Benchmarks help remodelers evaluate their company's performance. Some benchmarks are averages, some represent reasonable targets, still others set thresholds. The danger, however, is that a benchmark that is meaningful for most companies may not be appropriate for some.
Marketing expenditures is a good example. Introduced in 1998, the benchmark was set at 3% of total revenue. Although this number holds true for many full-service remodelers, it's too high for most small companies, and it's quite low for replacement contractors, who often spend 10% or more of total revenue on marketing. Pegging your marketing budget to total sales revenue may not be the most useful way to think about it.
In fact, Joaquin Erazo, vice president of marketing for Case Design/Remodeling, turns this benchmark on its head. “How much money you spend on marketing is a major factor in how much revenue you'll earn,” says Erazo. By determining how many leads were needed to generate past revenue, Erazo can determine the cost per lead and predict how much he'll need to spend to reach future revenue goals. “Look at history first,” says Erazo. “Past performance is the best indicator of future performance.”
Let's say, for example, your company took in $1 million in 2004 and you want to up that amount to $1.3 million in 2005 (see box at right). Assuming an average job size of $25,000, you'll need to perform 52 jobs in 2005 to hit your revenue target ($1.3 million ÷ $25,000 per job). If you sell one prospect in three, to land that many jobs you'll need to generate 158 leads (52 jobs ÷ 0.33 close rate). If you spent $125 per lead in 2004 on marketing, you'll need to spend $19,750 ($125 x 158 leads) on marketing in 2005 to generate the additional $300,000 in revenue.
That's just one scenario. Changing any one of the variables creates other options. You could improve your close rate in 2005, for example, either by improving your sales presentation or by pursuing better qualified leads, or both. Boosting your close rate from 0.33 to 0.4 means you'll only need 130 leads, saving you as much as $3,500 in marketing costs.
Likewise, landing higher-priced projects also changes the equation. If you focused on projects averaging $30,000 instead of $25,000, you would need to generate just 43 jobs. At a close rate of 0.33, you'll need the same 130 leads, with the same savings in marketing costs. Combine higher-priced jobs with a better close rate, and your marketing picture changes again. Selling 43 jobs at an average of $30,000 with a close rate of 0.4 requires just 108 leads. At $125 per lead, that's $13,500, less than you spent last year.
An oversimplification? Sure it is. But it makes two important points. First, as Erazo points out, “There are too many variables to use a percentage of sales to determine a marketing budget. You may spend the same as last year, you might spend more — it's not necessarily a direct relationship to revenue.” Second, it points up the value of measurement. The more data you have about how your company performs and how much it spends, the better you'll be able to set realistic goals for growth and evaluate next steps.