When thinking about adding a new service, one of the first things to look at is any new equipment and training that will be required, and the amount of business and margin you'll need to bring in to recoup that investment.
What kind of expertise will you and/or your employees need to compete effectively and profitably in the new service?
For many landscape contractors, service diversification is proving to be an effective way to add value to client relationships—and to stand out in an extremely competitive marketplace. When done correctly, diversifying can also drive growth. When done incorrectly, however, diversifying does nothing more than spread your company even thinner, and put your livelihood even more at risk.
"Contractors don’t always take into account everything that goes into adding and sustaining a new service,” says consultant Dickran Babigian of Navix. “There is also the cost of potentially losing focus on your core service that produces the majority of your sales and profit."
Another thing contractors don't always do is explore their options for diversifying and/or expanding. Sure, it could make sense to begin offering the service yourself. But according to Babigian, more contractors are finding out that merging with or acquiring another contractor makes even more sense.
"There are plenty of opportunities for mergers and buyouts in today's market," Babigian points out. "Many company owners are coming to the conclusion that they just aren't going to make a lot of money as a small company anymore. The time is ripe to be talking with other independent contractors about joining forces."
First things first, though. Let's explore the concept of offering a new service in-house.
5 questions to ask before adding a new service
When adding a new service, you have to consider the following if you want it to truly be a profitable success:
- Do you have expertise in the service you want to begin offering? This includes your existing employees. If not, where are you going to get the expertise and how much time and money will you have to invest?
- Could you hire someone with expertise to act as project manager to spearhead the effort? This is where some contractors are finding that mergers and acquisitions are a good way to go.
- How many competitors will you be up against, and what is the quality of those competitors? Everybody and their brother are in the maintenance business these days, for instance. On the other hand, the irrigation business is less cluttered. Is there room for you in the market? Can you steal share from some existing contractors?
- Based on competition and the nature of the target customer, will you be able to price this service the way you want to? The price wars are raging everywhere, but are even more intense in certain service sectors. Know what you're going to be up against.
- What kind of new equipment will you need to offer this service? Buying a $2,500 consumer-grade zero-turn mower represents an easy-in for a start-up maintenance contractor. Getting into irrigation, tree care or hardscaping, on the other hand, will require some investments in new equipment.
Write out a plan
“If you’re going to add a new service, you need to do some serious research,” Babigian advises. “You should really write out a business plan to help ensure not only a successful launch, but also a two- or three-year period where you will strengthen and grow the business."
Here are some additional questions you should answer in your written plan:
- What kind of sales volume do you want to do in order to deem this service addition as worthwhile?
- What kind of profit margin do you want to earn?
- What kind of ROI period are you hoping for with respect to the new equipment you have to purchase?
- What kind of ongoing training is going to be required of you and/or your employees?
- Will you need to institute any new forms, reports or procedures in order to offer this service? If so, what kind of training will be needed?
- Going one step further, will you need to invest in new software or other technological tools?
- What kind of marketing investment will be needed? Are you going to order all new business cards, invoices and letterhead? Are you going to re-letter your trucks, re-do your website and update all of your signing and other branding tools? Are your existing customers demanding the service so your existing salesmen can do upsales, or is it going to be a new market segment that may require the addition of a new salesperson?
Babigian says he would normally give a new department two or three years to sort itself out and shape itself up. The problem is that in today's market, you might not have that long. That's why it's important to explore all of your options when thinking about branching out. Diversification can prove to be the best thing for your business, but it could also be the thing that kills it if you misstep.
Dickran Babigian is the president of Navix, a consulting and software firm specializing in financial management programs and systems. Navix specializes in training and software that helps contractors monitor and manage their most valuable resources—time, materials and money—to improve productivity and profit margins. Email firstname.lastname@example.org or call (617) 828-1122 for more information.