Painters: Know Your Marketing Numbers

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.

Hey, this is Daniel Honan, the founder of Bookkeeping for Painters, and this is Richard Dunton, tax director for Bookkeeping for Painters. And today we're going to talk about knowing your marketing numbers. So this is today's theme. Super excited to get this started.

Yeah, absolutely. Marketing is probably one of the most important things we do in our business, right? That's how we let people know who we are and what we have to offer. So, you know, it's probably something that we're allocating quite a bit of our, you know, our budget towards. So we want to make sure that we're allocating the right amount. And that we're getting a good return on that.

Absolutely. Couldn't have said it better. So first, before we get too deep into it, let's just kind of highlight what we're going to hit. First of all, we're going to talk about marketing return on investment, what that is, how you can track it. Then we're going to go into what customer acquisition cost is, what that is, how you can track it, what should your customer acquisition cost going to be. They're going to talk about taking customer deposits and what you can do with that money and why it's important to take some sort of customer deposit and how that applies to your marketing. And then I'm going to go through some real-life case studies on knowing your marketing numbers. So first off, the basic kind of number that you need to understand for knowing your marketing numbers is marketing return on investment. So a marketing return on investment is basically you're going to put money into some sort of marketing campaign, right? Maybe you're running Facebook ads. Maybe you purchase leads from Andy's List. Maybe you are running a direct mail campaign. That's a market. That's a marketing campaign. And you're putting some sort of money into that right now. What you're going to get out of that is hopefully close work. So the return on investment is going to be basically the amount of work that you produce from that marketing campaign that you ran. And so it's basically a math problem where, let's say, let's take an example. Let's say you run some Facebook ads, you spend $10,000 on Facebook ads, and from that marketing campaign of running $10,000, that resulted in $100,000 in produced work from the leads that you got from that Facebook, those Facebook ads you ran. So $100,000 divided by $10,000 gives you your marketing return on investment on the revenue, for revenue, which is basically $100,000 in revenue divided by $10,000 in marketing cost gives you 10. So you had a 10 10x ROI. So for every dollar in Facebook ads that you put in, you get $10 out in revenue or produced work. So that's a good—

yeah, I was gonna say that's a good return on investment. If I can put, you know, $1,000 into something and get 10 times my money back, that's a wonderful investment, right?

Yeah, and there's another type of ROI you could use is it's that, that one's the revenue-based ROI, meaning we're using the top-line revenue divided by whatever you put into the marketing costs. The other type of return on investment that you can do is called the net profit-based. And so that basically takes the net profit, so the bottom-line profit, not the top line, not revenue, but bottom line profit divided by your marketing cost that you put into it. So for this one, you would have to basically look at your P&L and what you historically, uh, profit, net profit from the business. So let's say that you have a net profit of 20% historically. So using the same example, you run a Facebook Facebook ad, you put $10,000 in the Facebook ads, you got $100,000 in revenue, and you usually run a 20% net profit. So you have $20,000 of net profit from, from those Facebook ads because 0.2 times $100,000 is $20,000. And so then you take that $20,000 net profit and divide it by your $10,000 of that you put into the Facebook ad, which gives you a 2x ROI. So that's another way you can kind of look at that, and that kind of gives you more of a, okay, I put, you know, if I put $1 into my business, into this marketing campaign, I'll get $2 out in net profit.

Those two methods are very, very different, right? They're going to give you some, you know, the first one runs off the top line numbers, we're talking about a 10x, you know, return on investment. The second method runs off of your bottom line numbers, your profit. And that one's giving us in this example, a 2x investment. Do you think that that one method is superior to the other, or is it just kind of a matter of, of your personal preference?

Well, the first one is definitely easier to calculate. Because it's kind of very straightforward. As long as you're tracking, obviously we'll get into how you can track this, but as long as you know you're tracking your leads and you track how much you close and how much work you produce from that marketing campaign, it's relatively easy to calculate the revenue divided by whatever you put into that marketing campaign. But the net profit is a little bit more difficult to track and, uh, to get that number. But it probably gives you more information because, you know, there, there you could say maybe let's take a, uh, the same example here. Let's say you, you're doing the Facebook ad and you get $100,000 in closed work. It costs you $10,000 in Facebook ads, right? But what if your net profit historically was 5%. So that would mean that you spent $10,000 to get $5,000 in, in net profit. So that would be a lot different than, you know, because you're basically putting money into to not make more money. So that gives you a little bit more information even though the revenue ROI is the same, is 10x, but because the profit, the bottom line profit was a lot lower in the second example I gave of 5% instead of 20%, you know, it doesn't look as good. So the net profit ROI gives you more information because it tells you, okay, I'm putting this much money into the business, what am I actually getting out after everything is paid for? It gives you more of a, like, money in, money out kind of number, which is probably more useful. But it is a little bit harder to track that because you have to know, you know, what you're— what you're either— what you're historically profiting and, and assume that that's the same, or track it, you know, actively, which is a little bit more difficult as well.

Sounds like ideally you would be tracking both amounts. Because with the revenue, the top line, it kind of helps you see how much business you're generating from your advertising. But then the second method, the bottom line, helps you understand how much money you're actually keeping. And just, you know, in my mind I'm thinking, you know, if my top line number is showing a really good return on investment like 15 or 20x, but my profit, my bottom line number is showing very, very little, then it's probably not a marketing problem. I probably need to tighten up some of my operational costs. Like I'm bringing the money in, but it's going out somewhere. So, so that might help you understand where you need to make adjustments in your business.

Yes, absolutely. Yeah. No, no. Yeah, go ahead.

Oh, I was going to say, so I mean, Do you have suggestions as far as like, um, what numbers we should be looking for? Should we be looking for a 10x return on, on revenue and a 2x return on profit? Or is there maybe like, like a range?

So generally for the revenue-based ROI, you want to get a 7x or above, but, uh, so that's like just a general rule. 7 to 10x or more would be, would be good. For the, the net profit base, basically, if you're putting— if you're, you're getting more money out than you put in, then it's generally just good. You're, you're— you put $10,000 in and you got more money out, whether it be like in the example, first example, we said you got $20,000 out because you had a 20% a net profit. But even if you just got $11,000 out, you know, because you put $10,000 in, you got $11,000 out, that's a 1.1, uh, ROI. Anything more than what you put in is good. Um, so, you know, basically anything over 1 really would be a good ROI. Okay. Um, but, you know, this, this is definitely depending on the situation. But those are some general numbers that kind of give, give some guidance.

Gotcha. So, you know, we, we talked about like the return on investment. Are there any other metrics that we should be looking for, uh, to help us understand if, if we're, we're getting a good return on investment? Like, like maybe customer acquisition costs or or things like that.

Yeah, well, I'm glad you brought that up, Richard. Uh, yeah, definitely customer acquisition cost is, uh, is definitely a good number. Before we jump into that one, I wanted to quickly cover for marketing ROI. Um, how do you track this, right? Because we talk about, you know, what it is, why it's important, and how do we actually track this in the business. Now there's Many ways you can do this. A way you can do it is if you're using QuickBooks Online, there's something called classes in QuickBooks Online. And assuming you're not using it for another purpose, and if you are already using classes, there's another way you can do this using tags, kind of a similar methodology here. But basically, for every invoice, whenever you do your final invoice to your customer, you would put the— assign the class of whatever the marketing campaign was. So you would have a list of classes like Facebook Ads, direct mail, you know, Angie's List, whatever all your different marketing campaigns you're running. And then your final invoice, you tag that or assign the class of that marketing campaign. And then on the cost side of things, whenever you make a payment to Facebook Ads or make a payment to Angie's List or payment to your— whoever's doing your flyers, you tag it with the same class. And so when you run a profit and loss report, you have your— you run that profit and loss by class. And so the top line will show you, you know, they'll be separated by Facebook ads, all your different marketing campaigns, Facebook ads, and then agent list, direct mail, and it will give you the revenue for each of those. And then underneath on your advertising marketing cost, it will give you the amounts. So from there, you, you'll be able to derive your return on investment numbers in QuickBooks Online. So that's a way you can track it. Now, there's other, other ways to do it, obviously. That's definitely a way you can do it.

Cool. Do you think, you think using classes and tags is maybe better than, say, using a whole bunch of subaccounts? Under advertising. I mean, I know depending on your QuickBooks subscription, you might be limited on the amount of accounts that you can have. And it does make for some little bit messier reporting when you have so many accounts.

Yeah. It comes down to what all you're trying to track in your, in your business. Some folks have different service lines or doing interior, exterior, staining, fence, deck, whatever, then they want to track the different kind of service lines, and then they also want to track marketing. So there's no— the bottom line is, as long as you're getting the data that you need is the way that you should set it up, and it's relatively easy to manage. So it kind of depends is the answer. If you're, you know, classes are good for, you could do marketing campaign tracking, but you also can use classes for service lines, you know, track different service lines. But then there's also products and services you can use to track things and you can use tags, then you can use, you can use sub-accounts as well. You know, that wouldn't be my first go-to, but it definitely can be used as well. It just depends on what all you're trying to track. And then you got to figure out how to put that picture together based off all the things you're trying to— all the data you're trying to get out of your business.

Well, as a tax professional, I can say I appreciate a clean profit and loss when it comes to preparing taxes. So if you want to get on the good side of your CPA, I guess maybe don't drown him in subaccounts, but do what works for you, right?

Yeah. Yes. And all right, so getting to your prior question, customer acquisition costs. This is another number that definitely recommend you get a good understanding of in your painting business. So first of all, what is customer acquisition cost? It's basically all the costs that you need to put it in to close the sale. So this will be marketing costs, so you're spending the dollars on Facebook ads. This would be paying the salesperson if you have salespeople, whatever money you have to put in to close, close the sale. So usually it's basically marketing costs. And your salesperson. Those are the two main ones. And so it's important to know your customer acquisition cost because you want to know how much money you need to spend to get your next closed work, right? How much money do you need to put in your business, or does your business need to spend in order to get your next, your next job? So Let's talk about how we calculate the customer acquisition cost. Now, basically, you'll want to obviously have a bookkeeping system and to calculate this, and you want to be tagging all your marketing costs to a marketing chart of account in QuickBooks Online or some sort of bookkeeping software. So that's going to track your marketing costs, right? And then to, uh, for your salesperson, you know, you might still be doing sales in your own business, or you might have a salesperson that you've hired, or the sales team. And so either way, you'll need to know how much you're paying, what's your payment structure for your salespeople. So a lot of painting businesses, they're paying their salespeople somewhere between 5 and 10% of whatever they close, um, either as straight commission or a mix of commission and a base salary. So, um, so that's the other piece. Now, yeah, go ahead.

Oh, I was gonna— so it's your advertising costs plus your expenses for sales. So like you're paying your salespeople either commissions or salary or however you have it. Is there anything else that factors into that customer acquisition cost?

That's, that's pretty much it.

Okay.

But the number you'll need to dial that in, you can express it as a percentage. So since we already said Salespeople are between 5% and 10%. We'll just split the difference, say 7.5%, let's say, is what you pay your salespeople as a percentage of whatever they close, right? So 7.5%. Now, to get the percentage for your marketing costs, you'll have to go to your profit and loss, run your profit and loss by percentage of income. In QuickBooks Online, that's what they call it, percentage of income. Or say it another way, percentage of revenue. And you'll look at your marketing line and it, and that will give you your percent. And you run it over like the last 12 months so you have a good, you know, sample size. And that will give you, you know, a good, a good chunk to look at. Last 12 months, look at your marketing as a percentage of revenue. And, and usually most painting businesses are somewhere around the somewhere between 1% and 10% marketing cost as a percentage of revenue. And basically, that's kind of a wide range, but usually the reason why is because there's some painting businesses that are more aggressive on actively marketing and some are very reliant on referral-based type business. So if you're, if you're interested in knowing your marketing numbers, you're probably more towards actively marketing and putting money into the business, either with paid ads or whatever. So if that's you, you're probably closer to 10%. And so let's just say you— it's 10% for this example. So if you have 10% marketing cost of the last 12 months as a percentage of revenue, and then you also pay your salespeople 7.5%, your customer acquisition cost as expressed as a percentage would be the 7.5% plus the 10%, which is 17.5%. So that would tell us that your customer acquisition cost expressed as a percentage is 17.5%. Now the, the other piece of this is, you know, because I originally said how much money do you have to spend to to get your next customer. That doesn't really give us how much you need to spend. It just gives us a percentage. So to understand what do you actually have to spend, you have to calculate your average job size. So your average job size is for painting businesses doing, you know, retail or residential repaint, that's somewhere between $5,000 on the low end and $10,000, maybe even a little bit higher now just because of recent inflation. So, um, but you can calculate this for yourself, uh, either in your CRM or, or in QuickBooks Online by basically pulling your revenue from the past year and divide it by how many customers you served. So, um, you know, take your top-line revenue and divide it by how many customers that you serve during that period of time. Or how many jobs you did, and that would give your average job size. And most main businesses, like I said, between $5,000 and $10,000. So to continue on with the example, we said 17.5% was the customer acquisition cost expressed as a percentage. And let's say your average job size is $10,000. That tells me that your customer acquisition cost in dollars is $1,750, right? 17.5% times $10,000 is $1,750. So you have to spend $1,750 to get your next sale.

Is that a— is that good? Is that— is that kind of where you— is that where you want to be? Um, are there like, like maybe benchmarks on what your, your acquisition cost should be as a percentage?

Yes, glad you asked. Yeah, so yeah, you generally want to keep that customer acquisition cost no more than 1/3 of your gross profit. So in previous podcasts, we've talked about what is your gross profit be. The average is 40%. You know, most folks who work with are shooting for 50% or even more. So to keep the, uh, to keep it easy, let's say you're— again, you get a look at your profit and loss, you do it over the last 12 months, look at your gross profit, and let's say it's 50%, which would be great because that's above average. Um, and so what you want to do is take that 50% and divide it by 3, and that will tell you, okay, my customer acquisition cost should not exceed the 16.6%, 16.7%. So that would be basically the kind of the— you don't want to exceed that amount, right? So that would be at 16.6% and multiply that by your average job size of $10,000. So that would be $1,666. So in, in this case, if you had a gross profit of 50% on average last 12 months, uh, you shouldn't be spending more than $1,666, which is less than what we said the customer acquisition cost was, was like $1,700. So your customer acquisition cost in this example is a little bit higher than what you would want it, but it's pretty close. You know, a little high, but not too bad. So that's, and that's a general rule of thumb is 1/3 of your gross profit.

[Speaker:TOM BOWLEY] Okay, so if I have a painting business and let's say I'm doing $120,000 a year, I'm fairly small, I'm shooting for a gross profit of around 50%. At least 40%, preferably 50%. So that's $60,000 gross profit. One-third of that $60,000 would be my customer acquisition cost. So I can spend $20,000 a year on acquiring customers, right? And if I do, say, 20 jobs during the year, then probably about $1,000 per job to get the job. I mean, that's assuming the jobs are all even, right? Some jobs are gonna be big and some jobs are gonna be small and don't spend a fortune to get a tiny job. But okay, that makes sense.

Yeah. And for that painting business, that's kind of small. That $120,000 painting business, they're probably doing the sales. And so in that case, you know, you would want to use, you know, you might not actually be spending the $20,000. Hopefully you wouldn't be spending that much because again, customer acquisition costs, marketing costs, and what you're paying yourself, salesperson, you're probably not, if you're only doing $120,000, you're probably still maybe an LLC taxed as a disregarded entity or a sole proprietor or something like that. So you're probably not running a salary, so you won't find those costs on your P&L. But you can just use a plug number, just like say, hey, when I scale to the next level, you know, I'm going to pay my salesperson somewhere, you know, I'm going to pay them 5% of what they close or 7.5% of what they close, whatever. So you could just use that number to calculate your customer acquisition cost because you'll probably, if you're not paying yourself a salary or paying yourself commission, you won't see it on your P&L. You'll only see your marketing costs on your P&L. So this is something to keep in mind for the smaller painting businesses that are listening that go, hey, I don't have a salesperson. You'll just have to kind of use that a plug number to figure out your customer acquisition cost.

Gotcha. Gotcha. So you don't get, you don't get used to maybe having a little extra buffer there. And when you really don't, because once you, once you take that hat off and you hire somebody else to do it, then your costs are going to go up. That, that makes sense.

Yep. So exactly. Cool. All right. So yeah, go ahead.

I was going to say, so, so the next question is like, well, how do we pay for all of this? Right. You know, is there a way that we can kind of, you know, leverage, you know, leverage our money so that we can take the income we're getting from one job and kind of pay for the jobs in the future to come?

Yeah, absolutely. So knowing your customer acquisition costs, that's great. You know what it is. And maybe you know that you're within the 1/3. Gross profit rule, but what can you do with that information? One of the things you can do is make, make sure that your customer deposit is priced to cover your customer acquisition cost. In some states, you're going to have, are going to have this, it's going to be easier for depending on where you are when you're listening to this and where you perform your work. This will be easier for some and not as easy for others. So if you're in California, my apologies go out to you since you have a lot of restrictions on what you can charge for a deposit. But for most other folks, you don't have those sorts of limitations, so you can basically have more control over what you can charge as a deposit to your customer. So if you know your customer acquisition costs and you know, okay, I, I, my customer acquisition cost is $1,700, or just, you know, 17% of, of my average job size. Your deposit needs to be above that amount, right? Because you want to cover that cost, you want to get that money back from your customer to cover your customer acquisition costs. And, um, or even, you know, double that. You maybe get— cover your customer acquisition costs for that job, but also get the money to get the next sale as well, you know. And then maybe you also want to make sure you cover labor in your deposit. So definitely pay attention to how much you're charging your customer. It's important because of cash flow. We've all heard cash is king. I think we did a podcast on this already. But you need to make sure you are covering those costs in your deposit because that's going to help your cash flow and it's also going to help your marketing because you'll get the money to put that from your customer to get the next customer.

So, so you're talking about you, you say you're talking about you're getting this deposit from your current customer from the sale that you've closed and you're already using that money to get the next customer. And so the jobs are paying for themselves and you can just keep on doing this. And that way you'll always have enough capital, enough cash available to pay for your marketing, pay for your salespeople, whatever that customer acquisition cost is gonna be.

Right.

Nice.

Exactly. Yeah, so it really helps you scale because one of the biggest difficulties of scaling— I mean, there's many, but one of them is cash flow, you know. And ideally, you don't want to have to rely on creditors or lenders to give you a bunch of money to scale your business. You want to do it organically. You want to do it, you know, with your own cash. That's That's one, it's, it's the not a— it's cheaper to do it with your own cash. You don't have to pay someone else for the use of their cash. And two, it's just you have more flexibility if you can generate your own cash. So that's why a customer deposit is super important. There's a lot of folks that are resistant, they feel like it's shady business practice or something like that. It's not. It's plenty of other you know, lawyers. I mean, if you ever, you know, gone to a lawyer and, um, they're always asking you for a retainer, right? Like, um, it's standard practice. So I wanted to dispel the, the, uh, you know, obviously it's shady to take someone's money and not do anything for them. That's, yeah, that's definitely shady. But if you're, if you're providing value to your, your customer and just getting that money down to secure their spot on the schedule I don't see anything wrong with that.

Yeah, I got to say, Daniel, I don't know if I would agree that, you know, if we're going to argue that this is not shady, I don't know if lawyers is the example I would use for that.

I'm just kidding.

Yeah, there are plenty of very fine attorneys out there. And you're right, it is pretty standard practice to take a deposit because there's costs involved. And you need to kind of share some of that risk with your customer. Do you have a recommendation as far as like how much of a deposit we should be looking at? Is it, is it 50%? I know you mentioned that it might be limited by the state you live in, such as California, but assuming your state's not telling you what you can and cannot, you know, charge, do you have a recommendation as a percentage?

Yeah, I would say if you can cover your customer acquisition costs, right, that's one. And then also your labor, especially if you have employees. If you can cover those two things, that would be what I would set your deposit at. And the reason why I don't say materials is because you usually can put materials on credit. You can put it on your credit line with Sherwin-Williams. Or your credit card or both where you put it on your Sherwin-Williams and then use your credit card to pay down that balance and that extends how much time you have to, you get to hold on to your own cash. But yeah, so basically cover your customer acquisition cost and then cover your labor. Labor tends to be around 35 to 45%. So If you're at, let's say, 35% and then your customer acquisition costs are at 15%, 35% plus 15% is 50%. So yeah, so I would say, you know, I see people charge deposits between 20% and 50%. So I would, you know, for most folks, charging closer to 50% would make sense, especially if you have employees. If you use subs and you don't have to pay them until after the job is completed, you could probably charge a lower deposit, you know, just covering your customer acquisition costs, you know, maybe 20% would make more sense.

So this is about mitigating risk, right? So if you charge a 50% deposit or enough to cover your labor and your, you know, the acquisition costs for your next customer and everything falls apart and you can't collect on the rest, at the very least, you've got enough cash to pay your employees and to move on to the next job. Yeah, it makes a lot of sense.

Yeah, definitely. Yeah, and, uh, you know, I've worked with a lot of painting businesses, and, and the ones that really dial this in with their market, knowing their marketing numbers, knowing what to charge for a deposit their bank accounts are increasing every single month and they have hundreds of thousands of dollars just, you know, uh, ready to go. And so if you can dial this in, it's super, super important for your business. So one, knowing your marketing ROI, getting that between, you know, 7 and 10x or higher if possible. You know, monitoring those marketing campaigns, what's performing, what's not performing. If something's below 7, definitely take a look at it. Doesn't necessarily mean that you should cut it automatically, but just take a look at it and evaluate it based off of your margins, your, you know, your customer acquisition cost, how much money you need to spend to get your next customer, make sure your deposit's covering that customer acquisition cost, your cash flow. Is staying high within your business. So if you, if you get a good grasp on those things, your customer acquisition costs, your marketing ROI, and your, what you're charging your, your, your customer for deposit, and those are all working together, you are definitely on a good path to being able to scale, to scale your business.

Awesome. Yeah. Cash gives you options. Cash, uh, cash allows you to, to make decisions and do things. So definitely important to make sure that we, we have enough capital there to do the things that we want to do in our business. So these are, these are really great tips, Daniel. Thank you.

Yeah, yeah. Happy to, happy to, happy to help. All right, cool. So I'd like to hear from, from you all listening. You know, what kind of strategies are you doing in your business to track marketing return on investment? Any hacks that you have or tracking customer acquisition costs. What do you see in your business? What are your customer acquisition costs? Is it your cost different than what I was talking about? I'd like to hear what everyone else is seeing in their business. Or if you have any questions about anything that we covered, I'd be happy to hear about those. And you can go to the Grow Your Painting Business Facebook group. It's a private Facebook group. Just request access to Grow Your Painting Business Facebook group and we will gladly invite you in and feel free to ask your questions and we'll definitely get back to you.

Cool. So it's a private Facebook group. Are there any requirements to join?

Yes. Yeah, there's a couple questions. Just to request access. But yeah, as long as you answer the questions, we'll definitely let you in.

Okay, cool. They're not math questions, are they? No.

Yeah, you have to be able to tally out retained earnings and yeah, it's pretty difficult. But no, no, no.

If you, if you, if you have a painting business or you just want to learn more about how to grow your painting business, you're welcome to join. We'd love to have you. Um, I guess my point was, is, is don't, don't shy away. It's, it's private, but it's, but it's very welcoming. So, you know, definitely come join us, ask your questions, and let us know what kind of, what kind of numbers you're looking for. What kind of, uh, you know, return on investment do you think is a good return on investment where you hope to get in your business? So with that being said, I think, I think we're going to go ahead and wrap it up. Thank you everyone for, for listening to us today, and we hope to see you on the next podcast.