Mastering Gross Profit to Customer Acquisition Ratio for Painting Business Success

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decisions.

This is Daniel, the founder of Bookkeeping for Painters, and this is Richard.

I am the tax director with Bookkeeping for Painters.

How's it, how's it going today?

It's going great. Nice warm summer day. You know, the kids in our area are getting ready to go back to school. Uh, my son is not real happy about that, but, uh, it will be nice to have some quiet mornings once again.

Yeah. My kids are just getting used to going to school, so my son and daughter have just been exhausted at the end of the day, so they've just been like monsters by the, by the time it's bedtime, just cuz they're exhausted and just not getting, not used to all the excitement of the, you know, the first week at school. So. Uh, hopefully they'll get, they'll get over that in the week too.

Yeah, and then maybe you can get some better sleep. And exactly, it's always harder on the parents, right?

Yeah. But, uh, today I wanted to talk about gross profit and customer acquisition costs, and specifically the gross profit to customer acquisition cost ratio. And, you know, as an accountant who specializes in the painting industry and I've helped over 300 painting businesses with revenues between startup to $20 million over the last 8 years understand their numbers and save big in tax. One of the biggest things is having a firm grasp on this ratio, the gross profit to customer acquisition cost ratio, because this— once you understand this ratio and you track it, you understand it, and you can implement into your business, you know, you— it's like printing money. You can just, you know, how much money you need to put into your business and how much money you're going to get out of the business. So I thought only the government could print money.

Am I, am I off on that? No, I'm just kidding.

I mean, they, they printed in a little literal way, and, and so can you, you know, if, if you, uh, if you get this ratio down. All right, so first of all, let's define the terms we're talking about. Gross profit is what's left over after you perform the job. So this is your revenue, your top-line revenue, minus your— what you paid your painters, minus what the cost of the paint and materials were. What's left over after paying for those two things is your gross profit margin. And then, uh, customer acquisition cost. This is what it takes you— what you have to pay out to close the deal. So this is your marketing cost and what you pay your salesperson. So your marketing costs might be what you paid in, in Facebook ads or what you paid in direct mail flyers, whatever those costs are for the marketing to get the lead. And then on the sales side, what did you have to pay your salesperson to close the deal? So those two together are customer acquisition costs. And so the ratio that we're looking at is your gross profit to customer acquisition cost ratio. So this is the ratio we're talking about today.

So when you say customer acquisition cost, you're talking about all of the marketing, all of the advertising, whether it was, you know, successful in getting a lead or not. All of that would roll into your, your customer acquisition cost. Would, you know, we would probably figure that by like, say, taking a month and figuring out how much we spent in advertising, how much we paid our salespeople, If marketing is a separate line item from advertising, add that in too. So you get your total amount there and then divide it by the number of new customers you got that month. And that would give you your customer acquisition cost per customer.

Right, exactly. You can boil it down to a number like a, you know, typically on average I'm paying X amount of dollars for my customer acquisition cost. So you should know that. So, you know, how much money do you have to put into your business to get money out of it? Now, the money out of it part is your gross profit. You know, after you produce the job, how much money is going to the business to, to pay off, pay the overhead costs and go to you for profit? So let's Let's talk about why this is important. First of all, knowing this ratio, it, it, it in effect measures your profitability. Because if you have a— the higher the ratio, the better here, because that would imply either you're— if you have a really high ratio, like a 10-to-1 ratio, that would mean either you have your gross profit is super high or your customer acquisition costs are super low. Or a combination thereof. And so this one number basically tells you, uh, by proxy what your profitability is, if you're looking on track or not. And the number you should be striving for is, is a minimum 3-to-1 ratio. So this would mean like if you had a project that you did for $10,000, so you had a $10,000 project Your gross profit on that project was $4,500. So you paid $5,500 for your, your painters and the paint. And so what was left over, your gross profit margin was $4,500, or also stated as a percentage, 45%. Then, uh, your customer acquisition costs were $1,500. You paid $750 for the marketing, Facebook ads, let's say, and $750 to the salesperson for closing the job. And so your, your customer acquisition costs were $1,500. So the— in this example, your gross profit is $4,500, your customer acquisition cost is $1,500, so that's a 3-to-1 ratio. And so that, that's what you would want to target on, on average, is a 3-to-1 ratio or better. Stated another way, if you're looking at your profit and loss, if you look at your gross profit margin percentage, if that's somewhere around 45%, you would then look at your marketing costs and what you pay your salesperson as a percentage of revenue. And between the two of those, ideally, you know, they should add up to 15% or lower, uh, to keeping that 3-to-1 ratio.

So I like that because like, you know, we, we understand that it takes money to make money, right? We're gonna have to spend some money on getting new customers, you know, to do business with us. But that doesn't mean that our sales guy and our advertising budget is just unlimited, right? We don't want to be shoveling dollars towards something that's not earning us a return. So having that, that metric in mind, that, you know, for every dollar I spend on sales and marketing customer acquisition cost, I should be getting at least $3 in gross margin. That, that kind of gives us some boundaries, right? Gives us some ratio there of where we need to be.

Right. So if you're asking yourself, man, am I spending too much on marketing or am I spending too much on my salesperson or is my gross profit high enough? This would be a good way to look at it. Check your gross profit to customer acquisition ratio. Are you at least 3 to 1? If you're at least 3 to 1, you're probably in good shape. So this is a— if you want to boil down your financials into one number, this is a good way, or one ratio, this is a good way to do it, at least on the evaluating profitability. Uh, and it also gives an indicator of what the sustainability of your business is. If you can consistently have a 3 to 1 ratio or higher, This means you can basically put money into the business and get money out of it reliably without putting some sort of financial strain on the cash flow or poor profitability overall. So it's sustainable. So once you get— you can consistently get a 3-to-1 ratio, then you can just, you know, put money into the system and, and grow it from there. There's no, you know, ceiling on how big— I mean, there's other factors involved, but if you can maintain that ratio, it's, you know, the sky's the limit.

That's what you mean by print money, right?

Right, exactly.

Yeah.

If you know you're getting $3 out for every $1 in, we'll take that deal every day.

Exactly. And this is, you know, in a previous episode we talked about valuing your business, this is one of the big metrics that like equity firms and investment bankers, they look at when they're evaluating businesses, is that gross profit to customer acquisition ratio. So, you know, building— if you're interested in selling at some point in the future or just increasing the value of your own business so that's more valuable to yourself, uh, this is a great metric to hone in on and really maximize to the best of your ability. Additionally, you know, you can use this ratio to plan and figure out where can you improve it. Like maybe let's say you're already at 3 to 1, and so you're in good shape, but what can you do to actually improve it? Or maybe you're below 3 to 1. What are some ways that you can actually improve this ratio? Basically, if you decrease the customer acquisition costs, that would be one way to improve the ratio. Another way to improve it would be to increase your gross profit. So changing one side of the equation or the other. Now let's start with ways to decrease your customer acquisition costs. What are some ways you can do that? You can evaluate your— how much you're paying your salesperson. Maybe you're, maybe you're overpaying your salespeople. Um, you know, typically folks are paying their salespeople somewhere around 8%, you know, so taking a look at that, maybe you're paying them 10, 12%, and it's just not sustainable. So take a look at that compensation package for your salesperson. Another way to decrease customer acquisition costs is evaluate your marketing costs. Maybe you're, you've hired a marketing agency that just isn't performing. They're just not giving you quality leads that you can close. That, you know, and you're just spending a lot of money and the, the average, uh, marketing spend that on each client that you're getting is just really high. So you could take a look at that. You could also look at your, your, your closing— or I'm sorry, your sales process. Like, maybe that marketing agency— it's not the marketing agency's fault, uh, it's actually your sales process's fault because your sales process isn't strong enough to command high prices or higher prices than your competition. So, um, it's increasing your customer acquisition cost because let's say, uh, one example you have, ABC Painting has a sales process that looks like, uh, when you call them, they just come to your house, they walk around it, and they say, okay, I'll email you a proposal, uh, later this week. And so that's their sales process. And then XYZ Painting Company, they go, you know, they do a qualifying call, they go to your house, they sit down with you, they do a walk around with you, they build the value of everything they perform. They show you cool pamphlets on customer testimonials on all the folks they've helped, and they have a really strong sales process where they close on the spot oftentimes. So their customer acquisition costs might actually be lower, at least on the marketing side, will be lower because they're able to take leads and convert them into customers at a lot higher rate. So that might actually be a way to decrease, decrease your customer acquisition costs. Um, another way to decrease customer acquisition costs is to increase the amount of customer reactivations you do. So Everyone listening, you have a customer list, folks that you've helped in the past, customers that have worked with you, you know, on a periodic basis, you should look to reactivate those, those customers or reach out to them again and get them to buy again. If the more times they buy from you, the more valuable your customers are. And oftentimes you can get your, your old customers to buy from you again in a lot cheaper ways than it is to go out and try to get a new customer on Facebook or direct mail. For example, you know, your old customers, they— you probably have their phone numbers or their email addresses or both. And so you can just do an email campaign or a text message campaign to them, giving them an offer that said, hey, this is Daniel from ABC Painting. We're doing a special offer for our prior customers. Giving them 10% off of all interior projects for the month of November. And you send out that, that offer, which that, you know, didn't cost you barely anything at all. And then you can get folks to take you up on that offer. And so that's a really powerful way to decrease your customer acquisition costs because it's basically little to no marketing spend.

Sure. I know a lot of times you know, we have to have so many touchpoints before a customer is willing to trust us and do business with us, whether that's through our Facebook ads or, you know, our newsletter or seeing our signs in the yard. But you don't really have to worry about that with previous customers because they already know, like, and trust you. So, you know, you can get away with a lot less advertising and marketing by, you know, reactivating former customers. They don't need quite as much handholding to make a decision to do business with you.

Exactly. So the next way to improve the gross profit to customer acquisition cost ratio would be to increase your gross profit. So here's some ways to increase gross profit. The easiest way is to increase your prices. Increase your prices and keep the, the cost of what you're paying your painters the same and what you pay for materials the same. You can effectively increase your gross profit very easily. So that's, that's an easy lever to pull. The next one would be maybe changing your offer where you're bundling services together. So maybe like pairing up a particular service with a more profitable service. So for example, let's say exterior painting. Let's say you're— you'll do a whole exterior, and with that is bundled with a pressure wash, which the pressure wash services is a high margin service. It doesn't take skill, you know, it doesn't take much skill or time, but you can bundle that in with your exterior paint project, and it increases maybe the perceived value of that. While, you know, you being able to increase, increase the price on that, that offer. So you're bundling those services together and you're raising the price and it has a higher perceived value, but you actually are increasing your, your gross profit margin because it's a lot easier to do a pressure wash than it is to, to paint a house.

I think you just angered all the pressure washing people out there.

It's funny because I just went, I was at, uh, acquisition.com. We talked about this in our previous podcast. I went to acquisition.com, which is, um, Alex Formosi's, uh, his, his, uh, home office where he invests in other businesses. And he was doing a workshop and one of the businesses there was a pressure washing business. He does— he was doing like $10 million in revenue, and he actually started up a national chain of pressure washing companies. So he has a franchise, he has franchisees that work for him. And, you know, he was, he was admitting it, like, you know, it doesn't take much labor, you know, skilled laborers, you know, pretty easy to do a pressure wash. and it doesn't take, you know, very difficult, um, you know, supplies. Like it's water and maybe you can mix in some, some soap or whatever. It's not a complicated business. Uh, you know, and, and that's why he chose it to scale that business because it is a simple, uh, a simple business model. Like you're, you're providing, you're providing value for sure, but it's not hard to get a pressure washer and and wash a house, you know, it's a process that you can easily repeat.

Yeah, my son asked me to buy him a video game. It's a pressure washing video game, and he sits there in front of the TV and he spends— I'm not making this— he spends hours virtually pressure washing stuff. And at first I was like, this is ridiculous. But then I'm thinking like, well, if, if college doesn't work out for him, at least he'll be, you know, have a foundation in a skill that he can make some money at.

Um, but yeah, you should just get him a pressure washer and have him go around neighborhood and do cold calling to see if he can book any pressure washing jobs.

I, I said, that's what's funny, like in the game you like get paid money and then you can upgrade your pressure washer and upgrade your soaps. And, um, I don't know, it kept him busy for a while, so I was, I was good with it. I said, yeah, you need to do this in real life and you can make enough money to buy, you know, a real video game. But he, he Anyway, but yeah, I think I've seen folks do this, the bundled services with color consults also. Like, we'll come in and we'll do a free color consult. And again, that does take some skill, but there's not a lot of like other expenses involved. So it's a high margin thing. And customers tend to really appreciate it, especially, you know, men like me who can't figure out what color to paint anything. I've been told hospital white is not appropriate for every wall. So having someone come in and help, you know, do a color consult, that can add a lot of value to your services and help justify maybe some higher prices to get that, you know, gross margin up.

Yeah, cool. The other way to increase your gross profit is to be more efficient. So if you're— you can keep the prices the same, have the same offer, but maybe your crew is just not very efficient. And so this might be, you know, holding their feet to the fire, giving them the budgeted hours, say, hey, you know, I do production rates and everything's budgeted for a certain amount of hours for the walls, the trim, the ceilings, the doors, the railing, everything has budgeted hours. And so you guys need to task organize yourselves. Maybe Jimmy takes the trim and Johnny takes the walls and they each know their budget hours for each surface and you hold them accountable to beating the budget or maybe even incentivize them financially to beat the budgets on a home and get your crews to be more efficient. So maybe you could focus on efficiency and, you know, move your gross profit margin percentage from 40% to 45% due to the efficiencies that you're implementing. So that's another way to increase gross profit. Bottom line is the gross profit to customer acquisition cost ratio, super important ratio that gives you a really good understanding of where your profitability stands in your business and And hopefully that gives you some ideas on how you can improve that ratio so you can scale your business and start printing money.

Yes, I love it. We should all have a money printer, and, uh, if we can't borrow the Federal Reserve's, then we can do it through, uh, smart investments and, uh, hard work. So awesome. Well, thank you, Daniel. I appreciate you going over that with us. Uh, I learned a lot on this one.

Awesome. Yeah, hopefully it was helpful to you listening as well. If you want to join in on the conversation, definitely go to Grow Your Painting Business on Facebook. Uh, if you go to Facebook, type in Grow Your Painting Business and find that group. Join the conversation, ask questions, or like to hear what your gross profit to CAC ratio is. And, uh, with that, we'll see you next week.

All right, see you in the next episode.