In this, the fourth part of the Building Insights series brought to you by Construction Data Company (www.cdcnews.com) in cooperation with the Stevens Construction Institute, (www.stevensci.com), we address the value of marketing and data.
Marketing precedes selling. The two key functions of marketing are:
Understanding the market in which the firm operates; and, bringing prospective clients to a point at which they’re interested in the firm’s services.
(Note: In order to assist our readers, we have provided supporting spreadsheets that may be accessed through links in the text. We recommend you save the spreadsheet locally before you close it to preserve any changes you decide to make.)
In order to accomplish the first function, construction companies must not only conduct a self-analysis to determine their ideal clients, location, and types of work; but also, determine the percentage of market share that the firm’s work represents. Market share is the value of work won by the firm divided by the total market value of work available. (See: Market Share Scenarios) This can be extremely difficult due to a lack of reliable data. Although a single, specific percentage may be difficult to accurately pinpoint, firms should attempt to determine a mean market share based upon the trend of data which is graphed over the course of a year.
Construction Data Company can be of some assistance in this endeavor. One way to gauge market share is to compare the amount of work completed by the firm against that of other firms. CDCNews’ Lead Manager can provide a 90-day window of historical data including the work on which a firm has bid. CDCNews’ new Commercial Construction Market Intelligence allow subscribers to search CDCNews’ bidding archives by companies or geographies all the way back to 2009.
In order for market share to make sense, it must be viewed in relation to a profitability number. It is recommended that contractors calculate their Gross Profit Percentage, which is what remains from revenue after direct (or field) costs are deducted over a specified period (quarterly or monthly). Just as with market share, gross profit percentage is tracked on a trend line. Comparing the two trends shows the results of a con-tractor’s work acquisition efforts – the ability to gain work and the profit margin while doing so. In order to provide the clearest picture of how gross profit percentage and market share compare, it is recommended to view both values over a three year period. (See: Three Year Trend on Profit and Market Share)
There are nine possible interpretations of this data:
1. Market Share Up / Profit Percentage Up – This is the ideal situation. The firm is winning a higher percentage of bids and earning more profit on each job.
2. Market Share Level / Profit Percentage Up – The company is keeping market share while finding more ways to profit.
3. Market Share Down / Profit Percentage Up – The firm may be taking the opportunity to price higher and lose market share, but gain in profits.
4. Market Share Up / Profit Percentage Level – The company is keeping profit level but also winning more work. At a future date, this can be “harvested”.
5. Market Share Level / Profit Percentage Level – The company is holding its own, not gaining or losing in either area.
6. Market Share Down / Profit Percentage Level – This is a red flag. The firm is losing profit. Are clients leaving the firm?
7. Market Share Up / Profit Percentage Down – This happens when the contractor attempts to “buy” market share by cutting profit margins. The firm is working harder for less profit.
8. Market Share Level / Profit Percentage Down – The firm’s market share is maintained, but its profitability is losing ground. In this case the economy may be poor and the firm has had to cut its margins.
9. Market Share Down / Profit Percentage Down – This is the most stressful business scenario. The firm is winning fewer bids and at a lower profit margin.
Construction firms can utilize this quantitative model to generate discussion among the firm’s management team, assist in spotting negative situations and/or opportunities for growth, and even measure the performance of sales people, field supervisors, and division managers. This has become even more imperative in today’s market. Construction has become a sophisticated, data-driven profession. Contractors can no longer rely on their gut feelings. They must utilize data to make educated decisions regarding their marketing and work acquisition efforts.