Inside the mind of contractors

The fact that contractors and remodelers have been losing bids over pricing should come as no surprise. They’re under tremendous pressure for price concessions from homeowners, and if they want to stay in the game, contractors have to lower their prices somehow. But how they choose to cut costs through purchasing, and what goes into their decision-making process, is the subject of a newly released study by L.E.K. Consulting, a global management consulting firm.

The survey of more than 500 residential contractors, all of them business owners with at least three employees and five years of experience, revealed some interesting observations about the way pros use social media, how they judge “sustainable” versus “energy-efficient” products, and their unwillingness to “trade down” to cheaper brands when purchasing building materials. And lumberyards will be pleased to learn that their customers are, for the most part, loyal. Although many shopped at big boxes for more competitive prices during the recession, that trend is starting to reverse itself, according to the survey. Contractor loyalty to the two-step channel, as measured by those willing to pay a price premium to shop there, increased from 3.4% in 2010 to 3.8% in 2011.

“The two-steppers right now have the most loyal customers,” said Rob Rourke, VP growth strategy and M&A for the company’s Chicago office. “The big boxes would have to discount their merchandise more deeply to lure away [these> customers.” In the survey, contractors rated big boxes the lowest on the loyalty scale for the second consecutive year. They cited delivery speed, stock on hand for immediate purchase and contractor services as underperforming areas.

Yet the survey participants said they comparison shop across channels to get the best price for the products they trust, instead of buying less expensive brands or lower-grade products in response to competitive pressures. More than 50% of contractors indicated that they have used the Internet for price comparisons, and another 40% expect to conduct more purchasing online during the next three years.

The survey also asked contractors — a sample that took in framers, window and door installers, kitchen and bath remodelers, roofers, and general contractors who do room additions — how they use social media in their jobs. The answer was a little surprising: YouTube.

Pros are increasingly turning to the Internet to find instructions or videos on how to install new products or handle difficulties that arise. If a manufacturer’s website offers little help, there’s usually a video posted on YouTube of somebody who performed the same job or encountered the same problem.

Take the example of installing a vent fan in the bathroom. “Contactors are turning to YouTube to learn how to install the fan from the [ceiling> underside without going into the attic and rolling around in the insulation,” Rourke said.

But many of these “how-to” videos are posted by altruistic remodelers who are just sharing their expertise.

“The branded building product companies have been late to the dance in using social media to interact with their customers,” Rourke said. But then he noted a number of exceptions: CertainTeed, US Gypsum, Tapco, Emerson Electric and Owens Corning roofing.

Bruce Graf, president of Graf Development in Dallas, doesn’t see himself as a Facebook kind of guy. But he’ll watch installation videos on YouTube if he purchases a unique tool or product. A recent example is a trough or “infinity” drain in a shower.

And then there’s Pinterest.com, the popular new website for posting creative ideas, designs, recipes, fashion and everything in between. A designer he worked with on a project established an account so they could trade ideas back and forth with the homeowner. After that, Graf opened his own account and began posting some photos of his competed jobs. They proved to be popular; at press time Graf Development had 55 followers, and a number of Pinterest members have reposted his photos on their accounts. “I’m really stuck on it now,” Graf admitted.

Although Graf didn’t participate in the L.E.K. survey, his view on channel shopping are in line with the results. He buys his plumbing supplies at Ferguson and his lumber at an 80-year-old independent lumberyard in the Dallas area. “I want to see them survive,” he explained. Home Depot is for “basic stuff.” Graf eschews Internet purchasing and cringes when his clients order supplies online because they’re cheaper.

“The product shows up and it’s not the right product and it slows everything down,” Graf observed. He also noted that when the homeowner’s budget gets tight, “they’ll eliminate the green features.”

The L.E.K. survey found a big divide between “sustainable” (eco-friendly) and “energy saving” in the green products sector. More than half the contractors surveyed said they were willing to pay more than a 10% premium for these product attributes. But when the researchers dug a little deeper, they found that residential contractors were much more interested in the energy-saving products, while commercial contractors’ purchasing decisions were equally influenced by both.

L.E.K. consultant Rourke surmised that residential contractors are influenced by their clients’ appetite for anything that reduced their energy bill. But unlike commercial customers, homeowners are generally impatient to realize their energy savings. “They don’t get into the market unless the payback is three years,” Rourke said.

Commercial projects, on the other hand, are focused on the bottom line: cash flow. And if they’re aiming for LEED certification, the sustainable products will gain them more points.

Todd Jackson, CEO of Jackson Design & Remodeling in San Diego, guides his residential customers toward energy-saving improvements that may not seem dramatic at first. Reflective-coated plywood in the attic, motion-activated light switches in powder rooms and pantries, and insulation in interior common walls all come standard in the firm’s custom homes and remodeling projects. In most cases, so do tankless water heaters.

But when a client asks one of Jackson’s six project designers about solar panels, the firm sits down and does the ROI for the homeowner.

“We get asked many, many times about putting solar in, but in many cases, it doesn’t calculate out,” Jackson said.

When it comes to sustainability issues, consciousness usually prevails. Two of the firm’s clients have requested elaborate rainwater collection systems, and the estimates fell in the $14,000 to $20,000 price range. One homeowner went ahead with his plans; the other didn’t.