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Why funeral home profit margins are shrinking and what to do about it

      
Date Published: 
March, 2006
Original Author: 
Glenn H. Gould
MKJ Marketing
Original Publication: 
ICFM Magazine, March-April 2006

What worked in the past no longer works in funeral service, and some of the things being tried to reverse the trend are just making it worse. Why? Because they don't address what families want and are willing to pay for, this marketing expert says.

Many articles discussing marketing, whether in the funeral and cemetery profession or any other industry, begin with a definition of marketing as encompassing every activity within the business, not just the sales and advertising functions. Yet most people continue to use the terms marketing and advertising synonymously.

Simply put, anything your company does to generate new business or to hold customers is marketing—new buildings, pricing, employee training, sales tools and advertising all fall under the marketing umbrella.

Many death-care businesses, including vendors, are in desperate need of new marketing plans, and the situation has little to do with advertising. Those businesses suffering from high overhead and shrinking margins—which include most of the funeral homes in the United States—find themselves in their precarious positions because their marketing plans are failing.

Even if their advertising were more effective, these businesses would remain in a precarious position simply because their current plan of pursing additional volume at any cost is not viable at a time when many of the services they are offering are provided at a loss. For this reason, in this article I am going to address the issues of merchandising and pricing, which are integral aspects of a comprehensive marketing strategy.

If it's so popular, why is it so cheap?
Just as an illustration, let's begin with caskets. Casket companies have arguably provided the highest level of merchandising support in our business. Nonetheless, they consistently violate the most basic rule of merchandising: A product's more popular features should be reserved for the highest-priced models.

Everyone in the business knows that pink and blue are the two most popular colors for caskets. We also know that comer pieces, head panel embroideries and other structural features (such as the memory drawers) are very popular. But instead of being reserved for our highest-priced units, these features are (for the most part) available from the top to the near bottom of the line. Is it any wonder the public has difficulty seeing the value in higher-priced units?

Instead of being based on popular features, casket pricing reflects the cost of the materials used in manufacture. Certainly copper and bronze are more expensive materials than steel, and mahogany is more rare and expensive than oak and pine; but 90 percent of American consumers really don't care what the casket is made of.

They simply want an attractive, well built piece of furniture with special features, such as interchangeable corners, interiors that can be personalized and a choice of their loved one's favorite color—and they would be willing to pay for the features they want.

Applying this same analysis to funeral homes, we must ask why they include all of their services in their basic packages, thus depriving families of an opportunity to select—and pay for—additional services they may want. The funeral homes not only deny themselves the chance for needed revenue, they also deny families a choice so that they can select the package that best serves their needs.

Notice to the funeral and cemetery profession:
Consumers like choices.

Funeral homes must learn, as hotels have, that superior profits can be generated only by selling services, not merchandise. As funeral merchandise (caskets, vaults and urns) becomes more available from alternative sources, including retail outlets and the Internet, it will be increasingly difficult to realize a reasonable profit from the sale of these products. On top of that, funeral directors will increasingly face cremation families who will announce that they have no need for a casket or vault.

Profiting from services should be fundamental to the funeral business. Why else would funeral homes build and operate large facilities with rooms appropriate for large gatherings of people? Certainly very few funeral homes have anywhere near enough volume to simply operate as a furniture store; but most do serve enough families to profit as an event venue, making use of all their facilities.

Yet almost no funeral home effectively merchandises its services. Instead of incorporating graphics and other sales aids to help arrangers make effective arrangements, most firms operate under the assumption that families are fully aware of their options and will simply tell their arranger what they want.
 
Preneed lead generation is based on advertising concepts developed in the 1950s when mom stayed home with the children and seniors lived with their children, before answering machines and e-mail.

Cemetery direct mail advertising in the 1950s generated fifty times the results of direct mail today, at a time when postage was just pennies as opposed to $.39 apiece. The cost of getting a direct mail piece delivered is over $.40 apiece, including mailing lists and handling, and this is before the piece is created and printed.

Every knowledgeable preneed marketer in the business knows informative consumer seminars; family follow-up and public relations efforts generate leads of a far better quality than direct mail—at a fraction of the cost. Even so, cemeterians and funeral directors, led by preneed insurance companies, continue to flood the nation with direct mail appeals.

Incorporating consumer priorities into your marketing plan
The popular business book "Blue Ocean Strategy" discusses the concept that all industries operate under certain basic assumptions, so that every company within an industry ends up looking very much like all of the others. This makes price the only differentiation. The ongoing consolidation of the casket companies would be the anticipated corporate response to a declining market. Instead of creating a line of products geared to consumer priorities, the goal is to reduce overhead cost per unit while continuing to sell the same products.

As much as we would all prefer to sell American-made products, following this course to its ultimate conclusion will require funeral homes to offer lower-priced caskets manufactured outside the United States in order to get casket prices low enough so that families can afford to pay for the profitable services funeral homes are going to have to sell if they want to remain in business.

An objective observer of today's funeral homes would conclude that their priorities are, in descending order: 1. service, 2. large facilities, 3. vehicles, 4. clergy, 5. formality, 6. aftercare.

Suggesting "service" is a misplaced priority is tantamount to heresy, but the reality is most consumers are unable to evaluate a funeral home based upon service provided simply because they so seldom visit funeral homes. Furthermore, when people do visit a funeral home, they typically are so overwhelmed by the loss of their friend, the family's grief and the realization of their own mortality that afterward they can't remember the color of the casket, let alone the quality of service provided.

What about priority number 3, vehicles? Consider for a moment the lunacy of trading in a 6 to 10 year-old hearse with 15,000 miles on it in order to incur debt for a new vehicle. I cannot conceive of anyone believing that consumers select a funeral home based on the age of the hearse. Yet funeral homes maintain their vehicles beautifully just to sell them before they even reach midlife.

That money could be put to much better use: Create a reception room where families can socialize after the funeral. Buy equipment for creating video tributes the family will treasure for generations.

Then there's priority number 4, clergy. Research indicates fewer than 5 percent of individuals would consult a clergyperson to recommend a funeral home, yet funeral homes invest an immeasurable amount of time and money in church bulletins and contributions in the hopes of influencing local clergy.

The reality is that families who attend church are already familiar with their funeral home options, and most people without a funeral home preference do not attend church on a regular basis. On top of that, Episcopalians, Presbyterians and some Methodists encourage members to minimize funeral services or to let the church handle the service.

What does research show about how consumers decide on a funeral home? The influences they cite are listed in the table at the top of this page. Looking at this list gives us some variables we can control to produce tangible benefit to our funeral businesses. As consumers ourselves, we can understand why people would be more inclined to contact a funeral home where they know a staff member or one that's more convenient.

But how many funeral homes include in their promotional budget funds for building the community's awareness of their staff? As the second-most-volunteered reason for selecting a funeral home, building the community's familiarity with staff members should be a promotional priority.

When it comes to facilities, the funeral profession persists in building large facilities strategically located in places central to a very large population. Why not build several smaller buildings, each very convenient to a specific population? Families want a funeral home that's convenient for them and their friends, not one "conveniently" located between two fair-sized cities.

Summary
Reviewing funeral service from the consumer's perspective, we find that funeral businesses, like most others, focus resources on areas that deliver little in the way of customer value. This situation offers opportunity to those who realize the current way of doing business runs counter to what consumers want.

To take an example from another business, consider that for generations, roadside motels all included restaurants and lounges with their facilities. They continued to do this even after the interstate highway system was created and hotels and restaurants began to be built near the exits, giving families plenty of alternatives to eating where they were sleeping.

Even though the restaurants and lounges consistently lost money, motels continued to include them until Hampton Inn ignored the well defined norm and opened facilities offering only sleeping quarters and a free continental breakfast. Competitors finally appeared, but for years, Hampton Inn enjoyed a monopoly on this popular concept.

Returning to the funeral business, think about how operating differently would allow a funeral home to offer families better value and a more rewarding service, as well as to build relationships with new families who would turn to them in the future, even though other funeral homes ultimately will attempt to copy the leader's success.

The basic truth is, most funeral homes are suffering badly from shrinking margins, and still looking for solutions in the well worn business practices that brought us to our present state of affairs. Developing a new strategy or marketing plan focused on consumers could be the key to discovering a more profitable way to operate your funeral business.

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Code: 
A1346