The rewards for measuring are HUGE!
In fact, there’s probably no better topic to get into than measuring your business’ performance.
Your profits can definitely increase, your cash in the bank can increase, your employee’s performance can increase and your decisions can be made with absolute confidence in so many areas of your business – all by becoming very familiar and interested in your business figures.
Sure, you have a million other things to do in your business and probably can’t find the time to get into this subject, but what’s coming here will make it easier to get started.
The good news is that measuring is self-rewarding. As you begin to measure you will see immediate benefits, so you’ll want to do it and then do it more and more.
It can all seem pointless and even confusing to begin with, but so are most new subjects when you start, so don’t let that deter you.
Keep that in mind, because it’s important you just make a start because…
80% of success comes from starting!
So let’s start with basic things to measure, beginning with sales and marketing.
How to Measure Marketing
Marketing is a very big subject and a little tough to even define, but it involves advertising (lead generation), selling (verbal skills), all written communication (emails, signage) all visual representations of your business (uniforms, vehicles and even hair styles) and all verbal communication (from yourself or any employee with any potential or existing client).
That’s a lot to get one’s head around, but measuring it is easy.
Start today by simply asking every person who contacts your business how they found your business.
When they phone, ask them. If they email an inquiry, ask them.
The key is don’t assume you know, ask to verify.
And if you ask and get a poor answer, such as “online”, ask a better, more specific question, such as “was it from a Google search that resulted in you seeing out website?”
Determining the source of all leads is a great start.
After you’ve asked the question write down the answer and collate it all after a week, into a basic spreadsheet (if you don’t have anything else).
Then look at all the tallies of lead sources at the end of the week and see what you can learn from it.
You may (or probably) will learn that the majority of leads are from previous clients coming back, and that’s fine and actually great. It’s the ones that aren’t you need to be more interested in to determine what’s working and what’s not.
The second aspect of marketing to measure is the conversion rate of leads into paying clients. If you have 10 inquiries during the week and 3 become paying clients that’s a 3 in 10 or 30% conversion rate.
This is a super important figure to measure.
Because this so much potential to improve this figure.
If a business’ annual revenue is $500,000 and the conversion rate average is 30%, increasing it to 36% will increase the annual revenue to $600,000!
The 30% to 36% increase is actually a 20% increase, not a 6% (which a lot of people think), and that 20% increase in sales equates to a 20% increase in revenue.
When you measure conversion rates, something very interesting happens (as has been reported hundreds of times by clients).
It starts to go up.
That’s because it’s always lower than guessed (before measuring it) and so it makes you focus on the sales you don’t get.
When you focus on something, it generally improves. In business it’s no different.
Just by doing a follow-up phone call to someone you gave a price or quote to will generally increase conversion rates by 10%, which is a 10% increase in annual revenue.
Would you like a 10% increase, without spending $1 on anything?
Who wouldn’t? So start measuring conversion rates of leads today and watch what happens.
How to Measure ROI On Advertising
This is obviously relevant if you are spending money on PPC. You definitely need to see if its making you a profit or not.
Generating sales from advertising is super important, because it generates cash to keep paying for it.
So how much cash on cash return should you get from advertising? That’s the BIG question that needs to be answered.
The answer is – ‘it depends’.
If your advertising money has to get a return, so you can keep spending that amount of money, then it has to produce a Net Profit return.
Let’s say the net profit of a business is 10% of revenue, so if it was a $500,000 revenue business and the net profit is $50,000 then it would be 10%.
That means if this business spent $1,000 on advertising it would need to get $10,000 back in sales income so that the net profit paid for the advertising.
A 10:1 ratio is the goal that is an effective, time-proven ROI for service businesses on any advertising. Some may debate this, especially on the topic of “Lifetime value”, however this doesn’t work in the real world.
A client who spends $1,000, only once a year, and for 3 years of their ‘life’ is worth $3,000 in “Lifetime Value” – and this could mean that the 10:1 rule applies to the total value of $3,000 so the cost to “acquire” them at 10:1 is $300 that is allowable.
The challenge with this thinking is, you can’t cash flow the advertising if you have to wait 3 years to get your money back.
It also depends on if your business is totally reliant on paid advertising to generate clients or not. In most established businesses there’s a lot of referrals or ‘word of mouth’ generating clients for free, so all advertising doesn’t have to get a 10:1 return.
When you tally up all the leads and sales from an advertising source for a week or month you can then see the ROI of money spent to income received to determine your ROI.
Increasing conversion rates from lead to sale reduces the cost to “acquire” clients and therefore increases ROI. That’s another very good reason to measure conversion rates.
How to Measure Service Work Performance
This is where BIG profit opportunities exist, in nearly every service business, and especially those that ‘quote’ work up front before carrying it out.
For example in these industries…
- Tree services
- Electrical contracting
- Bathroom or kitchen renovation
- Solar panels
- Motor mechanic
- Financial planning
These business types generally provide quotes on work before it is carried out. So the quote is an assumption of the time it will take to carry out the work or job.
Where there are assumptions there are guesses in regards to profit so these areas definitely benefit greatly from measuring.
The less you guess decisions in business, the higher the profitability the business will have.
In services businesses as its such a people related business there are huge variables on every task a person carries out that relate to quality and time.
A person can carry out a task or job at high quality, and take a short time to do it. That’s one end of the scale.
The other end is that the task is carried out at low quality and it takes a long time to do it. That’s the other end of the scale.
The first outcome gives a higher gross (and net) profit.
The key is to measure these factors to determine what the gross profit on every job is.
To determine that the labour/employee costs need to be taken out of the sale price of the job. These employee costs are consider a “Cost of Sale.”
If a job was sold for $1,000 and the labour cost was $25/hour (average) and it requires 15 hours of work the Cost of Sale would be 15 x 25 or $375.
That cost taken out of the sale price leaves $625 as the Gross Profit on the income, or 62.5% Gross “Margin” on the sale.
The gross margin on every job needs to be accurately measured in every service business. That’s an essential and extremely beneficial figure to measure on every job.
The measured figure then needs to be compared to the estimated gross margin or ‘quoted’ gross margin to determine if the quoted equals the actual figure.
This is where learning takes place.
Job Management Systems
There are a few major players in job management systems that assist with all the measuring of jobs in terms of quoting and gross margins.
Three of the more popular ones in the market are…
The job management system is only as good as the operator and that’s the challenge with each platform.
The system providers are not management experts and so the user is trained HOW to use it, but not so much on WHAT it’s doing and WHY.
The reporting is not emphasized as much as it could and should be so the business owner fully understands the reports, what they mean, why they are important and what to do with the information however the platforms are enormously better than not having anything to track your business’ performance.
It’s important to measure “the gap” between quoted gross margin to actual gross margins and to understand why there is a difference. This is where wisdom is gained that can increase gross margins.
Generally speaking, the higher the gross margin the higher the net profit margin in a business and that’s the direction you need to take as a business owner and manager.
A bookkeeper can help with explaining the financials in a business, however they need to be used as an adviser who also explains what the figures are saying.
It’s easy to fall into the trap of having a bookkeeper (or accountant) that tells you the figures but doesn’t explain what they mean in plain English as facts to base decisions on.
Measuring is extremely rewarding, but it takes time to see that.
You won’t feel excited to begin with as it takes a week or two to see the benefits of it. That can mean to begin with its a bit of a leap of faith to start the exercise.
The rewards are HUGE though for persisting.
After training hundreds of businesses to start measuring, and providing spreadsheets for over 18 years to do so, the challenge of getting it started are very temporary.
Once you see your figures for your business and understand them, you’ll find a new level of confidence and satisfaction about your business.
You’ll find making decisions is exciting as you will understand the immediate benefit of that decision and that becomes exciting.
It’s exciting when you see a figure and realise the action you HAVE to take, that results in an immediate profit margin increase. And the more decisions you make like that the higher your business profit margins start to go.
It’s very common for business clients who attend the Academy of Business Mastery to make dozens of very confident, fact-backed management decisions during the course and experience rapid increases in net profit.
Does that kind of outcome help you to be more interested in getting started with more measuring in your business?
The rewards are great to adopt the discipline and focus required to be better at measuring. The sooner you begin to so the sooner you enjoy higher profit margins.
And higher profit margins mean loads more cash in your bank account!