Why You Need to Know Your Margins

Welcome to a game-changing episode of "How To Sell More." This episode dives deep into the world of construction and sales. Our guest, Stephen Scoggins, shares an eye-opening point: knowing your costs can make or break your business.
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Here's what you'll learn from this episode:

• How delivering top-notch service can give you a competitive edge.
• Why understanding your costs is the secret sauce to business growth.
• Strategies for scaling your business without losing your shirt.
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Don't miss these golden nuggets of wisdom!
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Meet our esteemed guest, Stephen Scoggins. He's not just a business owner; he's a titan who owns seven high-revenue businesses. With a podcast boasting over 4 million views, Stephen has insights that you won't want to miss.

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Key Takeaways

• The Importance of Service Excellence - Companies can gain a competitive advantage by going the extra mile in service, which can also justify higher margins.
• Understanding Costs Is Crucial - Knowing the costs involved in every aspect of the business is essential for growth and scaling.
• Strategies for Effective Scaling - Companies that scale successfully are often those that are able to adapt and innovate in both their service offerings and cost management.

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Top 3 Reasons to Listen

Unlock Competitive Advantage: This episode reveals why understanding your costs is not just good business sense but a competitive advantage in the construction and sales industry.

Scaling Strategies: Learn effective strategies for scaling your business, including how to balance revenue growth with cost management for sustainable expansion.

Tactical Steps: Beyond high-level strategies, the episode provides actionable steps that you can implement immediately to see tangible improvements in your business.

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More About Today's Guest, Stephen Scoggins

Serial 9-Figure Entrepreneur |Helping Entrepreneurs WIN AT BUSINESS! | Unstoppable Show | As seen in Forbes, Entrepreneur, Wall Street, & ABC
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Stephen Scoggins spent two decades tirelessly working, yet consistently fell short of his aspirations. Plagued by limiting beliefs and tumultuous relationships, he found himself stuck in a cycle of self-sabotage. His life took a pivotal turn when his mentor, Steve Myrick, jolted him with two transformative questions and a challenge. Suddenly awakened, Stephen became determined to shatter his limiting beliefs, surmount his barriers, and craft a life of significance. Now emancipated and laser-focused, Stephen is on a mission to share the invaluable lessons that propelled him from despair to unwavering confidence.
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Many recognize Stephen for his impressive achievements:

• Proprietor of 7 successful businesses
• Employer to hundreds of dedicated individuals
• An entrepreneur, father, and even a proud grandfather
• Host of the “Unstoppable with Stephen Scoggins” Podcast, with over 4 million views
• Engaging with hundreds of thousands of avid followers weekly
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However, these accolades merely scratch the surface of Stephen's journey. He firmly believes that if he could rise above his challenges, then anyone is capable of doing the same. Today, his prime objective is to guide others in showing up fully in their lives, transforming their challenges, and significantly elevating every facet of their existence.

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A Transcription of The Talk

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Mark Drager: Mr. Stephen Scoggins, you are the CEO of an $80 million company in the southeast, in the construction industry in the trades. You have 63 full-time employees, 380 contractors, and you've been doing this for 25 years. So I cannot wait to dig into what we can better understand, what we can all learn about how the trades approach sales, how it approaches business. And ultimately, like you, you know, you're cracking on $100 million of revenue, you're knocking on that door. So I feel like there's a lot we can learn from you. So let's break this down. How can contractors, how can those of us in the trades sell?

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Stephen Scoggins: More. It comes down to really two things. One, focus on service, and I'll break that down in a second. And number two, understand your costs. Those two things are pivotal in growing and scaling. Really, any business, it doesn't have to be construction. It just happens to be very specific to keep a margin erosion from happening in your business. On the service side, let's look at it this way. You got two contractors. Contractor one shows up to do a quote, do an estimate, spend time with whether it's a GC or whether it's a homeowner or whatever, commercial contractor, and they show up muddy boots. And then they walk through the property with muddy boots, and their mud is mud everywhere. Maybe they don't smell the best of the world. Maybe their shirt's not tucked in, right? That's one vibe. Whereas a company like mine is gonna walk in, shirt tails tucked in, super nice and neat, nice boots or shoes on, the little booties on their feet. Like, who are you gonna buy from? Who has already given you a semblance of professionalism, who's already kind of setting the tone for what's supposed to be there? So to me, service is nothing more than excellence in the ordinary. So how can you take whatever your service is, and up, notch it to three, four, or five levels to create an environment of excellence in the ordinary? How do you do your quotes? Do you get a set of plans, for example, in the construction industry? And you do a quote, you send back a bid? And that's it? Or do you get a set of plans? Do you have formal communication? Going back clarifying the different things that would go on with a set of plans with the client? You'd be opportunities to connect with them, maybe you're going to take it to the next level and actually send them a very formal document, a very formal scope, that looks really nice. And rather than just sending it to their email box, you set up a time either via Zoom nowadays, or in person, to formally go through and make sure they can digest to understand the true value they're getting. Because a lot of times, especially in the service side, what happens is, your competitors aren't thinking about the extra levels; your competitors are just chasing the deal. And what happens is, if you could chase the deal with a level of excellence and a level of servitude behind it in comparison, you're gonna get more deals than they're gonna get. And you're gonna get more deals at higher margins, or you're gonna get because people want to pay more when they know that what they're getting is valuable. It's that simple.

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On the second side of things, so one of the things that I see with a lot of businesses, it doesn't have to be just construction, but a lot of businesses in general, is they have no idea what goes into their costs, their COGS, right, cost of goods sold. They don't know how much it will use the construction terms to make it easy. How much do nails cost? How many nails do you need? How much does lumber cost? How many pieces of lumber do you need? What type of lumber do you need, right? Being able to itemize all of these costs down and understand how much each incremental piece happens, actually gives you a lot more clarity on what you should be going to market with price-wise. You know, and I know I'm not sure about Canada, but I know here in the States, eight out of 10 businesses fail. One of the top reasons, top five reasons that businesses fail is not being able to actually charge enough or understand the charging behind the cost. It's a cost-plus scenario, a lot of businesses or cost-plus. A lot of businesses won't take the time to like, you know, I've got multiple departments in the construction business, you know, one that handles remodelling, one that handles new construction, one that handles commercial, etc. Each one of them has their own P&L, but I have team members, for example, that are in charge of multiple departments. Well, we've got as far as to say, well, you spend 30% of your time in new construction, you spend 30% of your time over here in commercial, you spend 30% of your time remodelling, by the way, there's another 10% coming from, right? And when you do that, you're properly weighting your cost. So when we actually go to cost that a project, we know our cost, therefore we know where we have to hold the line, or maybe where it makes sense to actually have what we refer to as a gravy or fixed cost.

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Okay, I'll try to break that down even a little simpler if I can. Let's assume for a second that you have an opportunity to get a large client. There is a high-volume client, but they want you to be 5% less than what you would charge another client that's nowhere near their size. Okay? The mathematical equation is, if you understand your cost, then the next step in the process is you can actually look and see, okay, at what point do I break even and cover my cost? And now that every dollar over that is a win. So sometimes it could make sense to give the person a five or six or eight or 10% discount if the volume is there because, over a certain amount of time, you already covered your fixed costs. And now everything's gravy. See, by understanding where your costs come from, you are better positioned in the marketplace to dominate your specific sector.

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Mark Drager: How early into your business did you try to bring on professional estimators or people whose sole job it was, was to simply go out there and provide the services? You're talking about meeting with people, account managing, whatever you want to call it, and also being able to run all these numbers, because it takes a lot of bureaucracy to be able to have these types of details.

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Stephen Scoggins: Yeah, it's interesting because I don't know there was a key moment in time where I was probably seven or eight years in business before I realized that my mom and pop mentality, me because it was just me and a hammer for a long, long time, and some subcontractors was going to have to change. We were going to have to increase the level of sophistication and the data that goes into sophistication. So for every single entrepreneur out there that's trying to grow a business, the scale of the business, your business, and the sophistication of that business should scale at different revenue markers by for construction, it's $1,000,000, $10 million dollars, $50 million, $100 million. Okay, your level of sophistication has to drastically increase, which could mean, maybe you need a high-powered estimator, maybe you need a purchasing manager, which is great. But even if you have those people, if you don't have an ERP system that's sophisticated enough to handle the data that's going in and out, you're still going to have a broken mess.

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So one of the things that I like to do with entrepreneurs specifically is I like to teach them that there's really five phases or five drivers, right? There's the scale, the startup phase, the testing phase, the investing phase, the scaling phase, and then the operator sell phase. Most entrepreneurs can go from startup to testing within the first three years. A lot of entrepreneurs can't go from testing to scale up within the next 10 years because of sophistication, right? So while it's good to understand that you need certain team members, you have to prioritize when you hire them based on your level of need. But more importantly, you also need to make sure that the systems in which they're using and operating are actually driving up profitability, not decreasing it, which takes time, it takes a lot of forethought. And as a high-driving person who loves to start businesses, you know, I got a few businesses and I can't help myself, I love business. Like it's fun for me, right? So it's an innovation-creation mentality. For me, one of the things that I've had to do is I've had to force myself to slow down and put in the infrastructure so that businesses can stand on the infrastructure. So it's a long-winded answer to say it's never really a perfect time to hire a key team member other than when you can afford it, one and two, when your system dictates that you're missing a key piece.

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Mark Drager: Like for the longest time when you can afford it? Or do you think slightly before you can afford it, it depends on your model.

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Stephen Scoggins: It really depends on your model. I'll give you an example. So you know that I also have a thought leadership business in that kind of sector. When you go to market things in the thought leadership sector, there's a lot of expense on the front end, but you also get paid on the front end. So therefore, you actually have cash in theory for doing the job right? To hire people ahead of the growth. Whereas construction is a little different. Construction, you get paid after you complete said work after a certain amount of timeframe. So the only time it really makes sense to actually see that you need to hire ahead in a construction mentality is when you can, by definition, look at your entire sales pipeline, your backlog pipeline and say, “Hey, guys, we're about to be hit by a tsunami, we need to start we're looking at hiring these key positions, 30, 40, 60 days out.” So it's a different type of model that requires different thinking when you hire that person.

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Mark Drager: I remember when I was younger, hearing a conversation by a man named Harry Rosen, who built up a very, very large retail chain of designer high-end clothes, suits and things like that. And I remember him saying that in the fashion business specifically, you know, you get the materials, but you gotta wait 60-90 days before you have to pay. And so he was able to scale and grow his entire business on cash on hand because simply he was getting the stuff from Boss and from all these other places, he would sell it. And then he would get to keep the cash for like 45-60. I mean, if it was quick enough, sometimes like 80 days, he would be holding on to someone else's cash before he had ever pay out. I hadn't really considered that that would be a huge player and who you would hire. Now, if you had to go back and do this all again, I'm sure you would make a lot of changes. But talk to me about the difference between focusing on residential clients. So for any type of business where it's like the one-off versus maybe a large, like a large residential builder, a large subdivision, something where, you know, what's the difference between trying to sell each one-off to each individual client versus trying to go after that large whale, where they're gonna give you 300 installations or 500 or 1000 or a year over a year? Maybe they're a great partner, and you're gonna work with them for five or 10 years. How do you look at that?

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Stephen Scoggins: Well, I kind of mentioned to you this way. So again, we have three core departments. We have a remodelling arm, which is Direct to Consumer, Direct to Homeowner. We have a new construction arm which is direct to home builder, national home builders, regional home builders specifically for us. And then we have the commercial contractor which will do multifamily student housing, things of that nature. With remodeling homeowner, you need to understand what it is they want. They want to make sure they don't get taken advantage of more than anything else. To all of your messaging, all of your pricing, all of your estimating, all of the handshakes, all the phone calls, all the emails have to come to them in such a way that they realize that you are someone that they can trust. Through if you are someone they can trust, and they feel like they can trust you, they'll actually pay you more because they can trust you. You know, one of the things that kind of pops up in my head is Mike Holmes. Was it Mike Holmes, right? I think it's right. Yeah, Holmes on Homes, so he, you know, he walks in, he's like, "Everything's crap. We have to do it all right."

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Mark Drager: You know, he built an entire certification franchise program where people could buy into a Mike Holmes-approved contractor that charges a premium. And it's almost like a franchise system. Yeah, specifically, because he's built up so much trust.

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Stephen Scoggins: Exactly. So that would be how I would handle working with a residential homeowner. The problem we run into with residential homeowners specifically is it's really difficult to find salespeople, or what we call home consultants, that don't want the quick win. In other words, we're a relationship-based company. And it may take you one or two or three visits before you're formally signing a contract. A lot of folks in this area are do the one call closer, they'll really write the quote on a napkin and walk out the door, which I just don't understand how that's even a thing still. You know, the new construction side is different. The new construction side is you are doing a lot of bidding, not knowing if you're going to be awarded this stuff. And then you have to watch the RFP process.

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Mark Drager: Is that how it works?

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Stephen Scoggins: Yeah. So essentially, there's a couple of things. First of all, you have to get into the network. So when I first got started, my first customer was an old man Marik, which you and I've talked about in previous discussions before, small home builder, but very successful. Okay, so I was a good old boy, country boy living in the trailer park, that kind of deal. And he gave me a shot. And essentially, that's how it started. However, from working with him, to working with a national home builder, there were probably three things that I had to really work on. Number one, I had to start creating very detailed bids. They don't allow you to just pencil whip anything, they want to know exactly where every dollar is going. So when you know, that's what it goes back to that concept of knowing your cost, they actually taught me in that grand scheme of things we have, we want you to tell us what your cost is, right? So they call it a TCO program, which is a total cost of ownership, how much does it cost you to service our business, which is a little invasive, but the reality was, at the end the story, they were looking for sophistication? Do you have the processes and systems in place that if we gave you 1000 homes right now that we don't have to worry about this caving in on you. So there's the there's the sophistication piece, on top of that, they're going to require that you have very, very astute team members, team members that are actually used to operating in large organizations, which is why most contracting companies will last 2, 3, 4, or 5 years, and then they fall away. It's because they can't make the leap from good ol' boy to a sophisticated class. The commercial sector is a little bit different. The commercial sector is even another level of sophistication, another level of detail, another level of micromanagement, another level of safety protocols. Each one of them essentially starts off with a train of "Okay, I can do this on my own. Okay, I can do this with a few people. Okay, I can do this with a management team. Oh, crap, I have to do this with an executive team. Oh, crap, I have to lead an executive team." You see what I'm saying. And that's the evolution of those three departments. And after 25 years, thank God, through ups and downs, and everything in between, COVID, supply chain issues, and all kinds of stuff, we've managed to be pretty successful overall.

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Mark Drager: Now I can understand why you might have each of these departments because they have a different target, they have a different mix, maybe some are more or less recession-proof even, maybe there's time to cash or the margins are different. But if you had to suggest which one is the best that you focused on, let's just talk money, you know, which one is the easiest and best to sell once you figure out how to be good enough.

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Stephen Scoggins: This is so this is a learning lesson. So there are a lot of people that specialize in any one of those departments, any one of those revenue lines. Fundamentally, I believe that there are two things that every business must have to be successful. And one is called a margin maker, a part of your business that is high margin, high ticket, low cost, and then also with recurring revenue. Recurring revenue gives you cash, margin-making gives you profit, which gives you an abundance of cash to do other things with, whether it's investing or new equipment, your team, buying a house, whatever. The reason you need both is because the margin makers, at least for us, historically are going to be in the remodel sector and the commercial sector. You can charge a higher gross margin on those projects because of the level of sophistication that's needed to service the client. The new construction arm historically has much lower margins but very consistent cash flow. So if you look at remodeling, you look at commercial, for example, both of those have a time and time on money exchange that is very delayed. You do the work, you're waiting 30 to 60 days to get your money. New construction, on the other hand, has a reverse time on money demand. In the new construction arm, you do the work, you get paid 7 to 8 days later, maybe 30 days tops. You need cash flow to operate your company, right? You need cash flow to pay for fuel for the trucks and an extraction business, pay for your ERP system, pay for your estimators, your production managers, and all that kind of stuff. I don't know that, at least in today's time, I would choose one or the other. I think that they all bring value to the table. But if I had to start over again, I'm going to start with the recurring revenue model first, rather than the margin makers simply because you need cash to build your business first.

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Mark Drager: My agency that I started in 2006 was project-based, it sounds like it's very similar to what you're seeing on the commercial side. We did have to finance all of the projects because typically, we would get cash 30-45 days. Sometimes we had some clients where it's like 180, like they would wait six months, government. And one of the things we had to prove is that we could finance the cost of our own growth. But it was extremely high margin. We had to sell each project, we had to deliver each project. And so there was no recurring revenue. But there were recurring clients. And it as long as I carefully managed cash and was fairly conservative, I loved the fact that in the high-margin business like that, I could afford to almost charge anything, like make it much more value-based because I knew I could cut the margins way down if I had to do a budget project, or I knew that I had room to charge a lot more because there's a higher perceived value. Yeah. But as I'm saying this out loud, I realized that I operated as the good old boy. And when you're in a high-margin business, it's easy to be a good old boy because you're like, "Yeah, we'll figure it out later."

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Stephen Scoggins: Yeah. So I mean, you know, that the business you referenced earlier that, you know, did you know a little or at least last year, collectively, that company, I started with no money, no credit. And now the trash piles, literally building my lumber, ladders, and whatever the trash piles. I say all that to say that, for me, cash was King and I needed to create cash as quickly as possible. I also realized that one of the reasons the margins are much lower in the new construction sector is because of the layup is because of the level of saturation. So if you're doing something with any business, and it's not overly saturated with competitors, and all this kind of stuff for extended market pressure, so right now in the States, where our Fed is continuing to screw up our economy with their interest rate hikes and whatever. In quantitative easing. Yeah, quantify that. I call it quantitative being idiot, but you know, soft landing, I'll just keep planning better. All that. Anyway, let's stay away from that one.

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The level of saturation in the construction industry at the new construction level, because it's such an easy business to get into. Because if you have a tool belt and a ladder, and in a lot of cases, you can at least get going. Not a lot of licenses in the specialty trades that are needed, etc. Where on the other business models, there's a lot more required, and it's a lot more cash-heavy to get into. So I funded our entry point into the commercial market with $600,000 of my own money. But it became I'm looking for compounding. I want to see an ROI on time, talent resources on a consistent basis. I say all that to say that, some again, I think it's very industry-specific, based on where you are in the business, right.

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So if you can afford to wait for your time and manage cash, most business owners don't know how to manage cash. It's a very dangerous game if you don't know how to manage cash, if we're waiting on delete, delay receivables for that length of time, what if you're good at it, you got a good CFO, and you got people that can cash manage it, maybe it's something you could do, because you know, six months later, you're winning big and all of a sudden you got a big pot of cash. And maybe that's what you need to fund your operations moving forward. And kind of rather than having to finance every, every new deal.

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At the same time, if you're an entrepreneur that's bootstrapping it, like I have with all the businesses I've done, you've seen me work on building a couple of them, I fund the whole thing. Like I fund them till they work or they don't. And if they don't work, then you know, eventually shut them down. And if they do work, then I continually do what I do, right. So for me, it comes down to perspective, it comes down to choice, it comes down to which way, which direction you want to go. But again, at the end of the day, in a perfect world, every single business model should have a reoccurring revenue model and a margin maker. Now you might have five margin makers and have one reoccurring revenue model, but at least you have cash flow so you're not having to borrow money. I've watched a lot of people unfortunately, they borrow their way into future growth. And then they realize that future growth is not there and they go out of business. So I'm very big into recurring revenue and margin making, not either or.

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Mark Drager: Such great lessons. Steven, I can and often I do try to talk to you all day. We'd like to keep these episodes short. So as we wrap up, can you share with me your one tip, your one strategy can be anything having to do. It doesn't have to even be with your industry. But what is your number one tip, your number one strategy that you can give us on how to sell more?

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Stephen Scoggins: Number one tip I can give you on how to sell more is: Do not be impatient. Make sure your process of excellence is a perception of the buyer. The buyer will always pay more money if they feel like the value is there. If you rush through the process and you're rushed to just get stuff out, then you're not going to have the time it takes to actually create a value proposition that everybody has to have. Right? So don't rush it. One of our mutual acquaintances or whatever this, you know, everybody's been talking recently about Alex Rosen. He's so awesome. Like, he's been at this for 12 years. The thing he just launched, he was at it when he was putting that thing together for two years. And he busted it. Use that perspective, like Don't be impatient to just to get something to market like, be like really intentional about how you're bringing it to the market, what you're going to charge for it, what your costs are. And I think if you can avoid impatience, you can do some pretty amazing things.