A Position Paper Advocating Progressive Growth Strategies Over Price Driven Growth Strategies as a Pathway to Profits and Independence.

Since it’s Thursday, I figured I would “throw it back” to a position paper I wrote in 2008 for RIA’s Fall Conference. I almost forgot I had written this until a contact over at RIA asked me to write a new position paper to weigh in on how the restoration industry has evolved since 2008. In honor of that request, I thought I would post my last position paper to inspire myself and others. I hope you enjoy!

Manifesto

First of all, I would like to state very clearly for the record that I appreciate and respect the many honorable professionals in the insurance claims community, and the opposition expressed in this position paper does not reflect any conflicting principles with the insurance claims industry or the professionals who work within it.

I acknowledge that both restoration and insurance companies are for-profit entities. They are both built to satisfy the needs of the market and the financial interest of their stockholders. Insurance companies are not there to satisfy our needs as restoration company owners. Insurance companies are driven by one objective only and that objective is profit. Restorers are merely instruments to achieve that objective. I respect that purpose. Without financially healthy property insurance companies we would not enjoy the stable business environment that we all benefit from.

However, I believe it is risky to completely rely on the ever-changing property claims strategies of insurance companies and third-party administrators to support our families, our companies and those families who rely on our companies for their livelihood.

As a restorer, my goal was to create a restoration company that would provide services to victims of disaster in a way that would earn our firm the respect and the referrals of the claims community. My vision for the company was for it to flourish independently with or without claims adjuster referrals. This strategy proved to serve our company, our customers and the insurance community very well.

Also, I do not expect other restorers to agree with me on this matter. I am merely sharing my views on the subject because is something I am passionate about. Anyone who knows me knows that I am not particularly outspoken on a wide variety of subjects, but I am particularly passionate about one.

That subject is freedom – the freedom to be able to run our businesses as we choose without undue external controls. I believe that insurance executives strive for the same freedom for their companies and their industry.

My objective in this debate is not to convince you to apply end-user marketing, but instead, to urge you to develop the highest standards for quality service that will help you earn a good reputation in the community. These high standards will allow you to withstand the pressures of adopting low-ball bidding practices to build your business. I also suggest that you consider opportunities to develop alternative sources of large, profitable jobs for the long-term security of your business.

In the future, the restoration industry will change in ways that are difficult for local restoration companies to predict. Preparing for a secure and profitable future begins with greater independence today.

Introduction

There is a radically new business model being considered by many in the restoration business today. Their strategy is unlike any other in the industry and I believe that their success is detrimental to restoration industry market leaders.

Refusing to support and participate in such an enterprise is beneficial for all restorers who believe that low-price strategies are not congruent with the reliable business principles of restoration industry market leaders.

I am passionate about my personal freedom to run my business as I choose. I am passionate about helping the restoration companies within our organization achieve success without having to participate in some of the drastic price-cutting strategies that have emerged in our industry.

CodeBlue, a third-party administrator, was created to significantly decrease restorer profits while promising increased volume in return. They use rhetorical arguments to convince contractors, who are far too quick to sign up for a free membership, to join them in their crusade for decreased control and reduced restoration prices.

The organization could very well have a sound business model that will help their customers achieve their goals; however, we are not its customers. The insurance industry is its customer. And its objective is to convince you to reduce your restoration prices for the insurance industry so they can offer you up like a “stuffed pig on a platter.” CodeBlue has developed a dynamic price reduction system that has restorers further bidding down the fair market prices established by Xactware.

This example of a “win/win/lose” business model is completely contrary to the model that we always strive to live by which is “win/win” or no deal.

There is no benefit to leading restoration companies if this model succeeds. Its success will hurt those restoration companies that are focused on furthering their success by continuing to improve and evolve and focus on dynamic customer service and sales strategies, not cut-rate prices.

I believe that there is a better opportunity available to us all. Well-designed business management systems and dynamic end-user marketing, combined with more traditional agent, adjuster and broker relationships is a better path to a more stable future.

My Opponent’s position

Paul Gross, President of Code Blue, has been quoted on the RIA website proposing as a rationale for jumping on the price slashing bandwagon that, “Higher volume plus lower marketing cost equals more profit.” This simply is not true in this case. There is far more to this equation than is disclosed in his overly simplified statement.

Gross stated in a past position paper that “the cold harsh reality is that contractors are not a party to or beneficiary of the insurance policy. Therefore they must recognize that it is a futile effort to defy the very customer they serve; the insurance company. The customer is defined by the logo that is in the upper left hand corner of the check you get when the job is successfully completed. While not all in the restoration community enjoy those facts, they are irrefutable by case law.”

He went on to state “…Yes, the insurance client is your customer; like it or not . . . With a combative approach, you may win a battle but you will certainly lose the war. Let’s face it, there is no shortage of contractors in the industry, so if you choose to alienate the paying customers in your zest to pursue the end-user, you will ultimately end up on the losing end.”

Although he stated, “. . . it is never wise to reduce your value to a commodity-driven price basis,” his business model is fundamentally driven by commodity pricing. Computer programs make the contractor selection based on factors that include your lowest bid.

Paul is also quoted as saying, “. . . in reality, collaborative engagements require both sides to meet in the middle.”

My Position

It seems to me that CodeBlue has attempted to persuade insurance companies that are focused on price cutting as a goal to servicing victims by claiming that we are all charging too much for our restoration services and that there is significant excess fat to be trimmed away from “the stuffed pig.”

CodeBlue says it is the best solution for them to achieve the price cutting that is required for the increased profitability they desire. This is completely contrary to the message responsible industry leaders have been attempting to communicate to insurance companies for many years.

CodeBlue implied that if you do not follow them blindly down the road to lower prices, “that you will certainly lose the war.” I feel that beginning a partnership with intimidation tactics is a terrible foundation and is indicative of what we can expect in our future relationship with an organization.

Those that employ what are called “penetration pricing models” in the restoration industry are usually those most desperate for market share. It is a last resort strategy and a poor choice for forward-thinking, well-managed restoration companies.

I believe that an increased volume of low-profit jobs does nothing to improve the health and viability of your restoration company.

Volume-driven pricing reductions are not beneficial for most restoration companies. It is a dangerous alternative to a far better strategy of smart sales development strategies and effective business management.

It is my belief that “meeting in the middle,” which has been suggested by Gross, is suicide when the starting point in the negotiation is a Xactimate price list.

Creating a business environment that is conducive to low-ball bidding wars is not beneficial for market leaders. There will always be those who must resort to the use of the lowest possible price to secure business when all else fails, but it certainly is not the choice of market leaders.

It is often harder at first, but far more rewarding in the end, to develop business sources that choose your firm for the outstanding services you offer, not just price.

Those who are desperate enough to consider resorting to these types of low bidding competitions as growth models for their future should consider better solutions such as:

  • Employing tactical sales methodologies that generate a quantity of quality sale
  • Utilizing professional sales training through organizations such as Sandler Sales Training Systems or other reputable firms
  • Employing skilled, trained, experienced, educated sales and marketing professionals within your firm
  • Joining restoration organizations and networks that focus on profitability through leadership, training and effective business management skills and systems such as Business Networks, Business Mentors, DKI or 1-800-BOARDUP

We all come together within the RIA in an effort to continually develop smart, rational, innovative business strategies that further the interests of restorers. By discussing ideas that help us create a better restoration industry, we can create an industry that is cutting-edge, healthy and prosperous and that rewards market leaders who excel and innovate.

You will rarely find restoration market leaders involved in such low-balling tactics. They pride themselves on building a business that commands fair prices for quality work. I recommend to anyone who has not yet achieved that status to seek out readily available resources that can help you build a business that is self-sufficient and not reliant on a pricing model.

I hope by this stage in our careers that we have all learned such business basics. But for those who may need a reminder, there is always another guy who will do it cheaper than you! If you build a restoration business based on a foundation of low prices, you will usually end up going out of business after experiencing a truly miserable existence.

If Gross’s formula was changed to reflect the reality that higher volume of projects with equal or greater profit margins plus lower marketing costs equals more profit, then I would be opposed to this proposal. However, this is not the equation he proposes, and I believe the “successful” business model he proposes is a fallacy.

I’d like to revisit Gross’s past position paper that claimed, “The customer is defined by the logo that is in the upper-left hand-corner of the check you get when the job is successfully completed.”

This statement is most certainly refutable. Although the insurance company and insured are the

primary and sole parties to this contract of indemnification – exclusive of the contractor – the contractor and the customer are primary and sole parties to a contract of adhesion – exclusive of the insurance company. (In most cases this is true unless a direct repair program agreement expressly modifies that contractual relationship.)

As a brain tumor survivor, if I believed for one moment that my surgeon was going to allow the name on the upper left-hand corner of the insurance draft determine who his customer was, I would have walked out the door that moment and I believe with great certainty that any rational insurance executive or TPA manager in that position would do the same.

Volume driven pricing strategies can be very successful in many scalable businesses, but local restoration service companies are not scalable entities. A scalable company is one that can maintain or improve profit margins while achieving significant sales volume increases. In the restoration industry, profit margins usually decrease significantly with dramatic increases in volume due to operational inefficiencies that exist in service-type organizations.

Just as there are economies of scale, “dis-economies of scale” also exist. This occurs in restoration firms when inefficiencies increase within the firm as volume increases result in rising unit costs. Dis-economies of scale can occur in the restoration business with limited production capacity because they exceed internal management resources and quality controls become inadequate. We often see margins fall with significant increases in volume because operational inefficiencies increase leading to costly job and customer satisfaction issues that often drive down profits.

Restoration Industry

Does a larger volume of jobs with substantially lower prices increase your profit margins or benefit your company? If you are a market leader the answer is NO. I have seen the failure of the concept that a higher volume of jobs with lower profit margins bring any sustainable success. At best it prolongs the inevitable failure of poorly managed companies.

Increased sales mean nothing if they come at the cost of profit margins – that is what is being pitched by the opposition. Lower prices are almost always the first concession of those with lower quality services or inferior sales and marketing.

On the other hand, end-user marketing by reputable professional restorers can open a whole new world of opportunity and freedom. Unlike the CodeBlue model, end users are a relatively inelastic market. They are far less sensitive to pricing than to potential service issues.

The goal of our organization is to decrease our member’s reliance on traditional sources of business by showing them a new way of looking at the world of insurance restoration. For many, this is a complete paradigm shift.

If the opportunity to be free to achieve fair and reasonable long-term sustainable profits, to choose which jobs your firm signs and which jobs you walk away from seems like a sensible plan to you, then end-user marketing is an alternative to consider. It is not for everyone. End-user marketing demands unusually high standards, but provides more control, more independence, large jobs, controlled profit margins and consistent cash flow.

In closing, I state adamantly that those who win in our industry do not win because of reduced prices. Winners do so because of superior customer experiences that begin with a great sales system and staff, and continue with excellent project management systems and staff.

These great experiences do not occur at random. They are the result of well-designed planning, hiring, training and execution.

The choice of low-ball tactics versus the high road to profitability is yours. Choose wisely.

The opinions expressed and statements made in this position paper are those solely of the author, and do not represent the opinion of RIA and should not be construed as an association endorsement.

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