How To Profitably Operate A Low Cost Leadership Business Model In The Home Service Space

by Corey Philip
March 27, 2018

Brand positioning of your business is vital.  You don’t want to be stuck in the middle, as you’ll find out.

When it comes to brand positioning strategy and there’s essentially 2 ways you can go; cost leadership or differentiation according to Porter’s Generic Strategies, which has been taught in textbooks for years, and will continue.

The model basically illustrates that brands can go in the direction of ‘cost leadership; being the cheapest out there, or differentiation; doing something different.

Cost leadership brands focus on selling more a by getting the price low, by decreasing quality, service or features.  Think of airlines; most of which go for the cost leadership model.  They whittle away at seat sizes a quarter inch at a time, trim the padding, charge for peanuts, and some even plaster their customers with Ads.  No consumer necessarily likes these airlines, and the airlines are heavily bashed in reviews and social media, but they generally keep the planes full and turn a good profit.

That’s what the low cost leadership model entails; chopping away at what consumers want and expect, just so you can attract more clients with the lower price. Going that route in the home services is tricky.

Differentiation takes the opposite approach, they sell on the premise of offering something different than the average.  Differentiation leads to higher prices.  In the home service space differentiation is usually having a higher level of service (and subsequent reputation), better attention to detail, punctual business practices and usually using some higher quality materials.  Pulling this off isn’t easy either.

Stuck in the middle of the two, with seemingly no direct positioning, is Kmart.  “You don’t want to be Kmart” is what every professor says as they point smack dab in the middle.

The Kmart of home services would have, 3.7 stars, not quite good enough to attract the market of customers who want a job done right, and prices and that cannot compete with the low cost leaders.

Cost Leadership Can Work in Home Services.

Contrary to what every ‘service business advisor’ that you find online or in a book will say, the cost leadership model can work.  It’s not for everyone though.

I have to compete with a low cost competitor on the daily (Seriously; hello if you’re reading this btw). While the low-cost guys are generally regarded as fly-by-nights, this low-cost operation is not. They’re licensed, insured, quite a bit larger than my company, and they will get your project done… as done as their vague contract requires. Your project won’t be flawless but it will pass inspection. You’ll wait on them. You get no updates. You will have shirtless guys and cigarette butts all over your project. They might work a few days, then disappear, then randomly show back up.  If you complain, that phone is going ‘click’. If you complain again, you’ll moved to LAST priority.  Good luck claiming the ‘1 year warranty’. Threaten a bad review, it’s lol at you.  They’ve already got hundreds of bad reviews around the web — 2.3 star on Google at the moment

That’s not the type of business anybody says they want to hire, but when their price is 30-40% lower, there is a whole market of consumers that will turn a blind eye to those reviews. I’ve guesstimated that roughly 70% of the broad market would chose that low cost provider over the one with great reviews and the highest price.  You’d also be surprised at how many consumers will leave a bad review and then say “Yea they sucked but it was the lowest price” and then that leads to —-> referral.

So What Does It Take to Operate A Low Cost Business Model Profitably

Great Lead Funnel.  If you are going to be a low cost business in the home service space, you won’t be able to count on referrals and repeat customers. Your reputation will be horrible. Likewise, inbound leads might be scared off by the horrible reviews, and completely disregard the option of contacting you.

You’ll need a great lead generation funnel that consistently pipes in leads. It’s not impossible to pull of, but it isn’t as easy as having the reputation to go along with it.

  • A System for Getting Projects Completed.

    Low cost business models in the home service space, aren’t there to rip people off. If you’re going the route of a low-cost business model, you need to complete projects (obviously).  Behind that, you need a system that can handle volume and that you can easily throw new hires into.  The system doesn’t need to be flawless, only as flawless as you can make it at the price point you’re trying to get.  Most important though, is that you stick to the system.  Deviating from the system, to accommodate a customer request, throws a wrench into the system, which costs $$$.

  • Focused Only On Contract (not customer).

    It’s better to under promise and over deliver, so most service businesses try to give customers a little bit more than what they’re expecting.  That’s what leads to happy customers.  If you’re trying to offer home services at the lowest price, just like an airline, you need to focus on delivering only what you were committed to. This will include pinching pennies on any aspect that wasn’t specified in the contract, or any level of service the customer would expect, such as regular project updates or materials.

    With that it is important to add, that your contract will need to be pretty binding.  Once the deposit is given, you need to make sure the customer has no recourse for delays, or unmet expectations.

  • Recruitment System In Place.

    Expect high turnover. Good labor isn’t cheap.  No Secret.  And they aren’t going to want to work with the lowest grade materials all the time, and unhappy customers.  If you do recruit good staff, they won’t stay around long unless they’re being compensated accordingly, or they’ll go work for someone that can pay them more. The solution to this is to constantly be recruiting.  Day in and day out, job ads have to be running. Then you have to be hiring, and training.  In most businesses ‘hiring’ and ‘training’ aren’t daily activities, in a low cost leadership business, with the accompanying high turnover, they are vital to operations.  This is the only way you would be able to stay staffed.

  • Thick Skin.

    Getting bad reviews genuinely sucks.  If you’re going to operate a low cost business model, you’ll need to get used them Instead focus on the fact that you’re delivering your customers with “what they contract for” at a price that other “providers’ probably would’ve just taken the money and bounced.

  • Not satire.

    While this piece might read like satire, it is not. Day in and day out, I compete with a larger company that operates in this way.  Lowest price possible.  Cut what they need to deliver it, and make their target profit margin.  And the company, with a single owner, makes millions locally — well into the 8 figures.  Their profit margin isn’t bad.  Quite frankly, I could probably make more money if I went this route.  Again, it is not how I choose to run my company, but it is the flip side (likely more profitable) to my strategy, which is to only have happy customers which means never having the lowest price.

If you have poked around at some of my articles on the blog, like this one, you know that the strategy I have in place is to give my customers the best  level of service, the highest level of quality, the comfort of feeling like a ‘person’ to our organization, and everything that is needed to earn countless five star reviews. Ultimately that is what every consumer wants until economics are factored into the buying decision.

I find there is much less headache in this strategy and prefer to be associated with a highly reputable company.  There is less stress. I sleep knowing my customers are happy.  Employees are happier and recruitment is easier.  The pros far outweigh my cons in my opinion.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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