Last month in this space, I reviewed a series of market projections for 2014 from Harvard University as well as the industry’s leading associations.
Leading the Way to Profit
I have precious little free time and don't want to spend my billable hours giving away free information without a fighting chance of a sale.
I have precious little free time and don't want to spend my billable hours giving away free information without a fighting chance of a sale. The qualified leads - 40 percent to 60 percent of our inquiries - get all our attention and efforts; the others are politely referred elsewhere or given the necessary dose of reality. When it comes to sales, I suggest you track qualified leads, closing percentage, proposal conversion rate, days to contract signing, cost of sales and marketing, and cost of sales and marketing per contract.
The value of this knowledge lies in making better use of your time, money and expertise; having a barometer for gauging future success; and evaluating your salespeople and marketing functions. Who wouldn't want to work for fewer, nicer people, who are willing to pay more for your work? Sounds like a ticket to paradise to me. Get your reservations in ASAP.
Definition: Inquiries that have been narrowed down to likely prospects by asking about budget ranges, time frame, experience with prior remodels, location, etc.
Calculating your target: Divide target annual volume by historical closing percentage by average job size
Ex.: $1,000,000/20% = $5,000,000;
$5,000,000/$10,000 = 500
Predicting volume: Multiply qualified leads by closing percentage by average job size
Ex.: 600 x 20% = 120;
120 x $10,000 = $1,200,000
Getting phone calls, Web hits, e-mails or walk-ins is easy - it just takes money. Getting people to call because they want you is the hard part, and tracking qualified leads is more important than tracking "inquiries only." Getting 500 qualified leads might take 800 inquiries! At my firm, if we are not getting around two qualified sales leads per day, we know we need to step up marketing efforts or we will be forced to sell at worse margins to meet revenue targets.
Definition: Number of contracts sold divided by number of qualified leads
Calculating your target: Divide target volume by target job size by number of qualified leads per year
Ex.: $1,000,000/$10,000 = 100;
100/500 = 20%
Predicting volume: Multiply closing percentage by qualified leads by average job size
Ex.: 30% x 500 = 150; 150 x $10,000 = $1,500,000
Your target will vary depending on pricing, economy, average job size and type of firm. A closing ratio of less than 20 percent would be unacceptable and likely caused by poor marketing, a poor lead-qualifying process or poor salesmanship. With a closing percentage higher than 50, you're probably leaving money on the table by not charging enough, unless most of your business is repeat (80 percent or more of past clients should say yes); you do design/build and most clients follow through after the design process (85 percent or higher); or you do handyman services, where often a call results in a sale without an estimate.
Assume that in the past year you did $1 million in volume at 50 percent markup and 33.3 percent margin, with a 50 percent close rate on 100 leads. That's 50 jobs at an average size of $20,000. What happens if you raise your sales price 10 percent but your closing rate falls 20 percent? Are you ahead or behind?
In the current situation, you're looking at a gross profit of $333,000 on $1 million in sales. Under the second scenario, job size rises to $22,000, but number of jobs drops to 40, for $880,000 in sales. However, the 10 percent price increase translates to 65 percent markup and 39.4 percent margin, for a gross profit of $346,720 - $13,720 more.
You can do the math for a pro forma like this, but ultimately, you will never know if you are too expensive until you are.
Proposal conversion rate
Definition: Number of contracts sold divided by the number of contract proposals offered
Calculating your target: Divide target volume by average job size by the number of proposals you typically can generate annually
Ex.: $1,000,000/$10,000 = 100;
100/333 = 33.3%
Predicting volume: Multiply proposal conversion rate by proposals generated by average job size
Ex.: 30% x 400 = 120;
120 x $10,000 = $1,200,000
Proposal conversion rate should be even higher than your closing percentage because you still continue to weed out prospects via budgeting, qualifying for funding, personality fit and other factors. A conversion rate under 30 percent indicates poor value for the price, poor sales technique, incomplete design solutions or other factors you can investigate and solve. A rate of more than 75 percent indicates your pricing is probably not aggressive enough relative to your perceived value. Conversion rate probably should exceed 75 percent only with design/build, handyman or former clients. If your conversion rate is rising quickly, raise your prices and enjoy the extra profit margin.
Days to contract
Definition: Number of days from the first contact until the client signs a contract
This is important to know for scheduling: For example, which job type or client type can be sold and started in the quickest time frame? It is also a way to gauge the efficiency of sales staff, indicate a need to better standardize your product or service offerings, and most important, keep clients excited and involved.
I would propose a five-day lead on a handyman project, with the goal of starting work within 10 days. For full-service work, a time frame of four weeks makes sense: It allows a one-week wait on the appointment followed by three weekly meetings. If you're not in the habit of meeting more than once, than 16 days might be a better target. Design/build is very much a function of your own process, so target days might be 45 for one company, 25 for another. There is no benchmark here. You know and set your clients' expectations; here is where you measure against that promise.
Costs of sales and marketing
Definition: Add the cost of all paid advertising to the cost of all promotions, including signage, Web site, wearables and give-aways, stationery and collateral materials
We also include the owners' and office staff's wages and salespeoples' wages and commissions to give a true picture of the cost of in-house efforts to develop a sale. Industry targets are 2 percent of annual sales for full-service remodelers and 5 percent to 10 percent for specialty contractors, not including wages. Add another 2 percent to cover people costs.
Cost per contract signed
Definition: Total sales and marketing costs divided by the number of contracts signed
Again, targets vary depending on type of work and average job size. Cost per contract is higher for some specialty contractors and for firms with commissioned salespeople and fewer large jobs. (It's also high for companies without a clear sales message.) I would say cost per contract for full-service companies doing jobs under $10,000 should be no more than $600. For specialty or handyman, that might rise to $1,000 per contract with wages. With job sizes averaging $100,000, spend no more than, say, $8,000 with wages. My firm's figure is $580 with wages and $220 without. Our handyman job size has to be more than $1,500 each just to cover sales costs and overhead and earn 33 percent margin.
If your sales and marketing cost per contract is too high compared with average job size, cost might exceed the gross profit from those jobs - which begs the question of whether you should even be doing that kind of work. If the number is low, it could be that your marketing is targeted and effective or your sales staff is especially efficient. On the other hand, you could be in trouble when the market goes south and your meager sales and marketing budget will be insufficient to provide that oxygen for combustion.
Track this metric over time to gauge sales efficiency as the company's mix of offerings evolves, salespeople come and go, the economy changes and new marketing campaigns begin.
Put these numbers in context
These metrics are where you track how your pricing strategies, ad campaigns and product changes affect your closings and conversions. You can see how the company's doing every quarter or every month and even use a one-year moving average as a double check.
My firm tracks qualified leads by source and job type and converted sales by revenue, change orders, profit margin, days to complete and more. Here's why:
- You can develop a list of the best-known strategies to make the phone ring when you want it, from clients most likely to buy from you.
- You can assess the actual, not anecdotal, success of marketing campaigns and recreate efforts that attracted qualified leads. Ideally, you can analyze which job types to advertise in which media to get the most bang for your time and money.
- You can gauge profitability by job size, project location, job type, salesperson, type of contract and any other factors you choose. My company will jump for a kitchen lead from a job sign more quickly than a deck lead from the phonebook and be assured a better overall profit potential. This is one area where profiling is not only legal, it makes good business sense.
- If closing percentages are getting too large, implement a price increase to pay for the overtime and the inefficiency that being too busy creates. Follow very closely the number of qualified leads received to make sure the spigot still is running strong. Check your closing ratio and conversion rates and note, whenever possible, why you lost a particular job.
- If closing percentages are falling, either generate more leads with promotional efforts or roll back a couple of percentage points in margin target - but only if being too expensive is the reason you were given for losing jobs. You will find past clients and strong referrals will accept higher prices without affecting their closing and conversion rates.
- If percentages are steady or within 5 percent of target, try another price hike. The idea is not to gouge the client, it is to make a decent living, make the company profitable and sustainable, and provide decent wages and benefits for your staff, which takes professional-level pricing. This is a scientific way of getting to that point with the least amount of pain. Stop when you become overpaid.