One of the recent Flywheel Effect podcasts I co-host with my business partner, Brent Sonnek-Schmelz, covered the current economic environment and what it looks like for luxury home service companies. There is a lot of information — and a lot of uncertainty — around this topic, and I thought it would be valuable to discuss some of our findings here.
What brought this topic to our attention was that in March it was revealed that inflation was up 3.5% over the prior year, which was higher than what was expected. That has had a dramatic impact on what we’re seeing with interest rates and the buying capacity of consumers, which, naturally, affects our businesses.
Inflation hasn’t put a halt to our businesses, especially in the luxury end, but it has had an influence. About half of VITAL members are experiencing — or have experienced over the last year — a reduction in new project closes or projects taking longer to close.
Part of the reason for this is because of what happened during the pandemic. Because we’re in a project-based environment, new sales that happened during 2020, 2021, and 2022 are trailing off. Those projects are getting completed. Now we’re starting to see a lower sales trend over the last year for about half our members, which is not broad, but it’s enough to make us pay attention.
One of the areas that inflation is going to affect dramatically is the cost of labor. Wages are going up. It’s going to be harder to find labor to do the work and you might have to pay them more to get them on your team. In this economic environment, it’s unclear whether you’re going to be able to transfer those expenses into higher prices for your customers.
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Financing costs are also on the rise. If you are buying a new truck, you’re paying 10-12% interest instead of 2%.
The small percentage of luxury home service companies that are paying attention to those metrics will be in good shape. However, those that do not — which are the majority of them — are going to find themselves upside down.
Survive and Thrive
VITAL’s advice to all luxury home service providers is to make sure you have sound business fundamentals. You must have the right margins and cash flow in place or things can turn quickly. And it doesn’t matter how big or how small you are. The problems are the same — they just have a different number of zeros at the end.
Think about this as an opportunity. The companies that can dial-in their metrics, have solid cash flow, and not finance payroll out of deposits, for example, will have equity in their business and will be able to get credit somewhere. They are going to watch their competitors who are not running good businesses wither away and close, which means that when the economy turns around, they’re going to be there to pick up all the big jobs.
As for raising prices, I understand it is tricky — especially because you don’t know what your true labor costs will be. It’s always an educated guess. Part of the challenge is staying ahead of that. You work on long-term projects, and your pricing today should take into account what you think it’s actually going to cost you down the road to get this work done.
The concern that I have for those companies that are going to try to hold the line and not pass along those costs is that the consumer ends up losing, because, when you squeeze margins in a business, what ends up getting squeezed is the service. You end up not having enough hours or quality people on staff to do the incredible job that you promised when you sold the project months or years ago. The big cautionary tale here is you might think you are being smart by holding the line on pricing so you can get the job, but it becomes tough to succeed if you don’t have the margins in your business and the cash flow to do it right.
The Housing Environment
There are two components to housing: existing home sales and new construction. Right now, existing home sales are at a 30-year low. While pricing may seem like an issue — houses are at an all-time high — it is not, as they are still selling for the most part. The real problem is that many people can’t move — there are not a lot of people who can walk away from their 3% mortgage that they got 10 years ago.
The developers are no longer expected to build at the same rate they have over the past several years. The companies that are focusing on new home construction or on the move market, which is a lot of remodeling, are going to have an interesting time relative to the businesses that focus on home upgrades for the consumer.
We advocate that our members get as much leading data in their markets as they can, stay in touch with their major home builders regularly, and keep track of the pace of new leads coming in. Sales velocity, not just quantity, is critical for any business.
As far as remodeling existing homes, which peaked during the pandemic, I feel that strong demand is behind us. That is just my prediction, and I’m hoping that’s not the case.
So, mortgage rates are not going down, and neither are business lines of credit. If people have already spent the money in their homes over the past four years, they are likely not going to be spending more other than maintenance. We need to make sure that our balance sheets are in order so that we can weather that storm.
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I cannot emphasize enough the need for every home service business to monitor its leading indicators. You need to watch your metrics, because, in your marketplace, things are going to be different from the macroeconomic environment, and you need to have leading indicators to tell you what’s happening out there in the area you do business.
And of those leading indications, lead flow and sales velocity are among the best.
This is one of many topics covered in recent episodes of The Flywheel Effect, a podcast designed for entrepreneurs, small business owners, and professionals seeking to win in luxury home services businesses. Through a mix of candid conversations and interviews with industry veterans, suppliers, and service providers, the podcast aims to inspire listeners to think bigger and transition from technicians to visionaries. Check it out at podcast.growwithvital.com, YouTube, Apple Podcasts, or Spotify.
