If you frequently have customer requests for a service you don’t currently offer, you may be tempted to launch a whole new division based on this feedback.
While diversification can be beneficial and tap into additional revenue streams when done right, there are some major pitfalls you need to avoid.
Mistakes to Avoid
The first mistake is not reviewing your financial data first to see if such a decision is the best option for your landscape company.
“The worst thing is people that roll the dice and they go all in, buying vehicles, hiring, buying equipment, rolling this out without any kind of analysis to it,” says Fred Haskett, founder of TrueWinds Consulting. “Sometimes it works great because they have a client, or they have some clear demand for it, and they learn as they go. Sometimes they run right into a brick wall with that.”
Another major misstep is not having effective leaders in place to manage your new division.
“Successful landscape companies have people who are effective leaders, and their operating profit margin is the proof of their effectiveness,” says Greg Herring, owner of The Herring Group. “Do you have effective leaders for your current services? Do you have people who could be effective leaders for your new services? Companies without effective division leaders will not be adequately profitable.”
Jack Jostes, president and CEO of Ramblin Jackson Inc., says in one case a design-build company added landscape maintenance to their services, but the owner was the lead designer and tried to manage the maintenance division at the same time.
Jostes says their maintenance was a disaster. It eventually resulted in negative Google reviews, bringing down their company rating, which impacted the demand for their design-build services.
“There were times where I took on work that I wasn’t staffed for, that I wasn’t good at, to try and make ends meet,” Jostes says “The cost of that can be very stressful. It can cost you your reputation, and that can impact your ability to attract your actual ‘hell yes’ customer.”
Beyond leaders, you need to have the processes and staff in place to fulfill your new service. For instance, if you’re looking for additional revenue during the slow season, adding on holiday lighting work may sound like an easy solution. However, Haskett points out that this might not be the best idea if you also perform snow removal, as you may not have the capacity to execute both well simultaneously.
Methods for Diversifying
One way to satisfy customer demand without committing to launching a whole new division is to create commission relationships with companies that do perform the services you don’t offer. Jostes says sometimes the commissions you receive for referring customers to another company could be what your profit would have been from that department.
Jostes says another option is to consider acquiring a company that does have the skills, management team and resources you need to perform the new service properly.
Haskett says that subcontracting can be a way to test demand before fully investing. For instance, if you’re a mowing company but you want to get into lawn care applications, that requires getting applicator licenses, spray trucks and various chemical products.
“Maybe you should find someone to do that service for you as a subcontractor until you have enough volume to justify the investment in machinery and people,” Haskett says. “Irrigation is another one. Everybody should be doing irrigation services, but if you’re just at the point where you’re starting, find a good irrigation contractor. Offer the service as a subcontractor, and determine with your financials what a full-on profit center would be with an irrigator, all the associated equipment and trucks and things like that. Sub it until it grows to the point that you can justify having pulling it in-house.”
Haskett cautions against hiring someone with a skill set just to start a new division as they need to be a good fit with the culture and stay with the company long term.
“I’ve seen people that added a service just because they hired someone that had experience with the service immediately, and it turned out to be a bad hire,” Haskett says. “I went out and sold 50 accounts, and what am I going to do now?”
Other services, like commercial parking lot sweeping, you may find it makes more sense to only provide through a subcontractor versus investing in the equipment necessary.
“It’s better sometimes to add some of the oddball or tangentially related stuff through the subcontractors,” Haskett says.
Jostes says diversifying effectively comes down to offering services to your preferred customers who will pay you to do it profitably when you have the right people on the bus to fulfill the services.
