Manufacturers, of course, don’t treat top-tier certification lightly. Due diligence on prospective top-tier contractors includes reviewing Better Business Bureau reports, scouring customer reviews on Google and other sources, and additional background checks. In addition, local reps assess each contractor’s reputation in the marketplace. The reward for manufacturers is a guaranteed percentage of market share as well as further enhancement of the manufacturer’s reputation through word of mouth. This, in turn, can influence other contractors in the region to join that manufacturer’s CCP with the goal of mutually building each party’s business.
In summary, certified contractors receive designation/certification; preferred warranties; rebates/rewards; leads/lead generation support; favored terms on business building tools; and enhanced manufacturer rep support/training. Rebates/rewards are a critical element of this, reflecting a recent HIRI survey of a broad range of installers which found that 57% cited ‘everyday discounts’ as the number one reason to stay loyal to a contractor loyalty program. Consequently, design of these rewards is key. For instance, when it comes to reward program design, 56% of exterior contractors prefer ‘average rewards’ (offered once a threshold is reached) vs. tiered rewards (starts with a few benefits and grows with spend).
Homeowners benefit from these tiered, reciprocal relationships as well. Just as the manufacturer’s “locator” feature benefits its certified contractors, it also streamlines the process for a homeowner who is looking for a reputable contractor. The homeowner can proceed with the assurance that the contractor they’ve chosen has been designated reliable and of good quality by the manufacturer, which the homeowner often views as objective. As a bonus, the manufacturer can share additional tools with the homeowner through its certified contractors, such as free roof measurement services or visualizer tools that enable the homeowner to compare products with a 3D mockup.
What all this means for prospective private equity investors
Any review of a prospective investment in the roofing industry begins with an assessment of this underlying ecosystem of relationships, in particular the relationship between manufacturers and contractors. In essence, an evaluation of the CCP ecosystem serves as a proxy evaluation of investment opportunities. That’s because the certification process — especially at the highest level — requires the same sort of due diligence by a manufacturer that an investor would perform. And a name-brand manufacturer avoids risk to its reputation and its credibility by certifying only roofing contractors that have sufficient training, technical competence and customer service skills.
Moreover, manufacturers that grant the highest level of certification assume significant risk via enhanced consumer protections, including commercial NDL (no dollar limit) warranties that guarantee the homeowner coverage not only of the manufacturer’s roofing materials but also the contractor’s workmanship. On the commercial side of the business, the highest level of extended warranties also requires an inspection.
The manufacturer’s inspectors can often vouch for the contractor’s quality. Sometimes the warranty stipulates that the manufacturer must carry out work to address material or installation issues (e.g., on a commercial roof). In these instances, the manufacturer can choose the contractors to perform this work, and is more likely to select high-quality CCP contractors that are also good customers and can do the work in a timely manner.
This is another example of certification serving as a proxy, in this case as a means to determine the quality of a contractor.
In addition, a contractor’s level of certification can be a reflection of how committed it is to building its business — an important consideration for any prospective investor. One key metric to consider as part of the contractor evaluation process is the percentage of warrantied, digitally acquired or financed sales that the contractor has upsold. Another is the degree to which the contractor is taking advantage of CCP vendor programs in digital marketing, financing, etc. Higher performance on these measures indicates that the company is aggressively trying to obtain higher sales and/or margins. That can be a good indicator of the contractor’s willingness to expand, to adapt and to grow its leads — important considerations if growth and expansion into new markets is part of the investment thesis.
Prospective investors could also capitalize on opportunities to scale. By investing in multiple contractors, an investor could potentially “bundle” those contractors so they could negotiate better terms with manufacturers for the group than each contractor might have done on its own. Other opportunities for support at scale include customized digital solutions using a distributor’s or manufacturer’s platform.
The bottom line
The authors would like to thank Lucy Beimfohr for her contributions to this piece.
For more information, please contact industrials@lekinsights.com.
L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other products and brands mentioned in this document are properties of their respective owners. © 2023 L.E.K. Consulting LLC
Endnotes
1HIRI Brand and Supplier Loyalty Nov 2023