This question comes up a lot: What percentage of revenue should Home Performance contractors spend on marketing?
Traditional marketing wisdom says that a service business should spend 5% or more of its revenue on marketing, but that newer companies who need to invest in brand-building could spend up to 15% of revenue. Steve McKee recommends on BusinessWeek that businesses pick a percentage to devote to marketing, so future deliberations are framed in terms of “how should we spend this money?” rather than “how much should we spend?” or “can we afford this?”. This makes sense, but what’s the magic number for Home Performance businesses?
Contractor marketing expert Darren Slaughter suggests that most contractors should be able to get away with devoting 5-10% of their gross sales towards marketing, but that a business less than 5 years old should plan to spend at least 15% of gross sales on marketing.
Home Performance contractors, of course, have considerations that other types of contractors don’t have. Namely:
Home Performance remains largely unknown to the average homeowner.
As much as we’re doing to change this (see Energy Circle CEO Peter Troast’s article in this month’s Home Energy Magazine), the simple fact remains that the average homeowner is unaware that our industry even exists. They may have mold problems, they may have drafty rooms or high utility bills, but they don’t know how to fix these problems because they don’t know about the whole-house approach.
In the course of a company’s marketing life, you spend more when you’re introducing a new product or a new brand. It’s a pretty fair assumption that Home Performance is a new product. This would suggests that a Home Performance business’s marketing budget should be greater than other types of contracting businesses.
Consumer Marketing Costs More.
While components of our industry sell to other businesses, such as Raters and Insulation Contractors, most Home Performance businesses are marketing to consumers. That audience is less targeted than say, builders, and therefore generally costs more. Your conversion to sale will be lower, and thus you need to get your offering in front of more people. And, of course, that costs more.
Home Performance projects are typically smaller than many remodeling jobs.
“Contracting” is a broad category, grouping together builders of multi-million dollar homes with small-time drywall contractors. Home Performance contractors fall somewhere in the middle here. At the end of the day, the cost to obtain a job (cost per acquisition) has to be a fraction of your margin on the job.
So what are comparable industries, and what are they spending?
Adams Hudson says the industry average for HVAC is 4.3%. That’s lower than McKee and Slaughter recommend, but that makes sense: HVAC contractors are often partnered with builders so don’t need to market to homeowners directly. And service contracts are repeat business that don’t require much marketing.
Remodeling Magazine says the benchmark for remodeling companies is 3%, but that that figure is slightly skewed since many remodeling companies have no deliberate marketing plan at all, relying solely on word of mouth.
The Green Homes America Model.
At the ACI Home Energy Summit in Austin in 2010, the CEO of Green Homes America stated that they had been paying about $400 per acquisition. At first, that sounds like a lot of money to pay just to get a job, but let’s say the average HP job is worth $7.5K gross. 400 / 7,500 = 5.3%. 5.3% isn't too bad. (Worth noting, however, that Green Homes America is an established, well branded company. A less established HP contracting firm might have to spend more than that.)
We won’t pretend to have the silver-bullet magic number here. The age of your business, the size of your business, the intricacies of your market (whether you’re in Boulder or Wasilla) all play a role. But looking at Green Homes, looking at the recommendations of Slaughter and McKee, and looking at the benchmark of the HVAC and remodeling industries, we think it's pretty clear that you should be spending at least 5% of your revenue on marketing.
What do you think? How much are you willing to pay for a job? How much for a lead?