Intro
Making decisions on who to hire for marketing and when can be tough. Marketing companies promise great results, but what does that mean? And how will it actually impact your bottom line?
While you can never foretell the future, using some basic math and finance principles will help you make better decisions.
In this article, I’ll be outlining a formula you can use to make more educated guesses using math. Using this method will help you predict best case and worst case scenarios, and make informed guesses, rather than relying on how you feel.
Let’s dive in!
The Main Goal
Good marketing efforts should be sustainable in the short term while providing growth in the long term.
If you have cash stockpiled, you’ll be able to sustain “farming” marketing strategies that take longer to yield results.
If you have a little cash stockpiled, but need more immediate results, you may want to employ some “fishing” marketing strategies that can put cash back in the bank within 30 to 90 days. (If you don’t know what I mean by farming and fishing strategies, check out this article).
Sustainable Marketing
Marketing efforts need to put gross profit back into the bank to be sustainable.
Your gross profit is the cash you keep after you pay for materials and labor on a project. If you do a bathroom remodel for $15,000 and you pay $5,000 for materials and $2,500 in labor, you’ll be left with $7,500 in gross profit.
If you spent $2,500 on marketing to acquire the job, you would cover your marketing cost and be left with $5,000.
An Example Scenario
Let’s look at a scenario.
Let’s say on average Mike does 2 bathroom remodels a month from referrals. His revenue per job and cost of goods sold (materials, labor) changes from job to job. But on average, it adds up to the numbers above ($15,000 in revenue per project, $7,500 cost of goods sold.)
At 2 bathrooms a month, he’s doing $30,000 in revenue and paying $15,000 in cost of goods sold. This leaves him with a gross profit of $15,000.
But Mike also has fixed costs. His office lease, office manager salary, his own salary, and other miscellaneous expenses add up to $14,000 per month. So, after paying himself and paying his expenses, his business profits $1,000 per month.
Mike is considering starting a new lead generation program. Being optimistic, the program could bring Mike 2 or 3 new jobs every month. Being more conservative, it should at least bring him 1 new job per month. Also, Mike knows that it will take about 1 month to start selling jobs from the new leads.
Here is how the numbers would work out:
While Mike knows that the new marketing program will add $2,500 in expenses, he sees that even one new job would yield $7,500 in gross profit, and bring his net profit up to $6,000 total.
Mike bases these numbers on a 1:6 ROI (return on investment.) This means that for $1 he spends on advertising, he would get $6 back.
(Here’s one of our clients that got a 13.5X ROI on their advertising with Service Allies )
Calculating Returns
So, how did Mike predict that he would sell 1-3 jobs per month on this program?
There are three things he looks at:
- How many leads he will get
- How many leads he will have an in-person appointment with
- How many jobs he will sell from those in-person appointments
Based on similar programs he has used in the past, he predicts he will get about 25 leads per month.
Out of those 25 leads, if he is consistent with calling them, he should get about 8 in-person appointments.
From those 8 in-person appointments, he knows that he will probably close 2 jobs.
That being said, Mike knows that this time around could be different. Lead quality could be better or worse than what he has experienced before. So he sees what will happen in a less-than-ideal scenario:
What if he only gets…
- 20 leads
- 5 appointments
- 1 sale?
Since he knows what his fixed costs are and his gross profit, he knows that adding even 1 sale per month will put him ahead.
Short Term vs. Long Term Efforts
The above scenario is based on a short term marketing program that only takes 1 month to start selling jobs from.
When you consider marketing efforts, you need to think about the time to see returns as well as what the returns will be. While SEO might be one of the most powerful ways to get quality leads, for example, it can take 6-12 months to start seeing those leads.
Having Realistic Expectations
Delving into marketing and paying for leads can be confusing at first.
If most of your work has come from referrals, you likely close around 60% to 90% of those customers. Many contractors pay for leads and expect the same thing to happen.
The difference is that referrals have already been sold on you by their friends. Whether you know it or not, you have a team of salespeople in the field - your happy customers! When you get a referral, you get someone who has already decided to move forward with you.
Leads, on the other hand, are hearing about you for the first time. It takes a stronger sales process to build trust, be visible, and get the deal.
Somewhere between 20% and 40% is a healthy close rate for marketed leads. If you can hit that number, you’re doing fine. Companies with solid sales systems usually end up on the higher end of that spectrum.
That being said, there are exceptions. This client of ours, for example, had a 60% close rate with Service Allies leads.
Summary
In summary, to predict the success of a new marketing effort, here are the questions to ask yourself:
- How many leads am I predicted to get?
- How many will likely turn into sales appointments
- How many will likely turn into sold deals? (Typically 20% to 40% for marketed leads, depending on the strength of your sales process.)
- What is my average gross profit per sold deal?
- What will my immediate costs be?
- When are the leads likely to start flowing in?
- How soon will I start selling jobs from the leads? (Average sales cycle time?)
After looking at some worst case and best case scenarios, you should be able to better calculate your potential revenues and profits.
If you would like to explore utilizing Service Allies for your advertising efforts, please schedule a phone call today.
