Understanding Your Client Acquisition Costs | Ep #24 feat. Daniel Honan — The Landscaper Marketing Show

Welcome back to the Contractor Marketing Show. I'm your host, Matt Thiebaud, and today we're joined with Daniel Honan from Bookkeeping for Painters. What's going on, Daniel?

Hey, how's it going, Matt? Excited to be here.

Yeah, great to have you on the show, man. Guys, I'm really excited to have Daniel here on the show, and we're going to talk a little bit about just some simple stuff in terms of finances. Um, Daniel specializes with painters, but all the stuff they're going to be talking about is going to be Relevant for all contractors. And, you know, we're going to really gear things into not just talking about bookkeeping, although that's what Daniel specializes in, but he also helps just advise contractors on just really knowing your numbers and be able to make really educated decisions on like what you're doing with your business based off of those numbers. So I think that's going to be really valuable to have Daniel on the show today. So we're just going to dive right into things.

Let's do it.

Awesome, man.

Cool.

So yeah, so first things first, um, just say like at a high level kind of what you guys do and what you specialize in, and then we'll kind of like go into, you know, delivering some great value for everyone.

Absolutely. So what we do is we help painting businesses know their numbers and what they mean so that they can grow to the next level. And then we also help them save big in tax. We help them implement tax strategies so that they're Saving big in tax, because if you hit any level of success in your business, the biggest expense you're going to hit is taxes. So we help once you're making those profits, actually save money from the tax man. Yeah.

So it's the type of thing where it's like you always hear people say like, oh, you need to know your numbers. Like, that's super important. Why is it important to know your numbers and what exactly does knowing your numbers mean? Because I think that that phrase means like different things to different people, right?

Absolutely. You're exactly right. And the, the, to answer the first part, why you should know your numbers. If you don't know your numbers, you don't know your business. And knowing your numbers really means knowing your margins. Like you receive money from customers, right? That's your revenue. That's your top line. But then what's your margin after you produce that work? What's left over? That would be called your gross profit margin. And then you have all these overhead expenses, you know, software, insurance, automobile costs, whatever. That's all your overhead costs, you know, and then that gets you to your bottom line, which is your, your net margin. So under— that's kind of the basics. There's more we can get into for sure, but it really— understanding, knowing your numbers is really knowing your margins. And if you don't know your margins on how much you're going to make, you don't really understand your business.

Yeah, for sure. Um, you mentioned like when we were first chatting, you know, I thought it was really interesting you were saying like, you know, most contractors just kind of run their business by like opening up their bank account, see a number, and they're like, yeah, that number looks good, I'm happy with my numbers. Yeah, talk a little bit about that.

Yeah, no, it's super common. I mean, I was guilty of it too when I was running a painting business. It's just you have so much going on in, you know, running job sites, going to estimates, have dealing with crew issues, people showing up late. And so you just need like a heuristic, like how much is in the business bank account Can I make this next purchase? Can I afford it? And that is a— that's, you know, people talk bad about that heuristic, but it actually, it's a decent heuristic because it literally tells you how much money is in the bank. So it's useful. However, that shouldn't be the only data that's going into your mind in regards to your finance. So I would say, you know, if you're having trouble understanding, do I have enough money to hire the next my next big hire, my next production manager, or my first production manager, you know, do I have money in the bank, or do I have— can I afford it in the future? Because maybe I hire them, but, you know, payroll's every other week. Am I going to be able to sustain their salary or whatever I'm going to pay them? Uh, those kind of questions, if you don't know the answers to those questions, like, do— can I afford this, you probably don't have the information you need, which really comes from your financial statements. And that's like your profit and loss, your balance sheet, statement of cash flows. Those are the basic ones. So if you have, if you're really asking yourself these questions like, can I afford this? You know, I can only look at my bank account, but I don't know what's going to happen next week and that kind of thing. You probably don't have an understanding of your numbers and you need to dig into those financial statements or have somebody guide you through them so you understand where you actually stand in your business.

Yeah, for sure. I mean, I'm guilty of that as well, is like, I think like when you're starting out, you're kind of just looking at, yeah, your bank account and be like, oh, I think I have the money for this. But then, you know, in my experience, it's like you think you have the money for something, but then there were expenses that were coming up that like you didn't quite like account for, and then you're like, oh shoot, like now I got myself in like a weird situation. So Yeah, I think that makes a lot of sense. That's really smart. Like, how would you say that, because obviously this is the Contractor Marketing Show, like, how would you say that kind of this topic ties in with marketing so that a business owner can use this not only to make more profit in terms of like their operations, be able to use this understanding of their numbers to make better marketing decisions as well?

Yeah, so I would say a good way to boil this down is your gross profit to customer acquisition cost ratio. And so if you know that one number, and I'll describe what that, those words mean here in a second, but if you understand this one number, it can tell you a lot about your profitability and whether you can grow your business. So to just unpack, first we'll unpack gross profit. So the gross profit to customer acquisition ratio. So first gross profit, just so everyone's on the same page. This is gross profit is basically your revenue minus the cost to produce the job. So this would be your job site labor and any materials that you use to, to complete the project. So your gross profit margin is often stated as a percentage, and this is would be your gross profit margin divided by your revenue to get a percentage. And so on average, most trade businesses, contractors are hitting around 40% gross profit as a percentage of revenue. And so that's the average. If you want to be above average, probably need to be hitting somewhere around 50% or higher. We, um, we do internal benchmarking at Bookkeeping for Painters, so we know that the top 20% of painting businesses that we work with are hitting 50% gross profit or higher. So that's the first part of the equation is your gross profit. Basically what's left over after you produce the job, right? And then the second part of this equation is your customer acquisition cost. So customer acquisition cost is all the, all the costs associated with closing the sale. So this would be your marketing costs, you know, getting that, those leads to come in. So maybe you're using Facebook ads or whatever that it is, maybe it's door knocking or, you know, direct mail, whatever you have to you pay money for to get leads to come in, you know, uh, into your business. And then the other part of that is your, your cost to close the sale. So this might be compensation to your salesperson. Now, folks listening to this might be the salesperson still, which is fine. Um, I would use a plug number if you're— because if you want to grow your business, you have to build in the room for a salesperson, right? So maybe you're still the salesperson, but you want to make sure you're pricing appropriately so you can grow and actually hire a salesperson later. So the percentage that I typically tell people to use as a plug is 8% of whatever a salesperson closes. So usually that is, uh, mostly commission. Some people do mix of salary and commission, but It's usually about, falls somewhere around 8% of whatever the salesperson closes. So if you add up your marketing costs plus your salesperson costs, for the folks that we work with, it's their customer acquisition cost is usually somewhere around 15% of revenue. So that it's usually half going to marketing costs and half going to the salesperson. So Uh, that's customer acquisition costs. So to bring it all around, we said the key number in your business is your growth, your gross profit to customer acquisition ratio, right? So if your, your gross profit, let's say, is 45%, uh, if you looked over the last 12 months and you, you ran your profit and loss and it's a 45% gross profit margin, and then you looked at your customer acquisition cost, which is basically your marketing and your sales costs, and that's 15%, you would have a 3-to-1 ratio because, you know, 15 goes into 5 3 times. All right, so a 3-to-1 ratio would be what I typically recommend to shoot for. So if you're below 3-to-1, that means you probably— most cases is, uh, with the painting businesses I initially start working with is their gross profit's too low, like it's below 45 or 40%. And so, uh, that's usually the part of the equation you need to fix. Occasionally it's they're just paying too much for their salesperson or something like that. It might be a compensation issue, but usually it's, it's, uh, something with gross profit is off. And there's usually two things wrong. There's, there's two things that could be wrong with your gross profit. One is that you're, you're not pricing high enough to allow for you to hit a 45 or 45-50% gross profit, right? Or it could be an efficiency issue, or like a, or a pay issue, like where you're just paying your subcontractors too much money, um, or, or they're just blowing the budget that you set for them. Like, hey, this, these are the budget hours, and they just go way over. Um, so it's usually to fix gross profit, it's either a pricing issue or a labor issue. Um, to go with the pricing first, because that's the number one reason why gross profit is off. It's, it's something like the folks don't understand how to price to, to hit the gross profit that they need. So, uh, let's use 50% gross profit. Let's say you want to target 50% gross profit. That would put you, if you're a painting business owner, in the top 20% of painting businesses. If you're shooting for 50% gross profit, that stated another way, you basically have to do 100% markup on all your Labor and materials.

Yeah.

And so if you're, let's say you have painters and you, on average, you pay them $25 an hour, you need to add in burden because, uh, so that's an additional 30, 30% for payroll taxes, workers' comp, approximately just to ballpark it. So if you're paying somebody a base rate of $25 an hour, you're probably really having to pay like $32, $33 per hour. Um, and so, and to now, to what you would charge for that, because that's what it costs you, is about, let's say, $33 an hour. That's what it costs you, but you need to charge your customer $66 an hour, um, so that you get a 50% gross profit margin. So that's the labor piece, but don't forget about the materials. You also have to mark up the materials because a lot of folks miss this part. They got the they got their charge rate down, but then they forget, oh, if I want to hit 50% gross profit, I actually also have to, um, mark up my materials. Uh, just worked with somebody yesterday. They were doing great on the charge rate, but they were only marking up their materials 10%, and so they were hitting like 35% gross profit, and it was just— they were basically making no money. And, and we went through, okay, how are you pricing? And they said, okay, I only do I do this for my charge rate. I was like, okay, that's good. You know, uh, they were doing about $68 per hour charge rate. And, and then we got some materials and they're like, I do a 10% markup. I'm like, okay, well that's the issue. You have to, you have to do 100% markup if you want to hit 50% gross profit margin. So, uh, doing 100% markup on your materials would be the other thing. So getting your pricing down, um, is usually the the number one issue. If you're doing that right and you're, you're, then you gotta look at, okay, is my team hitting the budget? Am I overpaying for my subs? That kind of, those kind of things. And that just comes down to you in the painting industry. Definitely encourage, and this is applicable to a lot of other trades, is using production rates. So like how long for painters, it's how long does it take you to paint a particular surface? You know, you take the surface amount and multiply it by your production rate to get the amount of budgeted hours that that project's gonna take. And you give that, you get your price from there, you multiply it by your charge rate, but you also give that to your team on a work order so that they know, okay, this job is budgeted for 100 hours or whatever it is. And so you set the expectation, we need to hit these budgeted hours for you to, you know, either maybe you do performance pay or something like that, but motivate them to hit the budgeted hours. So that's fixing gross profit, those two things, pricing and paying your labor appropriately. It might be efficiency there. And then the, so that's usually the issue for most folks and the gross profit to customer acquisition cost ratio. Is fixing that gross profit. And then once that's fixed, then you can move on to customer acquisition costs, which, you know, um, typically you would want to be shooting for marketing costs, be shooting like a 10 to 1, at least a, uh, a 10x return on investment for your, your marketing costs. So if you put $1,000 into Facebook ads, you would want to get at least, um, $10,000 in work. Now, um, not to say that, that if you just start from square one, start running Facebook ads, you're probably not going to be good at it. So it's going to take a— there's some learning curve in there. Um, but over the long period of time, like several months, you want to be hitting it, trying shooting for like a 10x return. Uh, and if you're not— yeah, go ahead.

10x in sales, you're saying?

Uh, 10x return. So like if you put $1,000 into Facebook ads You should get $10,000 in closed work. Now, if you're not, there might be nothing wrong with the marketing. It might be like your sales process isn't good. Like you don't have, you know, a good follow-up. You know, you don't have it. Um, you're not changing that lead into a prospect very well. Like you're not getting them to schedule an estimate, or, you know, when they schedule an estimate, you're not trying to close on the spot. There could be a whole bunch of things wrong with your sales process. So it's not necessarily oh, there's a problem with the marketing. But it is, you know, you have to kind of dig deeper to see what's going on there.

Quick question for you. So earlier when you were talking, you were saying like, you know, um, there's like the operational efficiency, which is like maybe your sales guy or something, and then there's also like the pricing. For you, because I feel like you probably run up against this, um, which one do you find would be easier to fix for some guys? Because I feel like for the pricing stuff, you'll probably get some pushback from guys being like, oh, I could never charge that, you know. Do you ever encounter that? And then, you know, on the, the, uh, the, the efficiency side, it's like now you're working with people, so it's like, you know, motivating a sales guy, you know, it's not always the easiest thing, or like fixing that. So for— I'm just curious of your perspective between the two, like what would be easier to fix from your perspective?

I mean, it's always, I guess, easier— pricing is easier to change if— but it's usually a mental—

yeah, it's like you could do it like this, but it's a mind game.

Yeah, right. So when I'm working with folks, I have the luxury of knowing everybody else's numbers, uh, so I can kind of say, well, you're thinking that it's not possible, but I know, you know, 100 other painting businesses that are doing this, so it is possible. But it is definitely a mind thing. Like, you have to, you know, I think a lot of folks, they kind of project what they would charge, what they would pay for, let's just say, a painting project. Yeah, you know, and they're a painter, so yeah, you wouldn't pay $10,000 because you do this every day and it's super easy. Of course you're not going to pay $10,000 for this project, but you're not selling to you, you're selling to this, this, you know, this husband and wife, family, whatever. They've never painted in their life and they don't want to have anything to do with it. They just want a great experience and they want their house painted, like, looking great. So don't project your kind of whatever you got going on onto them because they're completely different people.

Yeah.

And so, yeah, you, you hear a lot of like, oh, the market can't support that kind of thing. But, um, maybe, maybe in that micro market, maybe that neighborhood, but if you go to the next neighborhood where they have more money, they probably could, right? So just figure out what— who, who are you serving, um, and those kind of things. So, but yeah, so pricing is easy to change, but like you said, there's like that mental piece you got to work through.

Yeah, and it's the type of thing too, I'm sure, that doesn't always exist in a vacuum because it's like Um, you could change the pricing, but then let's say that like their marketing isn't really that great and their sales isn't that great, then that might also be a bit of a struggle. So it's like sometimes too, like the marketing can also— can affect that. So if they got better marketing, they'd be able to charge a little bit more of what they want, and that would fix maybe some of those issues. And I always think, like, my personal opinion is that if you have really great marketing, then it doesn't matter if your sales team isn't as strong because like the marketing will make up for that and vice versa. Like if the sales is really strong and the marketing's not so great, then like it'll make up for that. So I was just curious of that, but sorry to interrupt you. So you were talking about the gross profit there and then you were talking about the acquisition, uh, the cost per acquisition there. So did you have anything you want to finish on that?

Um, yes, I— but I—

let me—

yeah, what you were saying there, I definitely agree. Like, um, where your, your marketing and your sales process can really help improve your, your ability to command higher prices. Yeah, but like, in strengthening those things, uh, when you increase your prices will help you be able— because really your, your marketing and your sales process is just— you're just building trust to close the sale. So the more you can build trust, the better you can build trust, the higher prices you can charge. I mean, and we were talking about, you know, the top 20% of painting businesses charge, get a 50% gross profit. Well, like top 1, 2% are getting 65% gross profit. So there's folks out there who are getting like their, you know, cost of goods sold is only 33, or, you know, a third of their, their charge. So they're like spending it like— so now those businesses, they have super strong sales processes and marketing process, like, and they are super professional and they have everything down to the T. Um, I went to one of these businesses, uh, on site and saw like their whole sales process and everything. It was incredible. Um, and so they can charge super high prices because they have this super strong process.

Well, and then the painting quality might not necessarily be better, but it's just the experience overall is better, maybe.

Yeah, yeah, I would— yeah, I don't think they're, you know, they probably have some, some offer that's compelling, but like you said, like, how much better are their painters than other people in the area? They probably have better processes, um, to make sure things are repeatable and stuff like that, but the quality of their painters is probably similar.

Yeah.

Um, but to circle back around to the gross profit to customer acquisition ratio, really it's getting that 3-to-1 ratio or better. Um, so if you can just focus on that one number, that one ratio in your business, knowing, you know, your gross profit to customer acquisition cost ratio, and get that to 3-to-1 or better, your profitability will probably be really good and you probably won't have any issues. If you are still running into issues, there's a couple of other things you could do. Looking at your overhead costs, you might be overpaying your production manager or some other things in your overheads, establishing a budget there. And then some folks might still run into cash flow issues as well, where they're, they're, when you look at their profit and loss, like it looks good, like they're profitable, like they have a good bottom line, but their cash flow is still struggling. Like, they feel like they're not— they don't have enough cash to pay their payroll every other week or whatever it is. So that, that could be something else that's going on there where I know for a lot of painting businesses— I had a painting business the other last week, we looked at their profit and loss and it was like, your profitability is actually pretty good. But, you know, the business owner was like, Yeah, but I, I like, I have no cash. Like I'm always struggling to hit payroll. Like there's something going on. And so we looked at that and it was actually, um, they weren't taking a deposit, like no down payment when they closed the work.

He was basically being the bank, right?

Yeah, exactly. So they're doing all the work and he's paying his people, he's paying for the materials, and then he wasn't getting paid until the very end. Uh, and so that's hard on your cash flow. So a lot of the folks that we work with are taking, you know, a 50% deposit. Now, some states don't allow that, like California and Massachusetts. I'm not sure about the rules in Canada, but California, Massachusetts, they have some rules on how much you can take as a deposit. But, you know, take the maximum legal amount that you can in your area. Usually folks that we're working with are taking 50%. Down, and, and then that allows them to cover their labor costs and their, uh, you know, customer acquisition costs a lot of times too, um, because usually labor is around 35% of, of the rep— of the, the sales price. So that, that covers your labor so you can pay payroll, and then 15— the other 15% goes to your customer acquisition costs so you can get the next customer. So you, you know, you're using your custom— your customer's money to get your next next work, next job.

Um, it's also just a lot— sorry, it's also just a lot less risky, right? Like, imagine if you're getting started and someone hasn't put anything down yet and you're like, you know, fronting all the material. That's extremely risky for you, like extremely risky. Someone could just walk and then now, now you're in a bad situation, right?

And most folks, to their credit, they are taking some sort of deposit, but it's usually pretty low, like 20%.

Okay.

Which is still, still low out in my opinion, because that doesn't even cover your, your labor costs. And like you said, it is— you're, you're taking on risk there. And at this point, I mean, every time I recommend, you know, folks to take a deposit because they're struggling with cash flow, I've never had anybody come back and say, I couldn't do it because it really impacted my, my close rates or something like that. I think homeowners are expecting to pay money down to get on the schedule, so Um, and I've been doing this for 8 years, over a year, so no one's ever come back and pushed back on that. Mm-hmm.

That's really good. Yeah. So, um, earlier too, you were saying that something that you also— like, with all of this stuff in context, you said something you also help contractors with is just understanding, like, what is my business worth? Like, what goes into understanding what it's worth? Um, do you want to talk a little bit about that?

Yeah, it's just a common thing. Folks have an interest— either they're interested in selling, um, they're selling their business, or they're just interested in what the value is, like what could they get for it. Um, and, uh, so I had the opportunity to go— do you know who Alex Hormozi is?

Of course.

Okay, yeah, at this point everybody does. I don't think I know the charts. Um, My mom knows who Alex Hormozi is. So I went to one of his workshops and they actually went through this process of valuing your business, which I thought was really cool. And so it's basically going through and understanding, okay, what is my EBITDA, which is basically your net operating income. If you're looking at your profit and loss in QuickBooks Online, it's what's left over after paying all your expenses. And then you take your EBITDA and then you get a multiple, which is just how much do I multiply this by to get the value of my business? And the multiple is determined by what size your business is. Like, are you doing, um, under $1 million in profit? Are you between $1 million and $2 million in profit? Uh, and then going through different, uh, financial metrics, like what is your, uh, uh, lifetime value of a customer to customer acquisition cost ratio, you know, uh, what is your net profit percentage margin? And so going through these different, um, health metric, financial health metrics, you to get your multiple. And then, then going through the risks of your business, like the big one is key man risk, which is basically, are you the person, if you were to leave the business today, would your your business still be in business, you know, a couple months from now, or would it go under because you're like the key person that's doing all the things? And so, you know, that's a big risk. And that in a lot of cases makes your business worth zero, which is fine. But the whole point of the exercise is really to understand what are the constraints in my business? And what can I do to unlock the value, the enterprise value in my business? What do I, what changes do I need to do? And it helps you really focus. Okay, I need to get myself out of the day-to-day. I need to get a production manager in place and I need to get a salesperson in place so that I'm not, my business doesn't have that key man risk. And then I can improve my net profit percentage and that will increase the value of my business substantially or And so, uh, just going through a business valuation can be very enlightening. At least it was for me. And it helps you focus on what are the things I need to do in my business to really unlock that value, whether you want to sell or just keep it as an asset, um, for yourself. Because if you're making it more valuable for someone else, you're making it more valuable for yourself.

Yeah, I feel like a lot of contractors too who might want to sell their business for specific reasons, then they make it more valuable and remove themselves from the process and build in all these great systems, then they might actually be like, oh, I actually do want to stay because everything I didn't like about this business now I fixed and now I actually like it.

Yeah, exactly. It's like when I sold my house a few years ago, you know, we were doing all the updates to the house or repainting it, doing— we put out a nice deck out back. Doing all these updates to sell the house, and by the time we're done, we're like, actually, it's kind of nice. I want to keep it at this point. It's the same idea with the business. Like, once you get it to, to have some, some value, um, it's actually pretty nice because, oh, I'm not actually have to work in the business anymore and it's just throwing off a bunch of cash. This is great. Why would I sell it?

Yeah, no, I love it. Cool. Um, so we're coming to the end here, but you were telling me that you actually have a free tool that you want to give to the listeners just so that they can actually pop in some numbers and figure out what their business is valued, right?

Yes. So it's actually a free service. Um, what we'll do, it's a 2-call free service. Basically, if you want to figure out how much your business is worth, we'll jump on the, the first call is to get, um, some of your financial metrics from you and ask you a few questions about your business. And then, uh, and then in between the first and the second call, we'll analyze how much your business is worth. And on the second call, we'll give you a rundown of here's how much your business is worth, like based off of, uh, DealStats, which I mentioned is a database of, uh, of transactions. Or actually, maybe I didn't— I mentioned that before the call. Uh, DealStats is a database of transactions, sales transactions. Um, so that we have an understanding of how much painting businesses usually sell for. And so, uh, we use, you know, deal stats, analyze your, your financial situation, and say, okay, here's how much you could probably get for your painting business, and then here are some ways that you could actually increase the value of your business. Wow. And, and so, yeah, it's a free service, um, no obligation there. Uh, but yeah, it's, uh, I'll give you the link, but it's bookkeepingforpainters.com free-business-valuation.

Yeah, awesome. I'll put that in the show notes so people can check that out. Go check that out, guys. Free service. You can check out like what you need to do actually to make your business more valuable, and then worst case scenario, you know exactly what your business is worth. So pretty neat. Um, so Daniel, thanks for being on the show today, man. You dropped a lot of heat. Um, any last kind of words or anything that you want to leave our listeners with?

Yeah, I would just re-emphasize, you know, you need to know your numbers to know your business. So don't bury your head in the sand on this topic. Once you understand these concepts, I mean, that's the hardest part. And then you can kind of make the right moves to get your business to the next level. Yeah.

And I'll put Daniel's contact information, like where to follow you and stuff. So if you're listening to this and you're like, this all sounds great, Matt, but a lot of it is also gibberish and I just kind of need some guidance and a little bit of help. Then I'm sure Daniel will be happy to help you out.

Yeah, absolutely.

Awesome, man. Well, thanks for being on the show today, and, uh, guys, we'll see you on the next show.

Have a good one.