Veteran home improvement dealers and media experts explain how to plan marketing budgets, monitor lead effectiveness, and adjust where marketing dollars go.

Source: REPLACEMENT CONTRACTOR Magazine
Publication date: 2005-07-01

By Joseph F. Schuler Jr.

Marketing is one of the biggest costs at just about any home improvement company and certainly one of the most important. Controlling that cost means avidly watching lead effectiveness and quality, then making sure every lead counts.

Many owners are satisfied as long as they have a sufficient number of leads to keep the salesforce occupied. That's exactly where they make their mistake, by taking lead quality for granted.

How good are your leads? Closely examined, you may discover it's time to remove or improve certain lead sources, based on true cost. Conversely, it might be time to invest more in others, based on hidden benefits.

Although there's no ideal marketing budget, most home improvement companies would be glad if they could keep marketing expenses at less than 10% of revenue.

Even if you reach that goal, it's important to ask yourself if those lead costs are fully loaded. The actual cost of an issued lead includes everything from postage to administration and other often-overlooked overhead expenses — salaries, home show display set-up costs, customer referral fees —and costs perhaps slotted elsewhere, such as giveaway items and telemarketing costs associated with issuing the lead.

Those who budget best watch key metrics not just annually, but weekly. Through analysis of cost per lead, leads issued, net sale per lead issued (NSLI, or slugging percentage), and other markers, they know how to adjust marketing investments whatever the number of lead sources. And, early in the last quarter, they confidently make budget changes for next year.

To accurately track lead effectiveness from sales and cost perspectives and to use that data to plan marketing budgets, lead costs must be fully loaded. Wayne W. Winn of Home Town Restyling, Hiawatha, Iowa, who spent $500,000 to bring in $5.4 million in revenue last year, fully loads his lead costs, down to T-shirts and hats for installers.

SFI (sell-furnish-install) leads can be particularly deceptive, so it's wise to look carefully at their actual cost. “If you pay your SFI retailer 15%, then add 12% for regular marketing cost for outbound telemarketing, then add salaries of your in-store people, plus all the regular costs to get the lead out the door, including licensee fees, total cost can be 35%,” says Bruce Butterfield of Weldon's Windows, Charlotte, N.C. If you're allocating incorrectly — and therefore budgeting incorrectly — “It can cause a company to go under,” he says.

Keep in mind, however, that marketing can't be managed solely from income statements. There's no correlation between revenue today and this month's expenses. Revenue is from sales made 30 to 60 days ago. Expenses are current, and from that investment, revenue has yet to be earned. “Marketing from an income statement is where most dealers go wrong,” says Brian Leader of Ohio Energy, a sunroom and window company in Columbus.

Looking back is important, but so is looking ahead. Start with this question: What's your revenue goal and how do you reach that goal via marketing?

Leader's other company, Ennovations, sells management software called ImproveIt 360, which includes a marketing component. He suggests that if you want to grow, you need to identify which lead sources are “scaleable”; that is, those that can be multiplied exponentially. Referrals from prior customers, for example, aren't scaleable. If you want to grow business by 30% each year, identify which sources create opportunities. If you're doing home shows, for instance, are there more such shows out there or do you need to generate more leads at shows you now attend?

In developing their company's marketing budget, Todd Schulz and Tod Colbert, co-owners of Weather Tight, Franklin, Wis., don't so much review historical data as forecast the leads, then sales, needed to achieve revenue targets. They call the method “benchmarking,” and at Weather Tight, every employee must meet benchmarks for sales, leads, and production per hour. (For more on projecting leads needed for sales goals, see “How Do I Grow By 50%?”.) If one of Schulz's 65 employees doesn't hit his goals one week, he's asked what kind of help he needs to reach them. This may take the form of training or coaching by department heads, who monitor employees in weekly meetings. Schulz doesn't let his people “test” him. “If they don't hit our minimum expectation, we have to be ready to get rid of them,” he says — although in two years, he's only had to let a handful of sales-people go for consistently not reaching goals. “People take their goals seriously,” Schulz says.

Relying on plans developed by department heads in each of Weather Tight's five divisions for increasing lead generation (more canvassers or home shows, for instance), Schulz can see what leads will come in, how many sales staff must be added, and then, what his company will reach in revenue.

Knowing employee commitments in terms of number of leads allows Schulz to predict his numbers. By knowing what his people produce, he knows who he needs to add for even higher numbers. This combination of factors is what enables Weather Tight to post formidable numbers in sales and marketing. During the past five years, the company increased revenues, on average, 51.6% each year. This year, initially projecting $10.5 million in sales, it's on track to reach $12 million, up from $6.9 million, installed, last year. The company predicts 34,494 inquiries this year and will issue 8,424 leads. Last year lead cost per issued appointment was $245 and marketing costs were 16.1% of revenue. High, maybe, but Schulz believes the most expensive lead “is the one I don't have.” Ideally, he shoots for 15% or less.

Schulz says his 15 sales reps are predictable when it comes to benchmarks, so he knows what they'll generate “as long as they have a lead.”

He watches slugging percentages for all divisions and every sales rep has a benchmark NSLI; for windows it is $2,159 and for sunrooms it is $3,378.

Schulz looks at lead profitability as well as closing rates to determine where marketing dollars should go. This year, that's mostly to TV advertising, canvassing, and home shows. He uses 160 lead sources in all.

To budget for marketing, you need to understand more than just what your leads cost. What did the leads produce? How many demos were set? What were the closing ratios? Which leads had more bank rejects?

For instance, television advertising is among the more expensive lead sources. (See “Can I Afford TV?” on page 66.) By scrutinizing your marketing budget in October and the leads and sales it produced, you can take advantage, in December, of prime media buys for the following year, particularly network TV spots.

Home Town Restyling commits around $100,000 to TV ads appearing weekly on the three-minute midday news segment of the local CBS affiliate. The segment helps produce a 50% closing ratio on TV leads. “TV lends so much credibility,” Winn explains.

When you're looking at lead sources, examine which ones were efficiently handled. If a lead source failed to perform to expectations, was the failure internal or in the message? Did your marketing staff fail to convert those leads to issued appointments? Or did salespeople fail to convert the lead to a sale in the home?

Questions like these are the reason Leader insists that you can't budget for marketing based on NSLI. Before chucking a lead source because of low conversion ratios, Leader suggests asking if the fault lies in training. “[NSLI] is good to manage a salesperson but not relevant in determining marketing cost or return,” he says.

Butterfield not only doesn't agree with that, he benchmarks NSLI.

“If NSLI is $2,500 at a cost of 5% of revenues, that's a phenomenal lead source,” he says. He looks for $1,200 to $1,800 NSLI in windows, $1,800 to $2,500 in siding.

Butterfield's NSLI for canvassing is $2,500. “The cost is miniscule, less than 1% on a radiation around a jobsite,” he says. “That's why I love it. All the money you save goes to the bottom line.” But NSLI is just one metric he examines in determining the usefulness of a lead source. How did marketing handle the call? How quickly did sales get into a home? How experienced was the salesperson? Butterfield not only looks at who handled the leads, but also the methods used to convert them.

Butterfield also tracks trends and adjusts marketing accordingly. For instance, if a show that did great last year flopped for want of attendance this year, was weather a factor? Is the country at war? Are people going to TV or the Web for their news? “It's a mistake to just look at the numbers,” he says.

Herb Gross, of Charlotte, N.C., author of <i>How to Win the Ad War</i> and a 30-year advertising specialist, says a consistent network TV campaign will always outdo any scattershot approach. “Focus on one medium,” he advises. “The thing that drives results is frequency. When people come up with a plan, let it run. If advertising isn't producing desired results, don't change the plan, change the message.”

Schulz and others advise against investing in just one lead source. In 1996, Schulz dropped home show and events marketing to focus solely on marketing at Sam's Club. Then, Sam's Club moved to a large regional SFI firm and dropped his company. That happened at around the same time that Weather Tight got out of cold calling. “We lost hundreds of thousands of dollars that year,” Schulz says. “We can't afford to put all our eggs in one basket.”

Winn loves TV's impact, but he also believes consumers are susceptible to various types of advertising and marketing. Consequently, he spreads his ad dollars among 26 lead sources.

Whatever strategy you choose, look ahead, look back, tweak as you go, scrub your database, and always market smart. Sales success has no choice but to follow. —<i>Joseph F. Schuler Jr., a former senior editor at</i> REMODELING<i>, is a freelance writer in Gaithersburg, Md.</i>

How Do I Grow by 50%?

Let's say you're running a $1.2 million company. Jobs average $15,000, and you want to grow to $1.8 million. Assuming you have the systems in place to manage and sustain that growth, your first question should be: What's my average closing rate?

Say you had 400 leads and 80 sales — a closing rate of 20%. If everything stays the same, you'll need 120 jobs to reach $1.8 million in sales ($1.8 million ÷ $15,000). Divide 120 by your closing rate of 20%. The figure you come up with — 600 — is the total leads you'll need. That's 50% more than the 400 you had to generate last year's revenue.

Say you spent 6% of sales ($72,000) on marketing, or $180 per lead. Using similar lead sources, you'd need to spend $36,000 more this year to meet new sales goals.

For better results, pinpoint your most effective lead sources and make incremental increases in these areas. Conversely, consider eliminating poor sources. For 600 leads, you need 11.5 each week. From that, establish close rate targets and sales projections.

Adjust for seasonal variations, and know what you need to stay on track, week by week. If average project size or close rates change, the number of leads you need will also change. Recalculate everything.

Can I Afford TV?

One Ohio home improvement contractor doesn't advertise on network TV. One Kansas City home improvement company only advertises on TV. Many other specialty contractors mix TV in with other lead sources. So what's right for your company?

It depends on the market.

“We've tried media in the past,” says Brian Leader of Ohio Energy in Columbus. “We've never been able to do it cost-effectively.”

So, for some, it doesn't work. Others swear that TV can be highly effective, if it has a clear call to action and enough frequency and reach. But frequency and reach make it a costly endeavor.

Author Herb Gross of Charlotte, N.C., says few can afford mass media in costly markets like New York, Los Angeles, Boston, Chicago, Philadelphia, San Francisco, Detroit, and Atlanta. An alternative is to identify key ZIP codes and market using direct mail, cable TV, and local publications.

Ron Sherman of Ron Sherman Advertising and Teleproductions, of Little Rock, Ark., says the top 15 markets require at least $200,000 a year in network TV advertising for TV to be a solid lead source. Smaller budgets don't produce results. You need to reach target viewers three to five times each month.

Sherman says in smaller media markets, tighter budgets can produce leads. One of his Kansas City clients spends $150,000, with TV as the only lead source. He grosses $2 million in sunroom sales.

Can you afford a trial run? Sherman recommends 90 days — at which point he tweaks the campaign, reviewing how it's produced and if the programs carrying it are effective. He also asks: Can the message be made more personal? In a large market, $200,000 funds a 90- to 120-day test. That can be accomplished for $35,000 to $50,000 in small- to mid-sized markets.

Sherman says he aims to make phones ring immediately. By re-evaluating after 90 days, even slight changes boost results. The goal is a clear, concise, and frequent selling message.

Sherman produces more than 400 TV ads each month. The most popular are “personalized” spots and 60-second sales spots with three “hooks.” The personalized ads, for example, can run during noon news hours, and create urgency by building to a climax with the hour's final ad, which urges viewers to take advantage of a last-chance offer.

Gross says it can take nine months for a TV campaign to take hold. But each year you advertise, you will get better results.