Ten years ago, it was nearly unheard of to ask a client to deposit money with a kitchen and bath remodeler before the design work was started. But the remodeling business has changed dramatically in the past decade, as have the professionals who practice it.
This month, we'll look at the history of retainers, the rationale for charging them in the remodeling business, how to market this tool and what the future might hold for design retainers.
Retainers, which are essentially prepayments for services to be rendered, have evolved in numerous professions where professionals are selling their time, including law, accounting and architecture.
It's difficult for most consumers to perceive the value of services, particularly intellectual services such as legal advice or design. All too often, after the professional has performed the services, the client rationalizes that the result received was not worth the amount billed.
This is obvious with legal services, where the lawyer you hired lost your case, but less so with the services of an architect who designs your building. Still, most people cannot see how the time they're being billed for could've possibly mounted up, particularly when it's being billed out at $75 to $500 per hour.
The retainer has evolved as a response to the need to communicate and clarify the financial arrangements for such services prior to them actually being rendered. It probably began as collecting in advance from clients whose ability to pay was doubtful, and evolved to a formal agreement setting out what was to be provided and how it was to be paid.
Consider the law of supply and demand, and how it relates to the type of clients we want to attract. Each of us needs to determine what segment (or segments) of the kitchen and bath remodeling business we want to operate in. Do we want to compete on price, becoming the low-cost provider to our client group? What will it take to compete based on other factors such as prestige, service, reputation, etc., wherein we can price our services substantially above some of our competition's prices?
The majority of NKBA members are not in a position to compete on price with some of the other players in the kitchen and bath industry, particularly those who have national operations and can operate at a loss for an extended period of time in certain market areas. While such low pricing will stimulate demand for remodeling, it usually is devastating for most small dealers.
In order to move away from price competition, it's necessary to differentiate your bundle of products and services from that of your competitors. The method for achieving this is to identify those things that your firm does uniquely well and, through marketing, create a specific demand for these. To the extend that you are successful in separating your market "bundle" from your competition, you will be able to control the supply side of the equation. If the demand for this bundle exceeds the amount that you can (or wish to) supply, price competition is no longer an issue.
Nearly every business is able to achieve some level of product differentiation in its particular market. Most remodelers do, in fact, have many truly unique aspects to their firms. No one else can deliver the same designs that your firm can, and if you can gain a perception in the marketplace that this is something special, you are in a powerful position to control the revenues and profitability of your business.
The reality is that price is not at the top of the priority list in the decision-making process for most of the clients we want for our businesses. In fact, if you're a full-service remodeling contractor, you may well find that you could raise your prices by 5-10% with no appreciable impact on your sales volume.
Once your business is at a point where it no longer competes primarily on price, the key to profitability is to focus your efforts on those clients who are willing to pay a premium for top-quality design and service. Using a design retainer agreement is the necessary first step in the process. Since you will not expend expensive design and drafting time unless you have received a retainer, you'll be much less likely to be working on phantom projects (ones where the potential client is "just looking" or "getting several bids"). This increases the likelihood that this "up front" time will actually lead to a signed contract for a remodeling project; at the very least, the retainer defrays the cost if nothing comes from the design and proposal.
Although not the problem that it once was, charging a design retainer carries with it the fear that potential clients will be put off and pass up your firm for the ones offering "free" design. While it is certainly a clich' to state that such clients will get what they pay for, the truth is that clients will always pay for design service in one form or another. If you offer "free" design service, you'll have to add a certain amount to each job you sell to cover the cost of designing all the projects you don't sell.
Charging a design retainer will allow you to assure your clients that you'll be able to concentrate your efforts on their projects. In addition, you'll find that those potential clients who are interested in price shopping will rarely be willing to put up a retainer. Finally, retainers are normally associated with professionals, and this can be viewed as a plus in the perception of your business among your potential clientele.
Future of retainers
Most design professionals in our business now utilize a design retainer agreement and collect an up-front deposit for their services. As this practice becomes universal among high-end remodelers, competition will move to the process of selling the design retainer as opposed to bidding for remodeling projects. If we take our business in this direction, we will probably move away from product-only sales where price competition is prevalent.
The practice of marketing your business as a design/build firm with professional designers available to your clients will set you apart from the mass marketers and give you a "product" that only your firm can provide.