How to Budget Advertising

for a Construction Business

By Michael Stone
budget
March 2009 2
How to Budget Advertising for a Construction Business
W
hen the housing market slows, many contractors fnd
themselves with little or no business. This is usually because
they have fallen into the trap of trying to work by referral
only. As all too many have found out, working by referral
wont suffce for the long-term in the construction industry.
You must advertise. Promoting your construction business needs to be a 24/7/365 activity.
The frst step in creating an advertising program is to fgure out how much
you need to spend. This is easy if youve advertised in the past and can use
company history to determine your results. If you havent advertised in the
past, youll need to estimate some of these fgures and adjust your budget
as you go along.
1. Project what you want to sell for the year $_____(1)
If you have been in this business more than three or four years, you
probably can expect an increase of between 610% growth. If you
have been in business less than three years, your growth can be as
much as 2030% or higher. Most, if not all, of your growth will
depend on the strength of your marketing program.
If you arent sure how much business you did last year, or want a
different method of setting this goal, use the owners compensation
method. Figure out exactly what you want to make next year, divide
that number by 0.08 (8%) and your answer is the amount of business
you must sell, build and collect for your company to support your
salary. If you have been in business more than 68 years, you could
bump that number up to 0.1 (10%) and be safe. You have proven you
are running your business well and deserve a higher salary. Go for it.
2. Calculate the average sale price of your jobs $_____(2)
This can be based on history or your expected average sales price
determined by the type of work you will be doing.
March 2009 3
How to Budget Advertising for a Construction Business
3. Divide your sales goal (1) by the average sale price (2):
(1) / (2) = _______(3)
(3) is the number of sales that you need for the year to reach your goal.
4. Divide the number of sales you need for the year by 12 to determine
the number of sales you need each month (on average) to reach
your sales goal for the year. Is it reasonable? If you dont have the
salespeople to reach that sales goal, go back to Step 1 and reevaluate
what you want to sell for the year.
(3) / 12 = _____ (4)
With your sales goal set, how do you get those sales in the door?
Advertising, my friend, advertising.
5. If you dont already know it, calculate your sales-to-leads ratio. This
is done by dividing the number of leads you have taken for a given
period by the number of sales you have made during the same period.
Leads Taken / Sales Made = Sales-to-Leads Ratio
_____ / ____ = 1 in X.XX (5)
Knowing your sales-to-leads ratio is important how can you know
where youre going if you dont know where youve been? Here is a
guideline on ratios for remodeling and specialty contractors:
1 in 1.1 to 1 in 3 ............ Probably selling too cheap; raise your markup
1 in 3.5 to 1 in 4.5 ......... Good; work at improving your sales skills, aiming
........................................for 1 in 3.5
1 in 4.5 to 1 in 6 ............ Need work on selling skills immediately; leads
........................................are being wasted
1 in 6 & higher .............. Set a time limit to improve to at least 1 in 4.50
........................................or it might be wise to fnd something else to do
........................................or someone else to sell for you
March 2009 4
How to Budget Advertising for a Construction Business
For those selling new homes (approximate numbers only):
1 in 1 to 1 in 8 ............... Probably selling too cheap; raise your markup
1 in 8 to 1 in 10 ............. About as good as it will ever get in new
........................................home sales
1 in 10 to 1 in 14 ........... Good, work at improving sales skills
1 in 14 to 1 in 18 ........... Need work on selling skills immediately; leads
........................................are being wasted
1 in 18 & higher ............ Set time limit for improvement or give the
........................................salesperson a transfer to your competition
6. Multiply your ratio (5) by the average number of monthly sales needed
(4) to calculate the average number of leads you need each month. For
instance, if your sales ratio is 1 in 4.5 and you need 5 sales each month,
multiply 4.5 x 5. You need 22.5 leads each month.
Ratio x Sales = Leads Needed
(5) x (4) = _______ (6)
7. Then, from your company history, determine the number of leads per
advertising dollar spent, or your cost per lead. This number needs to
be as accurate as possible, so do your research and get a good number.
Advertising expense divided by total leads = cost per lead.
Advertising Expense / Total Leads = Cost Per Lead (7)
8. If you know what leads have cost in the past, and if you know how
many leads you need based on your sales-to-leads ratio, its easy to
calculate the total amount of money you need to invest in advertising
to get the necessary number of leads.
Leads Needed x Cost Per Lead = Investment
(6) x (7) = $ to invest
Now you know the minimum you must invest in advertising to get the
phone to ring to meet your sales and production goals.
March 2009 5
How to Budget Advertising for a Construction Business
Keep in mind that if you havent been making a regular investment in
advertising, you will not see an immediate return on the investment. If you
are just now starting this program, you have at least one full job cycle to
go through before you make the fnal deposit in the bank of the last check
from the jobs you gain using this approach.
A job cycle is the period of time from when you place your frst ad, say
January 2, through the sales and building process of your average job until
you collect and deposit the fnal check. For specialty contractors, a job
cycle is normally around two to three months, which would make payday
somewhere between March 1 and March 31. For remodeling contractors,
a job cycle can be three to six months, depending on the size of your
average job, which makes payday somewhere between April 1 and July 1.
New home construction can vary all over the place. Small starter homes
can be up and done in less than 60 days, while the mega-square-foot
monsters that have been so popular can take two, three or even four years
to build. On average, however, you should expect at least seven to nine
months as your job cycle.
Once youve determined the level of advertising investment needed,
review our How and When to Advertise a Construction Business Paper
to get ideas and product and service recommendations on how to get your
advertising campaign up and running.
Michael Stone, author of two construction business management books, Markup and
Proft; A Contractors Guide and Proftable Sales, A Contractors Guide has
more than four decades of experience in the building and remodeling industry. He provides
Coaching and Consulting services for construction companies throughout the U.S., as well as
products and other services to assist contractors with their business management needs. He can
be reached by e-mail at michael@markupandproft.com, by phone at 1-888-944-0044, on
the Web at www.markupandproft.com or at his new Web site, www.myconstructionbiz.com.