customer will provide the company with profits for a long time.

The LCV helps you determine how much you can spend to get a new customer – one that continues to do business with you and is profitable for you.

In some industries, companies are perfectly willing to spend more than their projected profit for that first sale in order to acquire a new customer. This is called “going negative,” and you see it all the time with mobile phone providers and satellite TV companies. If the net profit on a first sale is $500, some companies will spend more than $500 on sales, marketing and acquisition costs to get that new customer. They know the LCV of that customer is high and that the arrangement will be profitable.

When you know the LCV of a potential customer, you can determine what you are willing to invest, in terms of initial sales and marketing.

• Customer Appreciation
Knowing the LCV allows you to invest in a current customer in order to strengthen your relationship with them. Take them to lunch, buy them tickets to a ball game, or take them fishing. I once bought a $25 marathon training book for a builder customer of ours. It was a simple, inexpensive gesture that he really appreciated and mentioned several times afterwards.The amount you spend can be proportionate to their LCV. A $3,500 duck hunting trip is a cheap investment for someone that will provide $400,000 in profit to you.

• Damage Control
The LCV can help you determine how much you are willing to spend to fix something or to salvage a relationship when there is a mistake or misunderstanding on a project. Sometimes it is better to bite the bullet on an issue – even if you are not at fault – than to lose a customer that is worth a lot to your business over their lifetime.

When you know the lifetime value of your customers, you can make better, more strategic decisions about how to sell to them and how to manage their accounts.

2. Opportunity Cost

The second concept is opportunity cost. Opportunity cost refers to the principle that if you allocate resources to one area, then you are giving up the opportunity to use those resources in another area.  

Concrete contractors can apply this concept to construction capacity. If your wall crew is on a job for Customer A, then it cannot be on a job for Customer B. You do not want to have your crews and resources tied up on a large project where you are making a 1% profit when they could be working on projects that would give you a 6% profit. 

It is up to you to make sure that you are maximizing your profits and LCV on every job you do.

I believe that for owners of construction companies it is most important to look at opportunity costs in terms of time and resources. We all have too many things to do throughout the day.  

We have to be aware of what we are spending our time on. Is it the highest, best use of our time? And are our crews and equipment working on the most profitable customers and projects?

By determining the LCV of your customers and understanding opportunity cost, you can make sure you and those in your company are chasing the right prospects and working on the best projects.

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Concrete FACTS, a publication of the Concrete Foundations Association, is THE voice for residential concrete industry news, market intelligence, business strategies, technical solutions, product information, and other resources for professionals in the cast-in-place concrete industry. Subscriptions to Concrete FACTS is available to anyone involved or interested in the residential concrete industry as a service to your industry. Please contact CFA Headquarters to find out more about your free subscription or Email Us