Looking below the surface

I have long written about the importance of knowing your numbers. Such knowledge helps us set the proper selling price for our business, adjust our marketing, estimate accurately, and much more. But what happens when the numbers “lie”.

The truth is, the numbers don’t actually lie—they are what they are. However, if we do not properly understand the numbers, or look at the wrong numbers, or look at one number in isolation from others, those numbers can give a very misleading picture. In this sense, the numbers can “lie”—they can tell us something that doesn’t correspond to reality.

I often hear contractors talk about closing rates (the percentage of estimates given that actually result in a sale). Some contractors give this ratio far more importance than it deserves—they think that there is some magic number that they should aim for. But what does the closing rate really tell us? Nothing more than the percentage of estimates given that actually results in a sale.

In and of itself, this number tells us very little. It can be useful in tracking the results of other actions—such as raising or lowering our price—but by itself it says virtually nothing. Indeed, the closing rate can be very misleading.

For example, I hear many contractors brag about closing 90% of their estimates. This might be good, or it might be bad. The evaluation depends upon why they have such a rate. If the contractor works solely by referral, a high closing rate might be expected. If his prices are way too low, a high closing rate also might be expected. In other words, the why determines the what—why he has a 90% closing rate determines what it actually means.

Consider another example—web site traffic. A huge surge in traffic would seem like a cause for celebration. But there could be many different explanations—an improvement in search engine rankings or a poorly executed AdWords campaign are two. The former would be a positive, while the latter would be a negative. However, if we just look at the increase in traffic (the what) without identifying the why, we might reach a disastrous conclusion.

This doesn’t mean that we must be omniscient. It does mean that we have to understand what the numbers are telling us and what variables can impact the numbers. We have to look deeper than just the number itself.

Let us say that you raise your prices 10% and over a months time your closing rate drops from 40% to 33%. This is a significant drop, and could easily be a cause for concern. Or it might indicate that you made on of the best decisions of your life.

To illustrate, I will assume that you have a crew of 3 painters, your overhead is $9,000 a month, you have been selling at $40 an hour, and you pay 35% of sales for labor and burden. With 3 painters you have 450 man-hours per month to sell. This translates to $18,000 in sales, $6,300 in labor costs, and a profit of $2,700. Let’s also assume that your average sale is $2,000, which means you sold 9 jobs (at an average of 50 hours per job) and generated 22.5 leads.

If the closing rate drops to 33%, you will sell 7.425 jobs. Because you increased your prices 10%, your average sale is now $2,200 or $16,335 for the month. Your profit will be $1,618. So far, this doesn’t look good. However, keep in mind that you only sold 380 man-hours—you have 70 man-hours still available. If you can generate 4.7 additional leads you will sell those 70 hours. Because you have covered your overhead, your only expense will be labor. Those 70 hours will generate $3,080 in revenues and provide a profit of $2,002. Consequently, for the month your profit will be $3,620, or an increase of 34%.

Obviously, we won’t generate a fraction of a lead or sell a fraction of a job. The point is that if we look only at the closing rate, we might conclude that raising prices was a bad idea. However, if we look at the entire picture—and can generate a few additional leads—our profit increases significantly.

It is often said that beauty is skin deep. The same is true of numbers. If you want to get to know someone—who they truly are—you must look below the surface. The same is true of numbers.

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