Three metrics can illuminate ways to boost customer retention and sales, and to reduce the cost of running your business.
The top two questions that lead every consultation at the beginning of the new fiscal and calendar year in my consulting business are, “What should I be measuring in my business?” and “What goals should I be setting?”
[EasyDNNnewsToken:Left Justify Embed 300 x 250]One of my best lessons I got in business was before I even had my first job after college. I had applied for and gotten an interview with McKinsey and Company which is a very prestigious consulting firm. In the interview, they gave me a case study about a railroad shipping company that was missing its profit goals amid slipping sales. After they finished describing the situation, the interviewer asked me how I would fix it. I went on for five minutes with all sorts of ideas on how I would get sales growing again. I was sure I had aced the questions, but they thanked me for coming and said I would not be getting the job. I asked why, and they explained I made a mistake most people do, I did not look at the entire picture.
They asked me a simple question from my very first business class: What is the equation to calculate profit? Simple, I answered: Units Sold x (Price of the Units – Cost of the Units) – overhead expenses. “Exactly right. So why did you spend all your time on only one part of the equation: units sold?” It was a very polite but powerful wake-up call on how business managers get tunnel vision on marketing and sales.
Now don’t get me wrong, I love sales and increasing sales numbers. But it is not the solution to every problem, and it should not be the only thing you care about. To have a healthy business you need to step back and look at the entire picture or, as my interviewer put it, all parts of the equation.
To be an effective manager you have to be able to know what is going on in all parts of your business, and there are certain numbers you need to know at all times. These are almost like the dashboard on your car. Knowing these numbers will tell you the overall direction and health of your company.
In my personal business I track about 20 numbers on a regular basis, but for the sake of this article, I am going to skip over the obvious basic financial measures (total sales, profit) and instead focus on three key, actionable but perhaps lesser known metrics that will help you diagnosis problems in your business.
Customer Loss Rate
One of the great things about the cleaning industry is that most of our clients provide an on-going revenue stream from long-term service contracts. However, as a company grows, one of the biggest drags on growth is the customer loss rate. This is easy to calculate. Just take the number of clients lost and divide it by the total number of clients at the start of the time period you are measuring. For example, if I start the month of January with 50 clients and I lose 4 of them, then I had a customer loss rate of 8% in the month of January: 4÷ 50 = 8%.
Once you know your loss rate, you can begin to test various changes to your systems, pricing, and service to hopefully lower this rate over time. Changing the customer loss rate is often the most effective way to increase revenue over the long run.
The table below shows the effect of customer loss on a fast-growing cleaning business. They have a great marketing program that is generating 100 new clients per year. They also have an annual loss rate of 60% per year, and also some of those new clients. The example show how in just four years, with no changes to their marketing program and goals, this company will go from an 80% growth rate to only 2.25% growth rate because of the number of clients they are losing.
This example shows the power of changing your loss rate, especially for larger companies; the larger you are, the more clients you have to lose.
This also explains something I hear from companies all the time in our consulting business. They come to me and ask for help with their marketing. They tell me that they were growing fast for years, but it suddenly “stopped working” and they are not growing anymore. However, most people who approach me and ask for help think they have a sales and marketing problem and they do not.
The problem is not that their marketing program is not working; in fact, it is generating the same number of clients every year. The problem is they are losing clients too quickly. If they knew their customer loss rate, business owners would realize where their problems are actually coming from and would be able to make changes to address the root of the problem.
Net New Customers Gained
Knowing how many total new customers you gain each month is great, but it’s even more critical that you know your NET new customers gained: Total New Customer minus Customers Lost = NET New Customers Gained.
At My Maid Service, we track this on a monthly basis, and it is one of my most important measures because it helps me to predict what the future sales will be. It is important to realize this is only a measure of on-going business, but it can be used in both residential and commercial cleaning.
For ease of math, assume an average bi-weekly (every other week) residential client is billed $100 a visit; they will spend $2,600/year for as long as I do business with them. Because they are so important to me, I have created a simply point system to track my business. Each client is assigned a value based on the number of times per month we would clean their home:
Weekly = 4 points
Bi-weekly = 2 points
Monthly = 1 point
We then keep a running tally. If we gain a new client, we add the points. If we lose them, we subtract the points. I have a big board in my office that we reset every month that looks like this:
I personally like this system because it is a quick and easy way to way to keep track of my business. I can use the same system for commercial cleaning and assign a point value for the number of nights per week a business is cleaned. I have this on a huge white board so everyone can see it. We take it a step further and write wins in green and losses in red. This keeps everyone in my office aligned on what really matters to me — adding more recurring clients than we lose.
This also lets them infer that certain business activities are changing. For example, they know when there is a lot of green on the board that I am giving extra hours and hiring. My staff also knows if the board has too much red on it, I will have to start cutting back on hours.
In the example above we are +3 for the month. This means we have booked 3 more recurring appointments per month than we have lost. If we take the average cleaning charge of $100 from the example above, this means we have booked $300 a month in recurring revenue. That is $3,600 a year. I can tell all of that in 30 seconds with no software or fancy reports.
The advantage of this point system is its simplicity, but it can also hide some problems such as gaining smaller clients and losing bigger ones. This same principle can be taken to one more level of detail if you want to record the monthly revenue generated from each client gained or lost. What is important is that you track both the losses and gains so that you can see in total whether you are losing or gaining recurring revenue.
Direct Field Labor as a Percent of Sales
It’s easy to forget that between 40-60% of your business costs are in your direct labor — paying and insuring the technicians you hire and train to clean. So it’s easy to get caught up in those rising sales figures without really thinking through the impact of costs on this number.
That’s why direct field labor as a percent of sales is such an important metric to track and understand. This is a measure of what percentage of every dollar that comes in the door is spent directly on the labor to clean homes.
To calculate this metric, take all of the labor expenses for the people who clean homes (including you – the owner – if you still spend time in the field), and divide it by the total revenue for the company during the same period of time.
Total Labor Expenses ÷ Total Revenue = Total Direct Labor Expense
This should consist of all expenses, including payroll taxes, benefits, and other direct expenses such as payroll processing fees. In general, this percentage will not change as revenue grows so if direct labor is at 50%, that means 50 cents out of every dollar of revenue you sell will go directly to your line labor costs.
Most companies need to see this number at or below 50% to be profitable or even just breaking even. But what is most important is not what the industry average is, but what your company trend is in this area. If your direct labor expenses are going up, you need to investigate the reasons why. This is a number that you need to track very closely and work very hard to make sure at a minimum it stays flat but ideally it drops over time.
Making Metrics Tracking a Standard Business Activity
Arguably the hardest part of measuring anything in your business is remembering to do it. Think carefully about how you like to keep track of information right now:
– If you’re a journaler, create a public journal where you and your staff keep track of these numbers.
– If you’re a spreadsheeter, create a spreadsheet and be sure to use the formula features to make calculations automatic.
– If you’re a Google docs addict, set up a new document so you can get to it no matter where you are.
Whatever your method of keeping track, use it to make tracking metrics part of your regular routine. Also consider adding this activity – or any new activity – to an electronic calendar that can give you audible and visual reminders to stop and check these important metrics.
Tracking the numbers in your business is often a very small time commitment once you get yourself set up. Make it a priority now so that you can achieve even greater heights in the coming months.
Derek Christian is the owner of My Maid Service with locations in Cincinnati, OH and Dallas, TX, as well as a business coach through Cleaning Business Builders and publisher of CleaningBusinessToday.com. Derek is now an investor in several cleaning companies including My Maid Service Dayton and Real World Services Columbus. Derek is also a consultant for industry leaders Blue Skies Services and Castle Keepers.