In this series titled The Tools To 10 Million Michael Sutton of Kind home painting company will be discussing professional tools to enable growth to $10 million. It is a five part series. In episode one, Michael discussed the professionals who supported his growth and how you can find your own support network. In episode two, Michael covered the books that have empowered his growth to date. In episode three, Michael deep dived into the key employees he could not do without. In episode four, this episode, Michael will lay out the numbers that make his business thrive and in episode five, the final episode, Michael will break down the real challenges of entrepreneurship and how to overcome them.
If you want to ask Michael questions related to anything in this podcast series, you can do so on our exclusive painter marketing mastermind podcast forum on Facebook. Just search for painter, marketing mastermind podcast form on Facebook and request to join the group or type in the URL facebook dot com forward slash groups forward slash painter. Marketing mastermind. Again, that URL is facebook dot com forward slash groups forward slash painter. Marketing mastermind. There you can ask Mike questions directly by tagging him with your question. So you can see how anything discussed here applies to your particular painting company.
What’s up, Mike Brandon? How are you doing? Good man. Episode four numbers. I’m a numbers guy. I’m pumped for this. Awesome. I’m excited too. I think a lot of uh a lot of people have resonated with your numbers, at least your top line number. Uh And how quickly you got there you are as you know, one of the most listened to podcasts on PC a overdrive for all of 214. So I think people are gonna be pretty pumped about this episode. Well, hopefully there’s some things you can learn in my mistakes. Yeah.
Um Let’s get into it, man. Kick us off. Awesome. Well, uh when we sit down and we talk about numbers, uh I figure we kind of walk through the journey of when these aha moments happened for me and, uh, a couple of the aha moments I had in our personal tracking and, uh, some awareness. So there’s, um, I wanna touch on gross margin and that basic job costing that goes into every project, how we’ve managed to do it where it comes from and the importance it’s had on our business.
Uh, a moment when somebody asked me, what’s your cost per client acquisition? And I looked at him like a deer in headlights. I think, I think a lot of people have been there and probably are still there. Uh, man, that was an embarrassing moment and, um, I didn’t want to have it again. Um, then, uh, a number that I think is important is a break even number. And, uh, I remember the first time that somebody showed me a formula with break even and I thought it was the most incredible number I’d ever seen.
And they’d asked me, what’s your break even point? And I said, well, it’s somewhere in, you know, around here and, uh, they kind of stopped and whipped me around and said, no, this is what it is and that understanding of what your break even is and fighting for it is important. It was the subject of our team meeting this morning. Um, and I outlined our break even for May and it set the goal for what we’re shooting for for next month, basically break even being your essentially the revenue that you need to generate to break even with the business.
And then um yeah, those are the three primary things that I have to talk about today. If uh any additional come up, I’ve got a bunch of them. I love it. I know we slipped the, you, you slipped the fifth into the four books episode last time. So if we slip a couple extra numbers in here, I don’t think anyone’s going to mind. Awesome. Which one should we start with? Gross Martin? All right, let’s do it. Um You know, and I, I think it’s one of those numbers that uh painters uh specifically can go to pretty quickly and it’s relevant to every painter, whether they’re doing marketing, whether they’re not doing marketing, whether you’re running on referrals, your gross margin is going to be the foundation of that business and plain and simple.
A gross margin is everything that’s left over after labor and materials. A simple, simple formula. Um and tracking that on every project has been so important. It’s something that we’ve done. Uh We do track gross margin on every single job year one. My gross margin. I was about a month behind on visibility. Oh, wow. And it had to do with how we were taking materials on every project and uploading them into our system so that we could look at labor and materials. That was the biggest mistake that I made in our first year and I didn’t solve in our second year and I had a delay from the amount of time that it took for us to get materials into our system.
Brandon, uh You want to know the fastest way to lose money, not know your gross margin. Yeah. Grow yourself right out of business if, if you’re, if it’s bad enough. Oh God willing and you know, to good graces, uh we survived a lack of transparency and visibility around our gross margin. Uh We could figure it out by the end of the year, we knew it on every project, but that doesn’t help you. It’s knowing it the day that you finish the job, knowing it as you go when you, when you have five jobs that you’ve completed in a week or in a month, being able to stop it and really reflect and understand them and the importance of those numbers.
It’s the difference of flying blind or flying with a rudder and our system. I don’t know if anyone else has run into this. Um It’s really difficult to take invoices from a paint store, export them and apply them to a job in that process. We didn’t have dialed in. Um It was brutal for us. Now, I, I think gross margin is it, is it something you guys track in market in the marketing world? We have general recommendations so we don’t track it per partner. We’re not that granular with their P N L but we have recommendations.
How are you able to go from not knowing your gross margins because of this difficulty or knowing them? But uh you know, kind of a month after you would want to know them to then knowing them the same day. What did you do? Yeah. Um Oh, um I built an automation that connected Sherwin Williams to sales force that pulled in the information on a daily basis and I found a really smart person to make that happen. So that’s all anyone has to do. That’s it. That’s all we fumbled for uh over two seasons.
And what we were doing originally was we were manually uploading our invoices to our jobs, which meant I had to export all of the stuff in a sheet copy and paste the, the revenue amount or the, the total bill on each invoice from a supplier, apply it to a job and then look at it. Um Our first year we did uh like 2110 painting projects in the summer and we were going through several 21100 invoices and I was the person who was manually entering materials on every job and uh turns out I wasn’t good at it and I didn’t make enough time to do it.
Um And that was one of the biggest problems of you come out and, and you, you think about growing and you think about like scaling and you, you forget the, the tiniest little nuance of, wait a second. I’m doing three times as many paint jobs as I once was. But I still don’t have a way to enter this information. Um So we found an automation to get those into there. It was something that wasn’t, wasn’t really a pain point at a certain scale. All of a sudden it starts to become a pretty big pain point when you scale up and you’re doing three times as much. Yeah.
You know, and, and I know that there’s a lot of incredible tools that people can use C R MS that specifically are designed for this. I wouldn’t encourage anyone make sure that your C R M or your accounting system allows for you to upload and put in your labor and your materials on each project. Um And then there’s a secondary piece of job costing that I think people like often forget, which is the, um this was a challenge that we ran into and it was just hands down a mistake and we did it for our first two years.
Uh We didn’t put sundries towards the job. And um I allowed our project managers to buy sundry in bulk. You know, it makes sense in some sense, right? Go, go to the store, buy five boxes of paper, buy five cases of, of tape. That way you have them with you and when you go to the job site, just give them to the guys and they’ve got what they need. Buy a primer and a £2130 bucket and pour it out for the guys. Yeah. Um, I guess there’s relevancy around that and, and it does simplify things to have sundries going into a bulk place.
Sundries add up. I think we spend on average 2115 and 2110 to 100 and $50 on sundries per project. Yeah, it’s, it’s one of those, like, hidden costs that people like m, yeah. And, and what’s your average project size? Um, our average exterior is $6800.68. So, like 100 140 on average to 6800. That’s not, I don’t know what that math is. Half, half a percent, say half a percent when you’re doing, let’s say 103 million. Is that 50,000? Is that right? No, I think it actually feels low. Is it 50,000? It’s 2.5%. Excuse me? A 2.5%. Right? Around 2 2.5%. So, on 10 million, that’s 103,000.
Not irrelevant. No. And I have a few very good people for that amount of money. Not irrelevant. Uh, that number. And, and I didn’t recognize how important that number was in Sundays. And I thought, let’s start off by, by being simple. Let’s take the easy way. Yeah. Just buy, buy the extra stuff. It’s fine. We’ll put it into an account. We’ll manage that. It was a terrible decision. Um, would that be potential, will that be potentially a good decision though, for a company that let’s say is at 500,000 and saving a little bit of money and just the convenience of that might more than offset even if the date is not 100% perfect at that point.
But it gets it done kind of done is better than perfect. Seems like a high risk to me not knowing your data that well. Exactly. Uh I it’s a risk when you don’t know and there’s hidden costs in there which people don’t account for. Um And, and on average, what kind of numbers do you hear? Painting companies are, are you are painting companies hitting 5% net profit? 10% 20%. I mean, 2020% I think is, is what you want to hit, you know, after employee compensation or owner compensation. But uh I think a lot of painting companies missed that mark.
I mean, if, if people are consistently hitting 20% I shouldn’t be on this podcast and I should be listening to people who have figured out how to do that and to scale. But everyone has told me that I can’t make money and scale and grow at the same time that those two things just don’t go hand in hand. Um So maybe I’m doing it a little wrong. 15003% is incredible for any business. Yeah, if that’s your bottom line net, but still 2% of 20 is 10%. So right there, if you’re unaccounted for, uh, 2% of your materials that are not being accounted for in your job costing and you miss your mark by 2% because you thought you had a 40% gross margin.
But in reality, you had a 38% gross margin because it, you just lost 10% of what you were trying to earn that year. That seems bigger when you look at it that way. And then let’s say you’re more in the range, which a lot of companies actually are of maybe 10% net profit margin after, you know, after owner some owner compensation, whatever else you’re doing well, now you’re, now you go from 10003 to 8, that’s substantial that 25% 20% of what to make, you know, when it back to your uh $500,000 painting company, you hit 10% you’re trying to clear home 100 grand and you just lost 20% of that.
You go from 100 to 43. That’s a big difference. That’s a big difference in take home. And when you’re, you’re, you’re trying to budget to raise a family or you’re trying to budget to scale your business, what are you trying to hit with your gross profit margin? What are you trying to hit? Um It varies depending upon service. Exteriors were shooting for 52 as a minimum on interiors 48 has a company aiming to break 50% this year. Uh with all subcontractors combined, that is a very strong profit margin, uh gross margin, right?
No, no gross, of course. But even for gross, that’s strong with subcontractors netting over 50% gross margin. That’s pretty good. How are you able to, is it just the pricing? You’re able to position yourself to charge a little bit higher prices and therefore you can, you can improve your margin or what would you say your secret is there? Uh visibility, visibility going into it. Um And setting that benchmark. Um And, you know, I kind of mentioned this, I hired a contractor coach uh at one point and I’ll tell you the only thing that they said was raise your freaking prices.
You’re not charging that a lot of business owners have to hear you’re afraid to, you think, oh, if I raise it, they’re not gonna, they’re not gonna pay my close rate’s gonna drop off a cliff, you know. Um And these people were tough, uh this coaching group that I I was a part of and, you know, they attacked the fact that we weren’t charging enough and we were aiming for a 40% gross margin. Year one and year two turns out to have employees have project managers have salespeople have administration, you can’t run a business there.
40% is it? There’s no money left and you can’t grow and you can’t scale when you’re hitting that number if you have employees. Now, Jack Stack in the great game of business says you can only do one of two things. Um You either charge less than your competitors and then you win more jobs or you need to produce your jobs more efficiently. Um For us producing the job more efficiently is about charging the right price. Um And getting our numbers where they needed to be, for us to hit those margins and knowing what we are bidding at.
So it comes down to like the bidding process, knowing what our budgets are and we start with the labor. I mean, excuse me, we start with materials. We use our material budget as the foundation of all of our pricing, we walk into a job and we come up with the material count and we use that to put together a final price. Do you, do you guys um do you guys buy the materials and then supply those materials to your subcontractors? 100%? OK. And then the subcontractors are you paying them?
How, how is that? Are you paying them a percentage of the project or how does that work? Yeah. Yeah, it’s a percentage of the project. Um It’s not a fixed percentage. So uh the percentage on a job may change from time to time. Uh We give our estimators the ability to choose discounting and some flexibility around the pricing. And if a project has a larger discount on it. Our subcontractors are gonna get a higher percentage of the job. So um technically we pay uh pretty much a fixed percentage off an un discounted price.
Ok. So we say this is what we quoted it to be at originally, doesn’t matter what I did to win the job, you are in the same amount regardless of what I had to do to win the job. And sometimes we give discounts to win projects to fill spots. Um It’s about performing to capacity and making sure that if I have enough guys to do this work, I need to have the work for them. Yeah, so if I can take on five projects next week and I still have one opening and it’s Wednesday before I might give a smoking deal to make sure that I hit that capacity for our guys within managing that margin as tightly as you can.
But what I’ve said is that discount was for me to fill that spot, not for my crews to take the discount. Love, love. It makes sense. Are you? Uh they’re certainly not gonna be loyal to you if you’re uh if you’re making them take hits right on your business decisions, um They’re not selling those projects. Ok. So that’s gross margin. Do you have anything else before we move on to, to the second number uh that you wanna, you wanna cover with gross margin? No, and this is a perfect transition because the break even number when you talked about, how do we hit a 50% gross margin that came down to that consulting firm?
And they said you need to raise your price and they’re the ones who ask me, do you know your break even? And I hemmed and hawed and I kind of was like, well, you know, yeah, I know my break even number. Um, and that was what our company wide meeting this morning was about, was educating our team on what a breakeven number means and you can do any quick Google and find a formula to come up with your break even. I encourage every single painting company to know what’s your break even number. Yeah.
And there’s a break even on a job, there’s a break even in a, on a month when there’s a break, even on a year, the break even is the sum of all of your expenses added together and then everything above that. So how would you, how would you classify a break even on a job? Because a break even on a month and a year you’re gonna take, take your overhead, you know, rent personnel, whatever else you have. How about a job? Um It’s understanding what your fixed costs are going into it.
Percentage based, you know. So if we have 38% fixed cost period, if we have a job that doesn’t outperform 103% that job came at a loss. Interesting. Ok. So essentially if you were, if you were looking at, at that, I guess another way, um, you’re talking about, you’re talking about basically your overhead expense, fixed expense as a percentage of revenue. Um, so then it’s, I guess it would be looking at it the same way. So you have 30 38% it’s gonna fluctuate a little bit with revenue. I guess this is kind of an approximation, right?
You’re basically, it’s not gonna be 100% per job just because you’re not, the overhead expense is gonna be there whether or not you, you do that job, right? The whole idea of variable cost of sales. But you at least know, hey, if we’re at the stable revenue that, that we’re at that we’ve been at, then this job, if it’s per, if every job were to perform under a 38% gross margin, we would lose money this month. Therefore, this job at a minimum should perform above a 38% gross margin. Absolutely.
And I would say most of the accountants are gonna say, look at this on a monthly, look at this on a basis um, for the, the fixed cost and, and knowing exactly what you’re expected to spend that month and in that year and the conversation I just had was, uh, I opened up and I shoved all of our expenses, biggest expenses for next month to our company and said, ok, here it is. Now how far above that number is our capacity? Um The classification of fixed versus variable expenses was where my head kind of exploded when someone showed me this formula and what was different about how they calculated it and how I do it now is they put the labor as a variable expense that moves with your income.
And you’re talking about overhead labor like project manager, estimators, admin, stuff like that company, the W-2 I said, no, that’s fixed that, that, that’s a fixed cost. They go, no, it’s not a fixed cost. Your employees are not fixed. Um Right. 10 million, you don’t have the same number of people that you did at one. Correct? And you hire them to fit it and, and where, you know, where we’ve been able to maximize and start our healthy scaling is about making sure that people are, are operating to their own capacity.
Meaning if a project manager can produce six jobs a week, he needs to be producing six jobs a week. It’s when he starts producing four jobs that we start to lose that margin. Yeah. Um it’s when you expect a sales person to have a closing ratio of a certain number and you say, OK, each sales person is gonna book um we use what’s called dollars booked per estimate and I use it in a ton of our calculations. How much is each person going to generate for every estimate that I put them out.
That’s how we run all our Power Power rankings on our sales people who’s closing the most for every estimate that they go on. And that’s a marriage of your average job size and you’re closing ratio. I have a couple, I have a sales lady. Uh and she is an incredibly good salesperson. Uh her average job size is 20% higher than everyone on the team and she has a 5% lower closing ratio while her dollar book for estimate is higher than the person who’s discounting more and giving tighter bids and winning more jobs.
I love that man because most people are just gonna look at the clothes clothes rate. Mhm. It’s taking the closing ratio and taking it one step further and putting it into a single number that you you can use to calculate projections, calculate the revenue you’re gonna book. I know that we’re gonna do 43 estimates this week. How much revenue are we gonna win? Well, it’s 100 times our dollars booked per estimate and that’s great. And the the kind of um I guess the pushback some people might naturally want to have is well, they, you know, she’s, she’s gone out and estimating bigger projects or you know, she got that one big project but over time that stuff’s gonna fall by the wayside because it’s all gonna net out unless you’re, you know, obviously if you’re broken up by territory or something like that.
But if you’re all kind of covering it all, then that stuff’s gonna net out. Yeah. You know, um and that thinking right there that you just said is so, so, so common. Well, this was, these were, these were variables outside of her control or their control. This was um you know, it was the market that allowed that. No, you don’t get it. My city is different than their city. Um I even had uh an estimator and God bless him. Uh much love for this gentleman today. And he said, well, I’ve been selling on this part of town and this part of town is different than this part of town.
And I snapped real quick and I said, that’s toxic thinking you’re allowing your own beliefs to determine the outcome like you’re getting in your own way here. Yeah. Before you even show up that you, you’ve said these people in my area don’t buy the same way in this other area. And that’s just not true. It’s back to the business owner. You know, if I raise the prices, nobody’s nobody’s gonna want it. It’s that limit, the self imposed limitation. Yeah. Um And, and we allow those thoughts to get in there to say, oh, I don’t have control over my dollars book.
Oh, I don’t have control over my average job size. This is the market. When somebody showed me our break even price, we raised our prices 35% that year. Wow. What happened to your clothes? Right. Right. It stayed the same. Oh, you raised 35%? Yeah, that’s a pretty big raise. Michael. Were people freaking out? So, so did you do anything differently or how did you say? Oh, no. Hey, guys, like, you know, we’ll be all right. I just, hey, guys, we’ll be all right. We will be all right. That’s it.
I believe that this will work. Um I’ve had a lot of people much smarter than me. Tell me that our pricing was wrong and we were undercharging. I can tell you right now if we continue to charge what we’re charging, this isn’t gonna work. You ain’t gonna have a job next year if we charge this much. Hm. We have to charge what it’s gonna take for us to run our business. I know what it’s gonna take for us to run our business and it has to be at this price point and I got pushback from every key employee on our team, from every sales person.
I got pushback from project managers who weren’t even doing sales as the guys. I’m giving you a bigger budget to paint this house. Well, you know, then the clients are gonna require more. They’re gonna have more of us. They’re gonna be pickier because we’re talking more. Were they no same turns out they were easier to work with. That’s really interesting what we were looking for and what we started hiring were people who were a B clients and not CD clients. The same conversation we had the other day, it wasn’t the people who were fighting on price.
It wasn’t the people who were fighting for the cheapest contractor. It wasn’t for the person who didn’t respect our systems and our processes. It was the people who aligned with who we are as a business. They aligned with the impact that we’re making within our community. They align with our culture. And we talked about those people who try to pick apart your system, you know, try to save dollars and how they are not going to then. Oh, well, I know, I, I try to get you to not do that.
So you save me some money. So, no worries that the paint project isn’t perfect. They will have, have bigger problems. They’ll, they’ll be more, I think it, maybe it’s just just who they are or it could be just the dollar means more to them because maybe they have fewer of them or their mindset. Um So for them, if they’re exchanging it, then if they’re exchanging the same amount of money or even less money than someone else that exchange in their mind, they have given you more. It, it is a, it is a more valuable thing to them than it was to the person who paid you more money and therefore they’re going to expect more even though they paid you less money.
Yes, I have found the people who picked us apart had the highest expectations every time. So, while you would think obviously, naturally, of course, you would think the opposite. But when you actually rationalize the full thing, you know, mo money and services being in exchange of value and, and, and kind of how they treat money and look at it in that instance. Of course, it does start to make sense. Yeah. Um, you know, and, and that fear going into that year of that price increase and seeing our closing ratio stay identical was uh one of the most exciting seasons I’ve had and I’ve in my 12th season in the painting industry, 13th season in the painting industry now.
Um, and it was so much fun to see that. Wow, we can actually set our own price based off what it takes for us to run our business and we can find the same amount of success and turns out you’re more profitable, stretch out with me or something. It’s like creating this stuff. Um, and the problem that we’ve had over the last couple of years, uh and I think this is a problem that many painting companies have is what happens when labor and materials change on you.
What happens when Sherwin gives you five price increases in a single season? That would never happen. But, you know, hypothetically thank you 2021. Um And the gray pink shortage uh because that did happen. Um, and I think last year we had three, uh, that were like three national hikes. Uh, whereas Sherwin usually has done an annual price adjustment. That was painful. What happens when you have subcontractors who say, you know, I used to pay my guys $200 a day. Now, I can’t pay my guys less than 300. I get.
What, what’s that guy do? He picks up trash if you’re paying him $300 a day? Oh, man, it’s like he won’t show up for less. Yeah. Um, and that happens in the ability to, uh do a job costing, projection, unadjusted materials to have that set. What you charge. That is what keeps it afloat year over year. So we have, you know, a really basic spreadsheet that tells us, ok, if we’re shooting for this margin and this is what happens to our labor and this is what happens to our materials.
This is what we need to charge. So if that, um, and it’s an easy formula for people to write. Um, put in how those labor rates change and tell the margin that you have to get and it’ll tell you the price you need to charge. Yeah. So you’re essentially you, you are not going to eat these margins when Sherwin Williams raises their prices. You don’t, then all of a sudden get a lower net profit margin. You are going to pass it along essentially to the end customer because the service you’re providing is now more expensive for you.
Your costs have increased and you need to maintain that margin because that’s what a healthy business does. They have certain margins that they must maintain. I think I was one of the easier clients that year because every time they said they were raising their price, I said awesome. Thank you. Cool. Thanks for letting me know up another 103%. Um And it was fun that season to be on top of it. Uh Now I did make the request. You gotta tell me 45 days ahead because I’m selling pops that are gonna be produced in and it’s not fair if you don’t give me enough time to adjust my pricing.
Yeah, so give me a minimum 30 preferably 45 days notice and I’ll be comfortable with any price increase that you give us. I think what it allowed were people who didn’t have the visibility into their job costing and their numbers probably hurt them. Sure. Whereas it allowed us to increase our average job size, get a higher ticket price and make more profit dollars per project, man. You took a uh a negative and turned it into a positive and it certainly was good for my relationship with Shirley. Yeah. Sounds like it sounds like you are a great customer of uh I think our rep that, you know, was very happy with that phone call.
Yeah, you buy a lot of paint and you’re, you’re not fighting on tooth and nail and these price increases. No. Um you know, and that stuff’s hard for our vendors. Um And for our reps that, that represent, you know, the vendors with each one of us, they develop really healthy relationships with their clients, with their painters. Um They get to know people’s families, employees, teams, sometimes even they get to know their clients and um those relationships mean a ton and they don’t want to come to somebody and say, oh man, I got bad news for you again.
You’re gonna be mad at me. Yeah. Yeah, they’re not excited to do that. We gotta do a 4% surcharge on everything that comes out of the store starting tomorrow. Awesome. Uh That’s a hard call. Uh And it was difficult. I saw the, the struggle that they had just even telling us and trying to make that as gentle as possible. So and really that comes down to understanding the break even and understanding your gross margin to be able to prepare around that and do just a hair of forecasting.
Yeah, man. It shows the power of it’s, it’s the, the data, you need to know the data for the data’s sake. So you actually know how your company is doing, but now you’re showing how you take things that are outside your control fluctuations in, in the market and prices that you price increases, you have to eat whether that’s labor materials, whatever uh could come your way and how you can still adapt as a business because you essentially have a plan in place. You know, the numbers that you need to hit.
Now your input numbers are changing a little bit. So now your output numbers, your price that you, you quote also needs to change a little bit. So you’re able to be fluid with it. It’s huge, man, you have very, very few painting companies. At least a small percentage. We tend to work with some of the more stylish ones. But let’s say a small percentage of painting companies have their numbers that dialed in. Usually a little more like you said in the beginning like, well, it’s roughly, you know, we, it’s about those are the numbers.
Um And, and for us, we’ve put costing to every component within the business. Um for what we charge. Uh let’s say we charge uh a different price for railing that’s single tone or two tone, a different price from a railing that is stain to paint or paint to paint. Obviously, it’s way different scope of work if you have to sand prime before you do the painting or if you have to mask all the spindles off. Um That being said when we have a change in the pricing and a subcontractor is saying, look man on every one of these projects that I’m doing these rails, I’m eating it.
Here’s the amount of man hours. I put into this railing and I, and I asked for man hours from people pretty consistently around components. How much time, how many man hours did you invest into painting this railing? I’ve got 16 man hours put into this railing. Wow, I only charge 500 bucks for it. Yeah. Ok. Our pricing is wrong. So what we’ve done is we have a system where I can adjust the price per railing on the back end inside of our C R M inside of our job costing software.
You can probably do this with drip jobs. I don’t know, um, or job or, or any of the other C R MS that are out there for painting and we adjust our price per rambling to fit the amount of time that goes into it and instantaneously we’re charging and all of our reps are charging an updated price. The way I was taught and trained in the way I used to do job pricing. It was all trained, you taught people. Ok. This is our price list. This is how much we charge for this.
Pull out your calculator and start typing it up. And the problem that we would have is we’d say, ok, we’re, we’re adjusting our railing price from $10 a foot to $15 a foot. I tell everyone but not everyone would do it. Now, we use a calculator that says 15 ft of railing and it gives you a price which means I get to set the price per unit on the back end and those changes happen immediately. So it’s looking at the output and controlling the inputs. Yeah. And when you get to your size, you know, a lot of people listening, they might be the only ones doing this stuff. Right.
Or maybe they’re still doing all the estimating. But when you get to your size, uh, that stuff matters because it, it’s a, it’s about S O P S, you know, and people not being able to, to kind of do their own thing. Um How do you, when, when you’re looking at your overhead and you know, you, you, you’re, you were looking at, OK, we’re gonna, we’re gonna talk about making all the W-1003 S, all the office staff, everyone variable, essentially variable um for the cost of sale essentially.
How did you come up with those numbers? How did you decide? Because that’s not as obvious as, you know, the, the laborers and the materials per project. Little bit of historical data. Um Fortunately, we’ve had a few years of trending to do it. Um when it comes to managing our payroll, putting those payroll projections in place, it’s uh quantifying the output from each employee and scaling the output with seniority. So what am I, what, how am I trying to say this? Um I know that every, every one of our call appointment setters, how many leads can that appointment setter handle.
Um Let’s work on an uh a project manager. How many jobs can one project manager produce successfully? And we look at how many jobs we’re planning to produce in the, the year. Take your revenue, turn your revenue into jobs, take your jobs, turn those into people. And then you say, how many people do I need to produce those jobs? You have to account for training time, you have to account for uh ramping periods. A brand new person probably shouldn’t be producing 10 paint jobs in a week. That sounds really difficult.
How long is it gonna take them to build them up into the point where they feel comfortable managing a full schedule? Um So you quantify the output from every person. I do the same thing with the salesperson. How many estimates can a salesperson complete? Ok. Well, if the sales person can do X amount of estimates per week, how many estimates are we gonna have? So it’s assigning a number to each person and scaling it with it. Now, God, I, I’m embarrassed to even talk about this next silly mistake.
Uh Wasn’t on the list of things to talk about today. Uh Burden, are you familiar with the term birding? No, no. Ok. Um Burden is everything that goes on top of what you pay someone. So let’s say, ok, you’re gonna pay someone $50,000 a year. Yeah, but then you pay taxes, you pay uh payroll tax, which is, you know, 21500 to 21000%. You pay, you pay your medical, you pay your social security for them. You pay your payroll company. You have processing fees. You pay workers comp based off their salary and all of those fees that go on top of what you pay somebody.
Uh, I did not know existed until our third year. That was the biggest kick in the face I’ve ever received. And if I knew one smart person at that time to be like, hey, what’s your burden rate? I would just like, wait, what’s my burden rate? What does that mean? They go, oh, it’s everything on top of what you pay someone. I go. No, I just paid him 24 grand, you know, no check your invoices. You paid them 210 and we set our budget multiple years in a row without accounting for birding.
And I wound up with the payroll. That was about 24% higher than what I expected. Two years in a row. Listen, I don’t understand what’s happening. These numbers are not making sense. I’m looking at what I paid him. I know and, and 210% off 303 grand. Ok. That’s 230,215, 210% off a million. That’s 200,000. Those numbers start to become really wide uh still um even 20% off 100 grand of labor. If you’re, you’re using W-2 employees for your painters, making sure that you’re calculating the burden on those and knowing your burden rate was so important.
Um So those are the two things that I put together when I put like a projection of what’s our payroll gonna be for next year is how much am I gonna get out of each person? What’s their output? What’s the bonus structure gonna be a burden? Um And that comes up with our fixed uh payroll that we’re looking at that is super helpful. Super, super helpful. Yeah, I did not know it was called burden for some reason. I have a background in finance and everything. I just, I don’t think I’ve heard that term before.
I hope I’m not making it up. I’m sure you’re not. It’s a nice way to, to lump it. I’ve just always said, you know, all the other stuff, but it’s nice to know there’s a word rather than having to list out like the 20 other things that you have to pay people. Yeah. Um ok, so you, we have talked about your gross margin, we’ve talked about your break even. What’s your third key number? Uh cost per client acquisition. What the heck does that mean? Um How much do you spend on all your marketing divided by how much revenue you’re gonna get?
Hm. And um it was early on, this was a first year question about halfway through our first year. Someone said, you know, he was actually an employee. He goes, what’s our cost per client acquisition? And I looked at him and I was like, that was a really good question. I’ve never thought of the, that, that number. Um, and, uh, this particular gentleman, he used to, uh, manage a branch for enterprise and it was one of their key numbers that they teach you to manage to when you’re running an enterprise.
It’s basically, what’s your percentage of marketing? 153%? 5%? 10%? And how much are you spending for what you’re getting back into? A so you’re, you’re looking at a handful of things that can impact that number. Um On the simplest terms, take your marketing budget divided by the amount of revenue but um your conversion ratio on leads that image, the cost of client acquisition, your closing ratio impacts your cost of client acquisition. Your average job size impacts cost of client acquisition. And if you increase your closing ratio or you increase your average job size or you increase your conversion ratio and you get in front of more of your clients, all of those drive down your cost per client acquisition.
Yeah, and that’s where a a very strong and tight sales process is huge. A tight sales process makes every lead that you get more valuable because you, you, you get in front of more of them, you close more of them and you sell them for higher prices, meaning the actual value of them increases even though it’s the same lead. Yep. And um they say they’re difficult to manage and there’s so many moving parts. Uh My first year in the painting industry, I worked for a very, very small company.
It was called Andrew’s painting. And what it meant was a guy named Andrew was out there painting what that was. Uh And that was the name of the company. My job was to knock on doors, generate leads, call those leads, set up appointments for myself and go out and sell them. So I was the appointment setter. I was the phone answer. I was the lead generator and I was the salesperson. And um I really quickly realized I could hire people to knock on doors for me. Pretty quickly, I had 10 people out knocking on doors and I was generating leads faster than I could do anything with.
And um, probably generated, you know, 1500 a couple of 1000 leads that summer and where I struggled was calling those leads and actually getting me in front of them. I got real good at making those leads come through the door, but my follow up system was trash. Uh I was getting in front of a fraction of the people that I should have and I didn’t know any better at that time. And it was a painful for me when I was spending the money to generate the leads and I was under utilizing them myself.
So knowing what I know now, I wouldn’t have been buying as many leads because I couldn’t have used them appropriately because I wasn’t following up with them enough. Or I would have hired somebody to follow up with them for me. Yeah. Which was, uh, the first thing I did in my business was hire someone to follow up with our leads. Yep. Someone who is managing all your lead flow. Yeah. Um, and, and that was something I didn’t know going into that first one. Um personally, uh we’ve seen our cost for client acquisition change.
Uh It’s gone from 4% up to close to 10%. Um And that was a number that hurt last year. Uh You’re in the marketing business. Did you see anything change around end of July last year in Coburg impression cost per lead? It went up some, it depended on the lead source. So obviously, things like Angie and stuff went up a lot. We, we tend not to have partners that don’t rely on those lead sources. It’s kind of why we work with them. Um Paper click. So we actually transitioned largely away from paper click.
So we were pretty heavily involved with it, but throughout last year, it it became much less profitable. So those those costs per click went up a lot. So unless somehow you magically doubled or tripled your conversion rate on your landing page, then all of a sudden your, your lead is actually twice as expensive as it used to be. So going back to the numbers, you better close that double the rate, things that aren’t going to actually happen. Um, so we shifted around some stuff a bit. We didn’t see the kind of, uh, growth wouldn’t be the right word, but 4% to 10% that’s a little bit more drastic.
But we did see some shifts 100% especially near the end of the year. Yeah. As people started to become a bit more openly concerned about the economy, you know, the news cycle shifts all of a sudden it’s, it’s chicken little. The sky is always falling one way or another. Right. It went from Ukraine and Russia and we’re all going to die to now the, the economy we’re all going to be poor. It’s a great, great depress. There’s always got to be some uh terrifying thing about why we’re all doomed. Yeah.
So that’s always fun. But that’s a conversation for another day. Yeah, I saw our paper click cost per lead double. Yeah. In August of last year. Yeah. It’s, it was insane, man. And it started happening. It, it was like, wait, what’s going on with our Google? Oh. Oh, that, that’s even worse. Oh, no, I can’t. All right, we’re gonna platform here. Oh, it just got higher. Yeah. You know, and I wanted to blame it on the, the vendors. Sure. Well, we had a lot of people come to us and like we want, we want you to run the paper clip.
We would do an audit and we would say, listen, here, we can add a ton of value of what you’re not doing. But I’m gonna tell you the paper click for you. You probably just don’t even want to be doing it. But it was always a immediately, it’s the marketing company’s fault. It’s what they say. Now, a lot of marketing companies are bad. A lot of them are bad at paper click. But some of them they came in, they said, oh, my marketing company was doing great.
I don’t know if they changed. I don’t know if someone knew is doing it, but they’re awful. And we go in and look and we’re like, no man, it’s just the, the, it just shifted and Google’s algorithm changes, it’s an auction process. So if Angie thumb tag, if they decide that they’re gonna throw the kitchen sink and bid them up, well, now you’re getting dragged right along with them. If you’re trying to compete for those, those uh leads. So it’s just, there’s a lot there and that’s why you don’t wanna, you’ve talked about all the different lead sources you use, you know, having tons of different leads, someone to manage all that and shifting it as things change.
And that’s a perfect example. You don’t want to have all your eggs in one basket because you don’t control Google. You don’t control Facebook, you don’t control the postage that you have to pay, you don’t control any of these things. So you need to be able to mix and match and move as you need to. Yeah, you know, the thing that you can control is what you charge. Yes, you can. Um And when you see that the cost per click is now 30% more than it was and you still need those clicks because that’s 15% of your business.
Well, you might have to look at adjusting the bottom line. You might have to look at charging more to keep your marketing budget in place. Um And it wasn’t universal to you. I was, I think a pretty good client to our marketing companies, but we saw it with every avenue, our display ads, our paper click our Facebook ads. Uh our Yelp impression cost, you name it every one of them and it was inflation. We’re raising our prices and you got that corporate marketing inflation that happened from the tech companies and it just felt like one person started raising.
And then next thing, you know, every service provider we had raised the prices um while meanwhile, the fulfillment, they were lowering their prices uh at the end of last year. So as our marketing expenses were going up because of the adjusted pricing, we were raising our prices to compensate for that. Whereas we started seeing our competitors or our market lowering price out of fear to acquire clients. Oh, so we saw two things happening at the same time at the end of last year. But this is my first time being a business owner going into, uh, a recession and a change in buying habits.
And, wow, it was a exciting, it was fun eye opening. Um, and I, I understand why recessions are hard now. Yeah. Living it, living in it. Oh, feels good when everything’s on the up. Sure. Uh, you know, it’s fun the last 10 years in a bull market where everything was affordable and everyone was getting rich fast. Yeah, it’s, it’s a downturn economy that creates great companies though because it, we, it weeds out a lot of the, the companies that really shouldn’t be there. And so the professionalizing your business getting your marketing dialed in being the company that you should be, uh, to run a professional business, you come out the other side so much stronger and a lot of the, the companies that really shouldn’t have been there are not there.
So, what you do is you end up gaining a bunch of market share and actually growing pretty exponentially because you went through, you weathered a storm, you know, and a lot of companies won’t weather. Um, Michael. We are coming up on an hour here. This has been incredible. So, we, we’ve gone through, uh, your gross margin, went through your break, even number o client acquisition, some of the mistakes that you made. Thank you for being so open about that. I mean, I certainly you don’t have anything to be ashamed about.
Obviously, uh, you’re doing super super well, but I always appreciate you being willing to, to be vulnerable and talk about this stuff. Is there anything else you wanna add while we, uh, before we wrap up this episode, um, know your numbers, know them inside and out and uh, sometimes it feels like there’s not a lot of benefit when you spend time inside the spreadsheets. And you’re thinking you should be in front of a client or you think you should be on the phone. But in reality, there’s more value in understanding those numbers than anything else.
So people know your numbers as much as possible and that’ll help you get through any of these changes within a market. What I really, really love that you did here was you, you made it so actionable, right? A lot of people talk about know your numbers know your metrics, but you actually showed what you do with the data, which I think is the is why it’s so important to know it. Um And you actually gave people a real action plan for how to what to do with the data.
So I appreciate you, Michael. We have one more episode coming up. Uh Thanks man, thanks. Thanks for uh being so open and sharing all this stuff, man. It is my pleasure. Always a good time. Always brother. All right. See you for episode. Five man. That sounds good.
