Reduce Marketing Costs by Improving Sales Process

This is Daniel. I'm a CPA who works exclusively with painting business owners, helping them know their numbers and save big in tax. And today we're going to talk about how you can lower the cost of marketing without actually spending less in marketing. So we're going to take a look at some key metrics you should look at in your sales process to actually dial in those key metrics so you can lower the cost of your marketing. So a lot on this podcast we talk about the ratio between your gross profit and your customer acquisition costs. We've had several episodes, but just to do a quick recap, gross profit is what's left over after you pay for direct labor and direct materials. So that's your gross profit margin. The average gross profit margin is around 40 to 45% for painting business owners. Now, customer acquisition cost, that is all the costs associated with closing the deal. So this is your marketing costs plus your sales costs. So marketing costs are, you know, paying for door-to-door, direct mail, Facebook ads, those are your marketing costs. And then your sales costs are paying your salesperson commission for closing deals. We're gonna hone in on the marketing costs. Now, marketing costs are usually about half of what your customer acquisition costs, so it's a big component of your customer acquisition costs. And remember, we want to keep customer acquisition costs to about 1/3 of gross profit. So if your gross profit's at 45%, we want to keep your customer acquisition costs at 15% or lower, and that's gonna allow you to scale. Now, now customer acquisition costs, half of that is made up of marketing. So we're going to dive into marketing metrics here, and I'm sharing my screen for those who are listening. We're looking at a growth, a growth model, and you can see that marketing is around half of the overall customer acquisition cost. So customer acquisition costs typically run somewhere around 15 to 20%. Of revenue, and marketing costs are usually about half of that. So about 7 to, you know, 7 to 8 or 7 to 9 or 10%. So how can we actually reduce marketing costs without lowering our spend necessarily? So the way we do that is by improving our sales process so our marketing dollars do more for us. So there's 3 metrics that we want to look at in our sales process: the set rate, the show rate, and the close rate. Those 3 metrics, if we dial those in, get those optimal, we can reduce the cost of our marketing because we're doing more with less. So you're more— if you improve your sales process, when you look at your profit and loss, your marketing costs as a percentage of revenue should go down. So I just met with someone earlier this week, and we were taking a look at his profit and loss, and his gross profit was great. He was doing about 45% gross profit, and then we looked at his customer acquisition costs, and and they were pushing over 20%, about 22%. And the thing that was way out of whack was his marketing costs. His sales compensation, he's compensating his salesperson about right, it was about 7 or 8%, but his marketing costs were around 15% of revenue. And so they were considerably higher, very high. And so the ratio of 3 to 1 wasn't working right now. The ratio of gross profit to customer acquisition cost was not there at all. He had more like a 2 to 1 ratio. And it was because his marketing costs were so high. So what we did, we dove into his sales process to see, okay, why is he spending so much on marketing? Because he was using Facebook ads and Google pay-per-click. And a couple other smaller things, but those were the two main ones. And we took a look at his Facebook ads because that was the biggest acquisition channel. And the first thing we looked at was his close rates, like how much, what percentage of the clients he was actually giving an estimate to, what percentage was he closing? And he was actually doing a pretty good job with his close rates. He was closing about 30 to 35%, so that's pretty decent. The next thing we, we walked through was his show rates. Of the people that schedule an estimate, what percentage actually show up or don't cancel on you? And this was also very good, it was over 90%. So, so far so good. Then we looked at his set rates. So when a Facebook lead came in, what percentage was he actually scheduling an estimate? It turns out his set rate was around 30%, so if 10 leads came in from, from Facebook, he was only scheduling about 3 on his estimate calendar. So this was the issue and one of the reasons why his marketing costs were so high. Because his set rate was so low for his Facebook ads, he was having to spend a lot more money on Facebook ads to get closed customer, closed work. So we dug a little bit deeper, okay? Why are his set rates so low? And so I asked him, you know, are you doing speed to lead? Are you, as soon as those Facebook ads as leads come in, are you scheduling them or having somebody reach out to schedule that lead on the estimate calendar? And he said that he had someone dedicated to that, but they weren't getting to them right away. It was taking them a little bit of time, and also they didn't really have a great script, it turns out, to do that. They weren't pushing hard enough. They would only call once. They wouldn't follow up if they didn't get ahold of them. So basically this was the issue. Their set rates were really bad, really low for Facebook ads. For Facebook ad leads, you should be getting, shooting for at least 50% at the bare minimum, but hopefully a little bit higher than that, maybe 60 or 70%. So that was the big takeaway for this meeting was, hey, really focus in on your set rates, get that person trained up or get a new person that can effectively effectively set appointments because this is where all your money is going. You're spending a bunch of money on Facebook ads and then those leads are coming in, but then you're not scheduling them on your appointment calendar. Your show rates have been fine, your close rates are good. So those are— you don't need to change anything you're doing there. Just need to focus on your set rates. So So that's kind of an example of how you can improve your marketing costs or lower your marketing costs as a percentage of revenue without actually spending less. Because in this situation, he could keep spending the same amount. It's just doing more with what he's getting from Facebook. So let's go through some key metrics that you should be looking at. Your set rates. So if you're running Facebook ads, you should be setting it at a bare minimum 50%, but ideally 60% or higher in most cases. Now, if you're— if you have website leads, like someone fills out a form on your website, for those leads, you really should be scheduling like 90% or higher because those are very, very hot leads. These are folks that are on your website. Trying to reach out to you to get an estimate. So you still need to treat those with speed to lead, getting them booked as quick as possible because they will go to someone else's website if they don't hear from you. So, but those are very, very hot leads. Where Facebook, you're kind of interrupting their day to tell them about painting. They might not have that top of mind, they might just be kind of interested but not super interested. So those are going to have lower set rates. Then you have other things like door-to-door. Again, those are not going to be as high set rates as like someone going to your website because you're kind of interrupting their day and knocking on their door, but you should have somewhere around 50% or maybe even a little bit higher. And then you have things like people responding to direct mail. You know, you should either be scheduling them with the QR code that's on your flyer or doing some sort of speed to lead, so you're booking those people as quick as possible. So those are some just rough numbers to take a look at your set rates. Now let's move to show rates. Show rates, do they cancel? Once you schedule them on a calendar for estimate, do they cancel with you or do you actually perform the estimate as scheduled. So your show rate should be super high. You should have some sort of reminder system, you know, texting the prospect a day before, the morning before, an hour before, reminding them of the appointment, and maybe email and text message, and also maybe even throwing in that qualifying call beforehand. But your show rate should be, you know, 90% plus. If it's below 90%, you need to take a look at that reminder system to make sure that you're qualifying them and reminding them about the appointment. So that's the show rate. Then the last one is close rate. Close rate is what percentage of the prospects that you're visiting and giving that estimate to, what percentage of those are you actually closing? In getting a deal signed. So close rates typically run somewhere between 25% and 40%. 40% is really great, really awesome. You have a really strong sales process or you're just not charging enough. If you're over 40%, you might not be charging enough because you do want to get a certain amount of nos. If you're getting all yeses, it might be an indicator that you're not charging enough money. Now, if you're somewhere around 30-35%, you're probably okay with your close rates. Not to say you can't improve them, but it's decent. Obviously, make sure you're charging enough too, because that's, as we've talked about in previous episodes, not charging enough money is like the number one issue for profitability issues in a painting business, but that's a whole other podcast. So those are some ballpark metrics looking at your set rate, your show rate, and your close rate. Those are some targets that you can put into practice. Take a look at your numbers compared to those general benchmarks to see if you're on track. And if you're significantly off track, maybe your close rate's 10%, definitely look at your sales process there. What are you not doing? Maybe you're not actually presenting on the spot. Maybe you're just sending an estimate in email and that's a very weak, you know, way to do that, very weak sales process. So maybe make that process better, present on the spot, have a presentation that you're actually giving to the customer. If your show rates are super low, like they're below 90%, maybe like I said, doing a reminder system, qualifying the person, making sure they're going to show up or not cancel on you. And then the set rates, like we talked about, making sure you're doing a speed to lead, getting those estimates booked as quickly as possible as those leads come in. All right, so hopefully this was helpful. If you're looking at your marketing costs as a percentage of revenue and it's higher than what you're shooting for, maybe it's over 10%, marketing is over 10% of revenue, Instead of just spending less on revenue, try taking— try looking at your sales metrics, your set rate, your show rate, and your close rate, and seeing where you can improve it to actually lower your marketing costs as a percentage of revenue. With that, I'll see you next week.