When it comes to gauging the health of your business, you know the importance of having and tracking your company’s key performance indicators. But as times change and the economy fluctuates, you need to make adjustments. Looking ahead, are your current benchmark numbers really the ones you ought to use? We searched for benchmarks covering operations, customer satisfaction, marketing, and social media and the Web. These numbers, gleaned from industry experts working with many of the nation’s top remodeling companies, can be used as lagging indicators as well as leading indicators—guides from which you can create goals for your own company. As industry consultant and REMODELING columnist Shawn McCadden says, “Use benchmarks to create a reference point and establish goals for what you want to accomplish, and to figure out a plan for how to get there. Then look back and ask, ‘What is the message my benchmarks are telling me from year to year?’”
Victoria Downing, president of Remodelers Advantage Roundtables (RAR) and a Remodeling columnist, sees the following numbers as the important benchmarks to track. They are gathered from a group of successful remodeling company owners who follow best practices and strive for professionalism in all aspects of their business.
Owner’s compensation: 18%
An often heard rule of thumb about owner’s compensation is that it should be 10% of revenue. The average for these RAR members is higher. If you compare yourself to other similar businesses to reach the bar they set, it’s important to understand how they arrived at that particular number. For compensation, RAR looks at “The combined net before bonuses—you have to earn it before you give it away—plus the salary or dividends or draws, that is, however [owners may] take out their own compensation.” RAR’s stretch goal is 20% of revenue going to the owner, Downing says. “Our members should earn enough to take an above-average owner’s salary and get a good return on their investment, which is net profit.”
On track to meet X% of budget: 115%
It’s important to know whether you’re going to meet your financial goals. At this point, the RAR group was ahead of budget. If they continued at this rate they would produce 115% of what they had budgeted. Tracking your progress and knowing where you stand with regard to that goal helps you determine what you need to keep doing or stop doing.
Cost of goods sold: 65%
Gross profit %: 35%
Overhead expenses: 24%
Net profit: 11%
Look at COGS, GP, and overhead, Downing says, to see if you’re going to be on budget and hitting the percentage that you planned for. “There is not any one ‘right’ percentage,” she adds. “These are measuring tools. Overhead expenses can be 40% if you can come out at the bottom with a net profit of 8% to 10%. That’s the real scorecard. It gives you the equity to buy equipment, build your business, and reward employees.”
You also want to look at your slippage (the difference between your estimated and actual costs). “What’s acceptable is 2% of the job cost one way or the other. You want to be accurate,” Downing says.
For Remodeling’s Big50 class of 2013, average gross margins for 2012 were around 33% and net profits were roughly 9%. That’s not only the best showing for any Big50 group since 2006, it also knocks the socks off of the 26.8% margin and 3% net profit recorded in the 2012 National Association of Home Builders Remodelers’ Cost of Doing Business Study. Gross profit within the 2013 Big50 group ranged from a low of 12.5% to a high of 59.3% and a median (half above, half below) at 32.8%, while the range for net profit was from a negative 1.2% to a robust 25.6%. The median point was 7.3%.
Quick Ratio: 1.37
Current Ratio: 1.70
The quick ratio equals accounts receivable divided by current liabilities; 1.37 means that the average for these companies is $1.37 of liquid assets to every $1 of current liabilities. The Current Ratio is all current assets divided by current liabilities. You want to have $1.50 to $2 for every $1 of liability.
The CR tells you—if you had to close down your business tomorrow—whether you would end up with cash or owing money. “You don’t want [the current ration] to be less than one. It gives you a low liquidity ratio—the stuff banks look at if you want to take out a loan,” Downing points out. “If it’s too big, say 5 to 1, you should think about taking money and putting it outside of the corporation. If someone sued you, for example, you’d have a lot of cash and liquidity.”
Percentage of raw leads to new prospects: 59%
Close ratio: 35%
Construction contracts: 24
On track to meet % of budget: 111%
When setting lead benchmarks, you have to define for yourself what a lead is. RAR defines “raw leads” as anything from online and calls that come in, including referrals. These top remodelers deem 41% of their leads as unworthy and turn 59% into appointments. The close ratio is defined as construction contracts divided by the number of new prospect meetings. About 1 in 5 leads turn into actual construction contracts.
Survey company GuildQuality focuses on the intricacies of customer satisfaction in the home improvement industry, surveying the clients of more than 1,000 remodeling and home building companies across the nation. According to president Geoff Graham, an average of 90% of customers of GuildQuality member companies would recommend that firm to someone else. That’s considerably better than the national average of 70%. “Some people may say you can’t please 1 out of every 10 customers,” Graham says, “but your benchmark should be 95%, where you can write off 1 out of 20 customers.”
Judith Miller, an industry consultant and Remodeling columnist, believes that customer satisfaction is one of the most important benchmarks for a remodeling company. “If your [company’s] customer satisfaction is consistently high, you can, gradually over time, raise your prices. It’s one of the best indicators about the future potential of your business.”
Graham agrees. He has found a correlation between customer satisfaction and a company’s ability to stay in business (see percentages at right). Looked at another way, he says, “About one out of every five businesses that deliver a poor customer experience—where poor is a recommendation rate of less than 80%—fail; whereas, only one out of 50 superior performers fail.”
With the popularity of websites such as Angie’s List, Yelp, Houzz, and others, homeowners have come to rely on technology for information both about remodeling companies and the remodeling process, as well as about home improvement products. “Customers are doing their due diligence,” Graham says. “The cost of being just an average or a substandard service provider has risen. It’s much harder now for remodelers who have a poor reputation to get work.”
All marketing—whether it’s in-home or showroom events, home shows, direct mail, newspaper, TV, radio, billboards, or online programs—is designed to generate leads and, eventually, to fill the job pipeline. Traditionally, residential remodelers have spent 1% to 2% of volume on marketing. But perhaps it’s time to raise the bar, McCadden says. He believes that successful companies likely spend closer to 5% or 6% on marketing, including salaries and expenses for those performing your marketing services.
Jacintha Anderson of Socius Marketing, in Tampa, Fla., suggests the following for a remodeling client with $1.5 million in revenue. Benchmark 6%, or $90,000, as an annual budget allocated to all marketing. This would include: home shows (about $12,000 per year); hiring a company to help boost your search engine optimization (about $1,500 per month) or pay-per-click advertising ($2,000 to $3,000 per month); and hiring a part-timer at $10 per hour to handle your newsletter, mailers, and social media. The remainder of your budget could be spent on direct-mail pieces and newspaper ads.
Lead Cost: varies
Benchmarking lead costs is tricky. If you have a $5,000 project and it cost you $500 to get it, that might be too much, Downing acknowledges, but that same marketing campaign might have netted you a $25,000 or $50,000 project, so there’s no set figure on lead costs. Remodelers Advantage Roundtables’ figures show $2,456 as an average lead cost per sale and the average job size for the top 25% of RAR members as $70,791. The question is whether that’s an acceptable ratio for your business. And if it isn’t, then you need a plan of action to change it. Perhaps “if you dug deep, you could look at the potential value over a lifetime,” Downing says
RAR’s benchmarks show that only about half of raw leads come from repeat or referral business. “That’s not bad,” Downing says. “It shows a mix of referrals and new blood. If it gets to be 90% or so … that could show a lack of growth. Fifty percent might mean [the company] is growing quickly”
Conversion rate: 35%
Besides lead costs, the other important benchmark is conversion rate. How many leads turn into actual jobs? These successful remodelers convert about 35% of their leads into construction contracts.
Social Media & the Web
This includes your investment and the returns on that investment from a mix of online efforts such as your website; presence on Facebook, Twitter, Houzz, Pinterest, and YouTube; pay-per-click ads; and email blasts. The ultimate goal with any digital marketing is to get people to your website and convert them into paying customers. SEO (search engine optimization) is what you do to make it easy for search engine software (such as Bing or Google) to find your website. (See the XML site map tip, at right.)
“If you’re not driving people to your site, you’re sharecropping on another man’s land,” says digital marketing consultant April Wilson, president of Digital Analytics 101. “You always want to own your own audience; you don’t want to cut through someone else’s clutter.” Once they are at your site, you want people to interact and to buy. It’s important that you understand each segment of the sales funnel, from “website visits” at the widest part, narrowing to “engaged visitors,” “leads,” and “sales” at the bottom, says Ben Landers, president of Blue Corona, an Internet marketing firm that specializes in the home improvement industry.
Why an XML Site Map Matters
Getting those 1,000 visitors a month to your website is no easy feat. The key: search engine optimization. “From an SEO perspective, the XML site map is critical,” says Ben Landers, president of Internet marketing firm Blue Corona. You can up the chances that search engine software will find you, by having an XML site map. (Note: This is not the “site map” often listed at the bottom of a home page — that’s really just a site’s table of contents.)
XML (Extensible Markup Language) is essentially a set of rules to encode documents so that search engine software can read them. The XML site map is a “blueprint of your website that tells search engine software ‘Here are all the pages on my site and where they live,’” Landers says. You have to create the site map, but it’s not difficult to do. Landers had Blue Corona crawl and analyze 415 sites from the list of remodelers in the Remodeling 550 for the past three years. He discovered that “47% of the sites do not have the file present. But ... of the [sites with a high SEO ranking], 91% have an XML site map.”
You can go to xml-sitemaps.com to generate a downloadable site map.
Website visits: 1,000 visits per month
Landers suggests a benchmark of 1,000 for remodelers doing less than $1 million in annual volume; for larger companies 2,500 per month, “and regional players might shoot for 5,000 visits per month or more.” And how do you know if your strategy is working? Google Analytics, a free service, is one way to find out. Wilson offers tips on what you should know about GA’s five top metrics.
New website visitors compared with returning visitors 50% : 50%
If you have an 80:20 ratio of new to returning visitors, that means “people are drinking a little nectar and then moving off your site. You want people engaging with what you’re doing,” says digital marketing consultant April Wilson, president of Digital Analytics 101. And if it’s skewed 20:80, you may not be growing your business.
Bounce rate: 35% or lower
The bounce rate shows the percentage of people peeking at a Web page and then leaving. You want this rate to be low.
Engaged visitors: 6% to 10%
These are visitors who, in some way, interact with your site by giving you their contact information, downloading an idea book, signing up for your monthly newsletter, etc. For the general remodeler, Landers suggests the 6% to 10% benchmark; for high-end remodelers, maybe 4% to 6%; and for exterior remodelers, 15% or more because their jobs are likely more straightforward and product-oriented rather than dream- or idea-oriented.
Lead conversion rate: 4% to 5%
If you’re a general residential remodeler doing kitchens and baths, for example, this 4% to 5% benchmark is what you should aim for, Landers says. High-end/luxury remodelers should target a 1% to 3% conversion rate.
Number of online pages: 200+
Google ranks pages, not websites, Landers points out. “Over time, small remodelers should shoot for a site that has 200 or more pages,” he says. “That includes images, project recaps, blogs, tips, idea books—each one a separate page.”
These are links on other sites that point to your site. The more places that link to you, the higher your credibility. But some links carry more weight than others: A link from Remodeling or from Amex Open Forum, for example, shows business or industry relevance and has a higher authority for search engine rankings.
Growth rate: X%
If your market is growing at an 18% growth rate, for example, you can use that as a benchmark for sales growth, says Barbara Nuss, CPA and owner of Profit Soup, in Seattle. “If the market is growing that much and you’re not,” she says, “you’re losing market share. Dive down into the metric for what drives sales.”
Email Open Rate: 30%
Click Rate: 20%
“Social media is shiny and sexy and interesting, but it still isn’t necessarily converting into business,” says digital marketing consultant April Wilson. “Email continues to be the top-performing vehicle for closing new sales across the board, regardless of industry type.”
Ultimately, you want to reach people who actually want your email messages. And you want them to click on the links in your newsletter once they open your email. (The click rate is the number of clicks divided by the number of opens.) Engage those who opt in with short emails devoted to a specific idea. “If you’re not sending out valuable, focused content, you’ll see sad little click rates,” Wilson says. For example, you might segment your e-newsletter audience by offering three kinds of information that recipients can opt in to: new project ideas, local events, or special discounts. “If someone doesn’t click on anything, you might assume they’re not interested in hearing from you,” Wilson says. In that case, maybe you drop them from your list or contact them less often.