Over the past few weeks we’ve been highlighting areas where your company could be leaking profit. Let’s face it, every business leaks SOME profit. The goal of this series to help you know where to look.
In Part I we focused on COGS and setting clear goals for billable labor.
Remember COGS stands for “costs of goods sold.” If this part of your business model is broken, you are only going to dig your business into a hole. We discussed the importance of having a clear targeted gross margin. If you’re a company that provides services (i.e. sells people’s time, like a marketing agency, accountant or lawyer), you need to track your billable hours.
In Part II we focused on sales and ensuring your sales comp plans are clear, fair and focused. We discussed the importance of ensuring the compensation plan of your salespeople makes sense and is a win-win.
Your sales compensation plans need to be clear and unambiguous, designed to motivate the right behavior.
Sales people need to have absolute clarity around their sales targets and your expectations as an owner.
In Part III we will focus on the marketing function, as an area where you may be leaking profit.
There is a classic quote by John Wanamaker, a 19th century merchant:
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
The point being, it is difficult to track marketing spending and attribute it correctly, therefore difficult to definitively state that one particular marketing tactic or channel contributed in a sale.
This lack of clarity often leads to companies throwing the proverbial “baby out with the bath water”.
They either do not market at all or don’t make any effort to track their marketing stategies. As a result, many small businesses end up spending more than they have to or apply their marketing budgets to channels that just don’t contribute to the bottom line.
So how do we prevent this profit leak from happening? Here are some thoughts:
Step #1 – Begin Tracking What You Can Via Excel
Measuring results is an iterative process, especially when it comes to marketing.
We recommend tracking what you can and then weeding out those metrics that you determine don’t make sense, as you gain more understanding. The fact is, you may not know which metrics are the most important initially and the only way to know going forward is to track them.
Pick 5-10 KPIs that you can easily track and try to glean some information from them.
For starters, here are few marketing KPIs you could consider tracking:
- Number of leads by source (referral, website, paid leads, etc)
- Number of unique visitors to your website by source (organic, social, direct, referral)
- Lead conversion rate by source
- Marketing spending by tactic, source or channel
- Number of closed deals (and revenue) by lead source
At first this may seem overwhelming, especially if you’ve never tracked any of these metrics, but it is critical to start somewhere.
Step #2 – Implement A CRM System To Make Tracking Easier
It’s hard to believe that companies like Salesforce.com started over 18 years ago in 1999. These CRM (customer relationship management) systems are ubiquitous now.
That being said, I still work with companies that have not implemented such a system and are paying the price for it in profit leaks. CRM system have become table stakes for being in business and you could be leaking tons of profit for not having one.
Start by loading all your customer data and leads (prospects) into the CRM. We use Hubspot CRM, but there are many other options like, Zoho CRM, Infusionsoft and Cloze.io to name a few. If your team is just starting with a CRM, I would suggest staying away from the more complex systems like Salesforce.com and NetSuite.
Using the CRM, you can start tracking the lead source of each deal that you close. These systems allow you to attribute a lead source to each prospect that then converts to a lead. You can then create conversion reports by lead source and determine which sources are the most productive.
This is where it can get tricky, since a prospect may visit your website to fill out a contact form as a result of talking with one of your current customers. Many of these tools allow you to integrate them with the contact forms on your website and will automatically attribute where the lead comes from, such as organic traffic (Google of Bing), social media (Facebook, LinkedIn, Twitter etc), direct traffic (someone typed your domain name in directly) or offline (you entered the lead manually).
Meet with your team at the end of each month and get their feedback of where they think the leads have come from.
Train your sales staff to get in the habit of ASKING how they heard about you. It’s not going to be perfect, but you are going to get a sense of where your leads come from.
Step #3 – Ensure You Are Accounting For Your Marketing Costs Correctly
Next, make sure you are reconciling your books correctly and accounting for your costs. You may want have your accountant adjust your chart of accounts, to make sure you have the correct categories and sub-categories set up under the “marketing” bucket.
Marketing is typically found in the OpEx or operational expenses section of your P&L. Do a deep dive into your P&L to make sure you are allocating your costs correctly. A good accountant should be able to handle this task for you and make sure it’s set up so that your bookkeeper is reconciling things the right way.
This brings me back to your financial model or budget issue. How much did you allocate for marketing in your budget? Again if you don’t have a financial model or budget you won’t know. We can help.
Step #4 – Calculate Your Lead Cost
Once you know how many leads you’ve received by lead source and you know how much you’ve spent on that specific marketing channel, you should be able to calculate your lead cost. Here’s the equation:
Lead cost by source = # of leads generated / Amount spent $ on that source or channel
Step #5 – Calculate Your Cost Per Closed Deal By Lead Source (And By Product….)
Calculate your marketing cost per closed deal by lead source by dividing your marketing cost by the number of closed deals generated by that channel or source. You may also want to do this by product if you sell multiple products. You can see how this can get really complicated fast, but it is essential for eliminating profit leaks for this area.
Marketing Cost Per Closed Deal = Marketing Cost of a specific channel (i.e. “trade shows”) / # of Closed Deals (with the lead source of “trade shows”)
There can be A LOT of profit leaking out of these areas. Once you begin tracking, don’t be surprised by what you find. You may have members of your team who FEEL one particular lead source is REALLY good. Note how I said, they “FEEL” like it’s really good. Typically there is no data to back it up, just gut feel.
Let’s look at an example:
You can see that for trade-shows a $40K spend yields $100K in revenue. However, for a $50K spend in Google Adwords (only 10K more), yields $250K in revenue – much more efficient. Note: I am not advocating for Google Adwords over trade-shows, just trying to make a point
Let’s see what happens when we reallocate some of the marketing spend to the more efficient channel.
You can see we are still spending $100K in marketing, yet we are yielding ~16% more in revenue. Obviously, this is overly simplified, but if you currently have little to NO information on what channels are the most productive, what are the chances that you are leaking revenue and profit? You may even have channels with a lower lead cost, but a much higher cost per closed deal. You won’t know if you don’t track it.
If you’d like to put in your own numbers you can access the Google Sheet here.
Step #6 – Review Your Goals And KPIs On A Monthly Basis And Make Adjustments
Once you have this information, you can begin setting goals and assigning KPIs to those goals AND tracking your results on a monthly basis.
At Envisionable we’ve built some technology to help you do just that.
We can even help you select the right KPIs to get started.
So hopefully I’ve opened your eyes to a few areas to where you may be leaking profits. We love helping small business realize their vision (see our mission here) – so feel free to reach out.
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