Arrest High Marketing Costs. They Are Killing Your Business
authors Dave Yoho | January 11, 2019
The world of marketing for home improvement companies has changed dramatically over the last 10 years. There are many new methods for obtaining leads, processing them and distributing them in an efficient manner to the salesforce. All the while, this is hopefully being done within a system for viewing the metrics, including goals for the number of leads that turn into presentations and the number of presentations that become sales. In addition, these metrics also gauge customer satisfaction (and often dissatisfaction) issues whether sales are made or not.
The High Cost of Doing Business
During 2018, revenues (sales) increased for most companies—in many cases far exceeding their projections. A byproduct of this success has been either a lowering of standards or neglecting the obvious. Costs for lead development have escalated for all forms of leads. Couple this with increased backlogs and the potential for cash-flow problems, all of which has reduced net pretax profit.
Since the average owner of a home improvement company is an entrepreneur, certain important issues regarding the operation of the business may be overlooked or ignored. Some prime examples of this phenomenon are:
• Determining fully loaded marketing costs, which includes all advertising, displays for showrooms or shows, and events.
• Job signs, script creation, and personnel costs for manning showrooms, shows and events. Costs of cell phones and computers for marketing efforts.
• Hiring and training marketing people for “incoming-leads” canvassers, plus managers and transportation related to these tasks.
Calculate the square footage of your showroom versus the total square footage of your office. You can then determine what portion of your costs for rent, light and heat are part of assigned marketing costs.
Once you collect and total all of these, divide the total number of leads (intake) into the total costs. Do the same again for the number of leads that you turn into issued appointments. No matter the size or style of your company, this defines your issued lead costs. More on this shortly; however, once you can clearly define the cost of an individual lead, you will soon see why we categorize the rising cost of lead development as obscene.
The True Cost of Your Leads and the Efficiency of Those Who Use Them
When fully loaded marketing costs equal 10 to 20 percent of gross revenue or when sit/presentation rates drop; and gross closings versus leads issued declines; and the response is to increase prices to build profitability, it creates a perfect storm.
A well-developed plan to deal with these issues is critical. It needs to be consistent with a strategy to make your company stable and capable of weathering unanticipated changes. These changes can come from many sources, such as reduced availability of financing, changes in the economy or unemployment remaining as low as it is. Certainly, the sources you use for lead development and the effective use of leads by salespeople are important elements.
In a survey taken in early 2018, the average cost of an issued lead (that is the fully loaded marketing costs divided by the number of leads issued as appointments) hit an all-time high of over $375. Actual costs ranged from a low of $185 to a high of $595 per lead issued. Some companies only guess at these true costs. Some with an issued lead cost of $500 or more take a “so what” attitude because they raised prices and business has been so good, they made money. This is despite the fact that earnings did not equal the degree of risk that goes with higher revenues with a lessened percentage of profit.
Examine This Actual Example
A company has an issued lead cost of $400 (not uncommon) and issues a salesperson an average of seven leads per week. Do the arithmetic. That’s $2,800 for those seven leads. In a month, that’s $11,200. That’s over $134,000 annually. Now examine, how much profitable business that salesperson provides for the company.
Example: $400 X 7 = $2,800, $11,200 per month, over $134,000 annually
When leads are abundant, issues such as “presentation rate” for the company and the individual salesperson, plus the “close rate” (the number of contracts received measured against the number of leads issued) are overlooked or accepted as revenue increases. In short, actual higher prices are used to offset poor or weak marketing performance.
For the sake of evaluating a salesperson who sold $1 million dollars (revenue), the $134,000 sales cost equals 13.4 percent—and that salesperson is paid 10 percent commission. That’s 23.4 percent. Despite the $1 million in revenue, the salesperson is overpaid.
This example is not uncommon. The problem lies in the planning of the sales program, plus the accurate evaluation of sales performance. Actually, this example means the salesperson earned 10 percent and at the very least, probably should have been paid closer to 8 percent.
Are You Utilizing Efficient Measuring Devices?
Today, lead costs are obscene even when revenue return is high. In addition, the cost of hiring, training and maintaining personnel for small business is also dramatically rising.
What is your salesperson’s close rate versus leads issued? Actually, in sales organizations a 28 percent (net) close rate (after rescission and credit turndowns) against leads issued is considered average.
While this is considered equitable in many companies, remember 72 percent of leads issued are not sold. And even if a company has some above-average salespeople who close 40 to 45 percent, that leaves 55 percent unsold leads.
How do you handle follow-up or second visits? Hopefully this is done not to simply reduce the price, but attempt to close a contract, which might have been mishandled—remember this represents 55 to 72 percent of the leads in this example. [For more examples check out our blog, daveyoho.com/wordpress.php.]
Are There Negatives or Cautions in the Rising Economy?
This country’s most recent rising economy coupled with an increase in consumer confidence and disposable income creates a two-edged sword. The glow of increased revenue clouds the judgement and reduces the caution necessary in issues such as lack of staffing, mis-hires, and/or mismanaged sales and marketing personnel.
In our most recent survey on hiring sales personnel, we have seen numerous case studies of otherwise successful companies, which create this concern.
Here is a case study: A successful company that sells roofing, windows and re-bath products in a Midwestern market with annual revenues in excess of $10 million. They employ nine salespeople, plus a sales manager.
They are considered a successful business with high revenues and above-average profitability. Their owner was astonished with the outcome of the audit for hiring, training, managing and turnover (for 12 months). Here is a portion of the actual data from that audit.
Costs for the First 60 Days (A & B) of Sales Training
A. Basic recruiting costs: postings, phone interviews, in-person interview, including management’s time,
– Over the course of one year: the average is $917 for each new sales hire
B. Training, (managers, trainers, time), plus two-weeks-in-training salary or advance for trainee
– An average of $912 per trainee, total cost at 60 days
C. Total cost of leads issued 60 days (50 business days) at $470 each = $23,500
– Net good business sold was $131,300 plus commission at 10 percent = $13,130)
Total costs including A, B & C = $38,459 versus $13,130
These costs represent 29.3 percent of revenue at 60 days
In 60 days, the salesperson’s effort was supported by $23,500 lead costs. So the question remains: What are you doing to arrest the high cost of marketing in your business? QR
Founded in 1962, Dave Yoho Associates is the oldest, largest and most successful consulting company representing the remodeling and home improvement industry. The company has a staff of field representatives and account executives who consult for large and small retailers, manufacturers and service providers. For more information visit daveyoho.com or email firstname.lastname@example.org.