In my experience, there is ONE primary reason why most trade businesses don't make any profit.
It's because they have a VOLUME-driven business model.
This is the business model where they prioritise bringing in as much work as possible to keep the pipeline full and keep their team busy.
Now, is this a smart business model???
Well, from what I’ve seen, most of our clients who have pursued the volume-driven approach didn’t necessarily pursue it from a strategic standpoint.
Typically, it evolved organically.
And what I mean by that, is they didn’t sit down, hash out the numbers and recognise that focusing on volume is the superior business model.
Most of the time, it’s actually the complete opposite.
Their volume-driven business model came about because they DIDN’T breakdown the numbers… And they DIDN’T breakdown the business model…
And because of that, naturally, they’re going to end up focusing on trying to bring in as much volume as possible because it’s the only plausible way for them (in their mind) to make more money!
They believe more work = more money.
So, they keep their prices low, punch out as many quotes as possible, focus on keeping busy; all in the hope that they keep their pipeline full of work throughout the year.
But this belief couldn’t be further from the truth.
Sure, volume is a critical factor in making money. It’s no good having a really solid profit margin if there’s no work coming through the door to begin with!
But in the same right, it’s no good having really solid workflow if you aren’t making any money (or even worse, losing money).
Being Busy VS Making Money
There is a HUGE difference between being busy and making money.
Being busy for busy sake doesn’t guarantee you’re going to make money.
To make money, you need to focus on being productive.
What does that mean?
Well, in your case, productivity means RETURN ON INVESTMENT.
Your goal as the business owner is to try and get the best return on investment from everything – whether that’s a return on your invested money, time, effort, or energy into the business.
Because, from what I’ve seen over the years, the most successful business owners always have the strongest returns in everything they do.
ROI And Your Business Model
Now, what does this mean from a business model perspective…?
Well, your business model at large should be focused on getting the strongest ROI possible as well.
The problem with the volume-driven business model, like I said earlier, is that it’s focused on busyness, NOT on getting a strong ROI.
That’s why, I believe, it isn’t a smart business model.
The Profit-Driven Business Model
The business model that you need to be focused on is the PROFIT-DRIVEN business model.
This is the business model that focuses on raising your prices and making YOU more money, not just keeping you busy enough to pay the bills and scrape by.
We actually once had an electrical client that was completely volume-driven when we first started working with them.
From the outside they looked great – $15 million dollars in annual sales, 35+ employee workforce, plenty of work coming through the door.
But when we actually looked under the hood of their operation, it turned out they were barely getting by... barely breaking even!
And this was the case because they had built their entire business model around volume of work and growing top line sales revenue… NOT profitability.
They had a volume-driven business model, where they were estimating hundreds of commercial projects at lowballed prices every single year and making very little profit.
The reason why I bring this up is because even large contractors can get caught up in the trap of simply focusing on volume and neglecting profit.
So, I’m urging you, do NOT make this same mistake!
At the end of the day, what’s the point of turning $15 million in revenue if it’s giving you little to no return for your efforts?
You need to transform your volume driven business model into a profit-driven one because it’s this business model that ultimately wins.
And I’ll prove it.
We have a plumbing client who is close to turning $5.2M in sales revenue this financial year (which is great, but it’s no $15M!)
But get this… they’re on track to achieve a pre-tax profit margin of 32%!
That’s close to $1.7M in pre-tax profit!
Sure, their revenue is 3 times less than the electrical contractor who was turning $15M, but that didn’t matter because they were making $1.6M more than them in profit!
And this was all because they were focused on building a profit-driven business model, NOT a volume-driven one.
THIS is the power of a profit-driven business model.
Because what good is work for work’s sake?
Revenue and volume mean NOTHING if there isn’t a good profit to be made from it.
Are you in business to be busy or to make money?
Busy and broke is a common theme amongst trade businesses, and it’s something that I want every single one of you reading this to stay clear of.
Always remember, it’s not about the turnover, it’s all about the leftover!
Profit-Driven VS Volume-Driven Case Study
Now, to really drive home this point, I want to take you through a case study:
In the volume-driven column is the business model before they made any changes...
5,000 leads… 525 jobs/projects… $3.1M in sales revenue… and $179K in operating profit.
For a business of their size, that wasn’t much of a ‘leftover’. In fact, it was only a 6% operating profit margin.
We knew they could be doing A LOT better, so here’s what we did:
- Introduced a consultation fee so they didn’t have to provide so many free quotes (cutting their number of quotes/quoting time down by 82%!),
- Increased their average quote price by 20%,
- Implemented a better onsite sales process to better close more qualified prospects at higher prices (increasing onsite conversion from 15% to 60%),
These 3 profit-driven tweaks result in an extra $480,000 in pre-tax profit (even with a $450,000 drop in sales revenue!!!).
Outside of the monetary benefits, the business:
- Cut down quoting time by 5,800 hours – they were able to remove their lowest performing salesman (cutting down overheads) and could focus on providing a better experience, service and quote to more qualified leads.
- Reduced their workflow by 32% – they were able to remove their lowest performing field workers (cutting down costs and improving onsite efficiency) and reduced the number headaches delivering less jobs/projects.
- Dropped their worst customers – with the price increase came more people saying “no” to their price (hence the drop in workflow), however, the prospects who didn’t go forward with the quote were the more price-driven ‘pain-in-the-arse’ customers.
Again, THIS is the power of a profit-driven business model.
I hope from this case study, that you can see why you need to focus on building a profit-driven business.
If you’re serious about making more money and building a better business and life, then you need to build a profit-driven business.
The golden rule here is: Don’t fear dropping your revenue and volume in the pursuit of more profitable work.
The more you focus on winning more profitable work, the more money you will make for yourself AND the less you will have to work, stress, and struggle just to make a dollar for yourself.
The 'Few Big Clients' Dilemma
Now, for many of you, you’ve probably only got a few key clients, like builders and so on.
So, dropping any of them immediately might not be the smartest move right away, considering they account for such a large portion of your revenue.
But your goal should still remain.
That’s why we recommend trying to move them on over a 6-to-12-month period, while you focus hard on marketing, sales and building new relationships with new value-driven customers.
If you don’t have the workflow and opportunity coming in, then you likely won’t have the luxury to say “no” to taking on the work from your price-driven customers.
FREE Tool To Get You On Your Way
To help get you on your way, click here to download our Profit-Driven Simulator where you can actually have a crack at modelling out your profit-driven business yourself.
Want MORE Help?
Now, if you’re after more than just tool, and looking for actionable guidance on the best way to tackle this transition in your business, then we’d love to help!
In fact, one of the first things we do with all of our clients when they join our full-service accounting package, is to jump on a zoom call, pull out our business modelling simulator, and breakdown their entire business model.
This way, we uncover right from the outset, where their greatest opportunities are, and how they can build a better business and make more money.
Then we work with them to make that model a reality.
If that sounds like something you’d be interested in, then click here to book in a call with our team today!
If you're an electrician, plumber, painter, carpenter, or any other tradie business owner turning more than $1M a year looking for assistance with your tax, accounting, bookkeeping, and business advisory - click here to learn more!
