How to Turn Your Service Business Into a Money MACHINE! [Mike Andes]

Hey everyone, it's Mike Andes and today we're going to be talking about how you can make your home service business much more profitable by knowing a number that is a little bit difficult to calculate. But I promise you, this is literally what makes the world go around in private equity banking and really figuring out venture capital and enterprise value. Enterprise value is simply the valuation of your business and one of the things that you can do to improve your valuation. One of the best ways to do that is to be able to have what's called capital efficiency. Right? So I'm going to write this down, I'm going to show you here on the board. Capital efficiency is something that is very important when it comes to your valuation. And I define capital efficiency as simply how quickly can I get to break even the break even point. Now, the break even point, how I define it, is simply the customer acquisition cost, or the CAC as the amount of money I need to spend on advertising to get one new customer plus the cost to deliver. This is going to be all your wages, all of your materials, all of your equipment, all of your fuel, everything to deliver on the product. That in my opinion equals your break even point. Okay, so what that means is I have to first off spend money in order to be able to acquire a customer. That's my customer acquisition cost. Then I need to go perform services for that customer. And a chunk of that revenue is going to be my cost, deliver my cost of goods sold, all of my direct labor, all of my materials, everything that goes into doing the job. And ultimately I need to also consider the fact there's also overhead as well. So stick with me for a moment. First off, I need to pay money to acquire customer. That's my customer acquisition cost. And then in order to actually deliver the product or service to the customer, I'm going to have to buy materials, labor, fuel, insurance, overhead in terms of rent, insurance, all this other stuff that goes into running a business. That's where my break even point is. The whole point in this is how can I get a put as little money into my customer acquisition as possible and make my business as profitable as possible in order to be able to get a lower break even point. Because a low break even point means that I don't have to do as much revenue to be able to get all the cost associated with acquiring a new customer. And this makes my business much more capital efficient, which means I get money out of the business fast. I put a dollar in and I get $2 out. That's the whole objective of business is to build a box. This is your box. And we got money in. This comes in the form of customer acquisition cost. And we have money out, also known as profit. Okay? All this other stuff inside of the middle in that box right here, this is your business. And literally all the gears and mechanisms of this black box is simply to create the systems, the training, the procedures to be able to turn what you spend on customer acquisition costs and turn it into a profit. The faster you can do that, the more the higher value business you have, the more capital efficient you are. And the faster you get your capital back out and get to break even, the better. So it's been a hypothetical example here. All right? Now these numbers are me really rounded. I understand they're not going to be super accurate, but just get kind of where I'm going with this for just a moment. So we're going to assume 100, 200, 300, 400 and $500. So here we got 1002-003004-00400 and 500. Okay? And this is the amount of revenue that I'm making on a customer, all right? And I'm just making these really simple numbers just so that you can understand this really easily. Now up top here, this is my revenue. So this is my revenue on the top here. Now on the bottom, this is going to be my how much money goes into finding my break even point. Okay? Now I'm going to assume that I have to spend $100 on customer acquisition cost, all right? I have to spend money on Facebook ads, Google Ads, flyers, door hangers, whatever to be able to get one new customer. This specific customer is what I am trying to achieve. This is revenue, this is customer acquiring costs. So down here are going to be my expenses. Okay? So I have a customer acquisition cost of 100, but now I need to go perform a job and I'm going to be assume that I have a 25% profit margin, which means at the end of the day, for every $4 that I make in revenue, I make $1 of profit. What that means is if I go out and do a $400 job for this customer, so $400, I'm going to assume that $100 of that is going to be profit, which means all of this right here is my cost to deliver. Okay? And so what that means is, is in order to be able to hit my break even point, I need to make generate $500 in revenue before I actually break even on this customer. Why? Because I spent a hundred dollars on customer acquisition cost. I spent $400 on extra cost of goods and everything. So I have to get $500 worth of revenue before I actually even make a dollar on the customer. The reason this is so important is because if I lose the customer before I make that, so right here I get this. Something happens. I do bad customer service, I don't do something correct on the property, and all of a sudden I lose the customer. Halfway through this journey, I only made $250 on this customer. Guess what? I actually lost money. I didn't even get to break even. I didn't make a single dollar in profit. And some people. Oh no, you made $250. No, you didn't even get to break even. Because to break even on this customer, you actually need to generate $500 in revenue. And then anything above $500, you make 25% in profit. But before you even get to making profit, you have to get past your break even point. And the lower this number, the better. Which means if I can have my customer acquisition cost go down and I can make my profit margin go up, in other words, be more efficient, I can bring this break even point way down. If I'm able to make my customer acquisition cost $50 and I'm able to make my business 50% profitable, now all of a sudden I could more than half my break even point and I could actually make profit on a $250 customer. So I know there's a lot of math. I know it can get very overwhelmed. But this is the basic of it. When you get a new customer, you have to spend some sort of money to acquire that customer. And if it doesn't come in the form of advertising and marketing, it's going to come in the form of admin time or your salesperson to go and get the job. So there's a certain amount of sunk cost or cost to acquire a customer. That's your cac. In order to get the customer, then you have to go get materials and labor and all these other costs to do the work itself. So you don't make money from day one. You don't make money from the first dollar you make for with a customer. And this is so important because if it takes $1,000 for me to be able to get to my break even point, and I'm making a hundred dollars every single month from that customer on a recurring basis, it means that if I turn the customer, if they leave before 10 months, I literally didn't make any money. In fact, I lost money on that customer. And so if you're spending money on getting new business and marketing and advertising, you need to know your customer acquisition cost and you need to know your profit margin in order to be able to know how much revenue do I need to generate with this customer before I even make a profit. And then if you have a recurring revenue business like mowing or cleaning or pool cleaning or any sort of maintenance services, you'll then be able to back that into, well, how many months do I need to keep this customer for me to make a profit? Because you'll be able to know how much revenue on average per month you make per customer. These are the type of numbers that are not glamorous, they're not fun, they're not exciting. But I promise you, if you can drive your customer acquisition costs down, in other words, make your marketing more effective, and you can make your business more operationally profitable and less wasteful, you'll be able to drive this break even point way down simply because of this math. Because remember, your customer acquisition costs plus your cost to deliver the product and service equals your break even point. So I know this is a lot of math. It's not the fun exciting, these don't cut videos, don't get a lot of views. But I promise you it'll make you more efficient and the faster you can get money going into and then out of the business, this black box, you'll be able to make it much more capital efficient and you won't have to go into debt. A lot of times the reason companies have to go into debt is because they put money in. They're trying to grow, grow, grow, and buying trucks and equipment and they're spending money on advertising. But it takes them six months, a year to actually get money from profit coming out the other end of this box. And because of that, they have to take up big lines of credit, lots of debt, in order to grow their business. The number one way to grow your business profitably and bootstrap your business, in other words, don't go into a bunch of debt, don't have to go and get investors, and ugly things like that is making sure that your break even point is as low as possible. I'm Mike Andes, founder of Augusta Lawn care and copilot CRM.com thank you so much for watching.