There are many lead-generating services in the construction industry; it seems like a new one pops up every week. One service advertises, “Our contractors only pay us a 5% referral fee, once they win the job.”
Only 5%. They make it sound like peanuts. I realize that many of these lead-generating services are charging 5-10% of the sales price, but is that reasonable?
The fact is that a large majority of construction contractors, both residential and commercial, never see a 5% net profit. How can you afford to pay 5% of the sales price of a job if you aren’t even making a 5% net profit?
Looking at it another way, if you’re only making a 5% net profit, why should you have to pay all of it for the lead?
You can’t and you shouldn’t pay that much for a lead unless you can raise your prices accordingly. You can do that one of two ways.
You can build that cost into your overhead, but that carries a risk. You should only pay 3% to 5% total for marketing in remodeling, 1% to 2% for new home construction. When your overhead expenses get too far out of line, whether it’s because you’ve opened a showroom that you can’t afford, you have too many office employees, you’re paying yourself too much salary, or you’re being charged 5-10% of your sales price for leads, your business is at risk. You’ll have to increase your markup to cover the additional expense. Every job will have a higher price, and when it comes to increasing your markup, there’s a limit to how high you can go.
Or you can tack the 5% fee onto the sales price of every job that incurs that fee. That will prevent you from having to raise your markup on all jobs, but it will make the price of these particular jobs much higher.
Obviously, lead-generating services don’t consider 5% of the sales price to be a burden. They figure contractors make so much money they carry it home in a wheelbarrow, so why not charge 5% of the sales price? They see an opportunity to get rich quick, they want to take money home in a big wheelbarrow. They’ll do it by soaking contractors. Those contractors then have to charge homeowners higher prices or risk losing their business.
Which leads to a question: If homeowners knew that contractors using these services were charging them a higher price, would they be as anxious to use the service?
I think homeowners honestly believe that it doesn’t cost them anything to find a contractor through a lead-generating service. That’s what they’re told, so it must be true. On the contrary; there is no free lunch. Someone has to pay the middleman.
If the lead-generating services weren’t so greedy they’d be easier to accept. They are providing a service that has value. But 5-10% of the sales price is what an owner’s salary should be. It’s in the range of what a salesperson is paid, or a job superintendent. I realize that every job starts with a lead, but there are other ways to get leads that don’t cost 5-10% of your revenue.
Begin your marketing efforts with a quality website that’s optimized so you can be found locally. Use vehicle and job signs. Hand out business cards, make community connections. Sponsor a local youth sports team. Then branch into all the other marketing methods that are out there that won’t leave you dependent on a greedy middleman. You’ll be happier and your clients will be better off as well.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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