[Brian]

The thread on selling while you sleep evolved into a discussion of discounts and profit. That got me thinking about other ways I use numbers in my business.

Let’s assume the following:
A net profit goal of $40,000 @ 10% of sales
Average sale of $3,000
Closing rate of 33%
Average lead cost of $100

The revenues would need to be $400,000 to make the $40,000 profit. At an average sale price of $3,000 this means that 133.3 jobs must be sold. Since the closing rate is 33% this means that 400 leads must be generated (133.33/ .33). And, since each lead costs $100 this means that $40,000 must be spent on advertising.

This type of analysis is a big part of my planning each year. For example, I might conclude that $40,000 is too much to spend on advertising—I simply can’t make it work in our budget. I have several options: 1. Reduce the per lead cost, which would reduce the advertising requirements; 2. Increase the closing rate, which would reduce the number of leads required; 3. Increase the average sale, which would also reduce the number of leads required; 4. Some combination of the other 3.

Planning then becomes a process of deciding on which numbers make the most sense in terms of attainability and affordability. If I want to reduce the per lead cost, how do I do it? If I want to increase the closing rate, how do I do it? Then as I move forward through the year I can compare my actuals with the projections and see where I stand.

Starting with my profit/ revenue goal I am able to determine what I need to spend on advertising, my closing rate, my average sale, etc. to reach those goals. Of course, we have to track a lot of data to make these evaluations, but we have a data base that captures most of it, and QuickBooks gets the rest.

I hasten to add that the above numbers are purely hypothetical.

Brian Phillips

 

[vermontpainter]

I can see that this is going to be a productive thread. And I know that this is all hypothetical...

Reducing the cost per lead seems like it would be difficult. The first thing that pops into my head is you would probably consider advertising less or in less expensive ways? This seems like it would work against the goal.

The obvious answer to increasing the closing rate would be to lower prices, which is also counterproductive.

Would you look at it in the sense that if you could bump the closing rate up to 40 without compromising prices, in fact maybe even shoot for a 10% higher average sale? Getting the closing rate up to 40 with all else remaining the same would increase revenues to $480,000, more than covering the cost of advertising, in fact you could do more.

We have discussed alot of strategies in other threads where you could increase the closing rate and average sale without compromising the numbers. Is this how you would approach the planning?

 

[NEPS.US]

I can see that this is going to be a productive thread. And I know that this is all hypothetical...

Reducing the cost per lead seems like it would be difficult. The first thing that pops into my head is you would probably consider advertising less or in less expensive ways? This seems like it would work against the goal.

The obvious answer to increasing the closing rate would be to lower prices, which is also counterproductive.

Would you look at it in the sense that if you could bump the closing rate up to 40 without compromising prices, in fact maybe even shoot for a 10% higher average sale? Getting the closing rate up to 40 with all else remaining the same would increase revenues to $480,000, more than covering the cost of advertising, in fact you could do more.

We have discussed alot of strategies in other threads where you could increase the closing rate and average sale without compromising the numbers. Is this how you would approach the planning?

....Seems to me then the goal should be to increase your average sale. By doing so you would reduce you average lead price and lower you advertising. More concentration on marketing instead of blanket advertising.

 

[Brian]

If you lower your hourly rate you will decrease your average sale. So I am assuming that the pricing stays the same.

I generally try to improve all of the numbers, including the hourly rate. But I don't generally use an increase in the hourly rate to increase revenue projections in the planning phase. I use it more as a management tool to control backlog.

A small improvement in closing rate, average sale, and lead cost combine to net significant differences. An improvement of just 5% on each would lead to:
Average sale of $3,150
Closing rate of 34.65%
Average lead cost of $95

This would reduce the number of jobs needed to 127, the leads needed to 381 and the ad budget to $36,190. Small improvements in all 3 areas could reduce the ad cost by 9.5%.

Brian Phillips