As a home service business owner, it is imperative to track business metrics and key performance indicators (KPIs). Knowing your metrics paints a map of how your business is doing and where it needs to go to achieve success.
This is why we have compiled a list of the top seven key performance indicators you should be tracking for your home service business.
The first metric is a simple one that you are most likely already measuring. Revenue is simply the income earned by your company from the sale of your services.
Revenue does not account for any expenses incurred and is generally known as the “top line,” as this is where it appears on your income statement.
The second metric is gross profit. This KPI tells you specifically how much you earn from producing your service. Therefore it is calculated as follows:
Gross Profit = Revenue - Cost of Services Sold
Cost of services sold (COSS) is the cost directly associated with producing your service. In this case it would be the cost of labor and materials.
Gross profit margin is the percentage of your gross profit compared to your revenue. It is gross profit divided by your total revenue.
If your power washing company produces $400,000 in revenue, but labor and material costs are $200,000, your gross profit is $200,000, or a gross profit margin of 50%. Different companies will vary, as some have much higher material costs, but a general rule of thumb is that gross profit margin should be at least 50%, though a target of 65% should be viable for home service businesses.
Net profit, otherwise known as net income or bottom line, are the earnings of a company after accounting for all expenses, including operating expenses, taxes, etc. Therefore it is calculated as follows:
Net Profit = Revenue - Expenses
Learn about the top three mistakes home services businesses make when it comes to setting up and running ads on Facebook.
Net profit, as mentioned, is also called the bottom line. This is because it usually falls at the end of a company's income statement. Net profit is a better reflection of a company's performance than gross profit. Of course, some companies have much higher costs that cannot be avoided, resulting in lower profit margins.
Net profit margin is a ratio that shows the percentage of total revenue that is attributed to net profit. It is equal to net profit divided by total revenue.
If your power washing company produces $400,000 in revenue, but total expenses are $350,000, your net profit is $50,000, or a net profit margin of 12.5%. A good target for net profit margin for your home service business is between 15% and 20%.
There are several ways to increase your net profit margin:
Generally this metric is measured for a specific marketing campaign, such as a Facebook advertising campaign. It is simply calculated as follows:
Cost per Lead (CPL) = (Campaign or Marketing) Spend ÷ Total leads (attributed to the campaign)
Although this metric is normally used for specific campaigns, it is also wise to know as a business owner, your company's value of a lead. In other words, overall, what is the average cost for a lead. Simply put, this would be your total marketing spend divided by your total number of leads.
That being said, you should still be aware of the CPL for each marketing channel. For example, what is the CPL for Facebook Ads vs. your CPL for lawn signs. This will give you an idea of which channels are working, and which are not; which channels to increase your spend on and which to slow down.
CPL is a very important KPI in Facebook Advertising. For help with lowering your cost per lead for your Facebook campaign, contact us here.
The closing rate is the percentage of leads which converted into a sale. It is a very simple formula:
Close rate (%) = Leads ÷ Conversions
This metric is simple, but a lot goes into improving this number. This process is known as conversion rate optimization (CRO) and there are several pointers and tips to get you started:
Remember, just because you might have a high close rate rate of 90% (I'm looking at you $99 guy), it does not mean you are profitable. Your pricing structure might reflect poorly on your bottom line and you might need to reevaluate - even if that means lowering your prices. Find what is the optimal close rate in your industry.
Once you know your CPL as well as your close rate, it's time you get to know the next metric: your customer acquisition cost (CAC). If your CPL is the cost of acquiring a lead, then your CAC is the cost of acquiring a new customer (or conversion).
Therefore the calculation for the metric is as follows:
Customer Acquisition Cost (CAC) = Marketing and Sales Spend ÷ Conversions (or Acquired Customers)
According to a study by ChatterBuzz, the consumer services industry had a median CAC of $90 and the industrial services industry had a CAC of $78¹. It is important to note that this was only within the Google Paid Search Campaigns in 2018. During that same year, ChatterBuzz found that the average CAC was much lower on Facebook Advertising. The consumer services industry had a CAC of $31 while the industrial services industry had a CAC averaging $38.
As is the case with CPL, CAC can be attributed to a specific campaign or can be calculated as a company-wide metric. Figure out what a good CAC is in your industry so you know what to benchmark against.
Now that you know all about acquisition costs and close rates, this final metric is the lifetime value of a customer (LTV). Previously, we had only mentioned KPIs and metrics that measure past performance: revenue, profit, costs. But LTV is actually a prognostication model which attempts to project the revenue generated by future customers.
Before we reveal the formula for calculating lifetime value of a customer, we must first calculate and define the variables. These are the followings steps to calculate them:
STEP 1: (s)
Calculate your average job size.
Let's say it is $300.
STEP 2: (c)
Calculate the average visits per year.
Let's say it is 2.4.
STEP 3: (a)
Calculate the average customer value per year.
(Average job size x average visits per year)
$300 x 2.4 is equal to $720.
Now that we have calculated the average customer value per year in Step 3, we can plug it into our LTV formula. Companies will use different methods of calculating LTV. We will show you two common methods, and then calculate the average.
(a) x (t)
$720 x 5 years = $3600.
t(s x c x p)
5 years(300 x 2.4 x 0.214) = $770.40
t = the average customer lifespan. 5 years used as an example.
p = profit margin per customer. 21.4% used as an example.
Calculating the average LTV of multiple methods is more accurate.
This means that you can spend up to $2185.20 for customer acquisition during an average customer life. If you spend more than that, you are likely losing money.
There are a plethora of metrics and KPIs to keep track of and this list merely scratched the surface. As a home service business owner, these are the metrics you should know about your business.
In the famous words of Peter Drucker,
¹ Values are in USD
David Chudzinski is the founder of Aurora Marketing. When he is not serving clients, he is enjoying time with his wife, practicing jiu jitsu, or playing guitar. He calls beautiful British Columbia home.