How Much Should Builders Really Spend on Marketing?

Work backwards from your sales goal, average project value and conversion rate to understand the enquiries and marketing budget your building business may need.

What you’ll take away

• Start with the business outcome you want, including profitability and capacity.
• Use your average project value to estimate the jobs required.
• Check your conversion assumptions before deciding what to spend.

Transcript

From the published episode transcript. Automated transcription may contain errors.

What's up guys, Cameron here from Contractor Scale. So today I wanted to go through one of the big questions I always get is, how much should I spend on marketing and where should I sort of put it. Now I'll jump into more of the how should I spend part today and I can look at where should I spend it next time. Um, ultimately what we want to do is go through how this all fits in really quickly and then I can jump into the numbers portion of it.

So let's just jump in and do it. So this is the overall picture of how all your marketing should fit together. So just really quickly, I wanted to cover this before we jump too deep into the weeds. And so over here we've got things like ECO, which is a longer term strategy. In here we've got your Facebook, Instagram, your social ads, all that kind of stuff. Over here we've got referrals, right, so people coming through naturally, word of mouth, that sort of thing. And then down here we've got your Google ads, your pay per click, that sort of stuff.

Now all the way through here we've got some other stuff around qualification and follow up and everything else, but we'll leave that for another day. But just wanted to really quickly look at, before we jump into any of this stuff here, we need to know ultimately, uh, how much should I be spending, okay? Now, got a bit of a checklist here that we can run through at the end, and I'll share this with you. Okay, but so the first thing we really want to know is where are you actually trying to get to so really a common thing, but most people don't really know where they're going to get to.

And, um, ultimately, if you don't know what you're trying to get to, then you'll always get there. But if you define a clear goal that you're trying to hit, then obviously it's much easier to break that down into pieces and get there. So this is a marketing budget calculator, and you're more than welcome to take a copy of this and work it out yourself. I'll share it with you in the link, but down here, we always start off with the end goal. Okay. I'll zoom in a bit here because it's a bit small, but Ultimately, we're trying to look at where are we at now, and where are we trying to get to.

So, starting off here, we've got your total sales goal. So, right now, let's just go through this basic example. We've got a few things in here in yellow, which are your variables, okay? And down here to work out some of the specifics. But what we want to do is work out your goals. This is going to give you sort of where you need to get input wise. That'll give us down here the total number of leads and things that you need. So this means that we can then look at the strategy that is going to get you there, because someone who's doing.

50 kitchens a month. It's going to be very different to doing three custom homes a year. Okay. And so we need to make sure that the strategy aligns with where you're trying to get to. And then down here is going to give you some estimates on where you're going to end up profit wise at the other end and how much you should be spending and things like that. So really quickly at the start here, put this example in here. So let's say that John's at one and a half million looking to go to three.

Okay. Again, most people don't really have an idea about where they're trying to get to. They say, Oh, maybe I could double it. But that's fine. We just need to look at this thing in layers. And so, as you grow your building company, there's always different points where you're going to get stuck. So naturally, as you get into business in that sort of first 500k, you can do a lot of the stuff yourself. And then you need to start looking at getting some help. Then you get into that sort of up to about the million mark.

And you can have a really profitable company up to that sort of point, but you're going to be doing all the work yourself. And so next thing we want to do is take a look at leapfrogging that piece, um, to get to the next most profitable mark. Because if you go around that million mark and you hire some help, you're going to have to hire someone who can help you in more of the managerial side of things, or whether it's a superintendent, or whether it's, um, project manager, that type of thing.

That's obviously going to put a big expense onto the books, and depending on where your margins are at, it's going to take out a bit of your profit. So we want to try and get away from that million mark up to the next point of one and a half to two, okay? And all these different steps here are going to be some of the bottlenecks that you go through. But regardless of that, let's say that we're going from one and a half to three million dollars, right?

That's cool. We have a goal in mind. That's fine. Now, with that goal, it doesn't always have to be perfect. Growing the business. It could be more. Let's get the thing more profitable. Okay, so all these different things You just need to answer about where you're actually trying to get to have you got small kids Do you just want to make more profit and keep the company the same size? Would you want to grow and take on a bit more stress and a bit more? Risk and reward at the other end.

So next thing we want to look at is okay. What's your average sale value? So the average How many jobs, uh, did you do, and how much money did you make? So we can work that out to be just some round numbers here. So let's say that those were 200k on average to get to that one and a half. There's seven and a half projects that you need to do across the year to get to that point. Nice and easy math, okay? So, next thing here we can look at is, alright, what's your conversion rate of?

Okay, and this conversion rate's gonna be really, uh, Wildly different depending on where your lead source is coming from currently. So let's say that you're getting all your leads from referrals, word of mouth, this is going to be extremely high. So I've got some benchmarks over the side here, which are ultimately, if they're coming from word of mouth referrals, you should be looking at about 80%. Okay, so someone says go work with John, then naturally they're going to work with you unless you really stuff it up.

Whereas when you get any kind of other leads through, marketing, whatever else, we put this at 10 percent and a lot of people actually run lower than this, but it really depends on where they're coming from and what process you have in place and everything else. But let's say that we set it here on average at 10%, that means you need 75 leads, 10 percent of those turn into seven and a half jobs. Okay. Again, that's easy math. Now that's going to give us. A bit of a estimate down here on your number of qualified leads you need across the year to hit your goal.

But we always double that number because there's always rubbish that comes through. Whether it's people looking for a job, whether it's people trying to sell you things or materials or whatever else. There's always that rubbish that comes through. So, that takes us to about 150 when we double it. Okay, now big number obviously looking at that on paper But the easiest thing to do is break it down monthly which gives us twelve and a half leads a month So not a big number to hit when you break it down to be a bit smaller Okay, and so the big difference here is most of the time you'll be at this point here You know, maybe you're getting this many leads come through But you're probably not spending any money on marketing or very little or you're putting it in places You don't really realize maybe you paid two 2, 000 to wrap your van with signage.

Maybe you did a print run of some signs for the yard. Um, maybe it was on some radio ads. Please don't do that. But all of this stuff just adds up and you need to make sure that you're getting a return for every dollar spent. But on average, the industry average for leads is around 2. 50, okay, and this is not buying leads from Howells or HomeAdvisor or anything like that, because what happens is if you do that from any of those shared lead sites, they are going to give it to three to five other people, and there was actually a court case that went on where they were actually distributing it to more people than that as well.

So the trouble is that if you pay for those leads, there's already going to be a battle to the bottom. But if you do any kind of marketing, on average, you'd see around 2. 50 per lead, okay. That's it. So, 150 times 250, 37, 500 or 3, 000 a month in marketing spend, okay? So, just skimming down here a little bit further, we can look at things like cost per client, we can look at your, um, your, what comes out the other end. Let's say that you're at 10 percent gross, which you shouldn't be, should be much higher than that obviously.

Um, but that'll give you 150k on the bottom end or a 2 to 1 return on ad spend. So this is not very good. Normally we wouldn't work with people on such a low level down here because you need to make sure that if you're doing any marketing that you have enough profit in there to pay yourself and get enough return back on this whole thing. So let's just look at this in another scenario here. Again, we can play up the variables. Let's say that you double that to 3 million.

Again, if we keep the average. sale value the same, doing those 200, 000 jobs, you now need to double the amount of work you do. So you've just added on a lot more stress, a lot more time spent, etc. Uh, and sure you'll make some more money at the end of the day, but you've, you've just doubled the workload at the same time. Instead, what we can look at is, why don't we try and change the work that we're attracting and do some larger jobs. Okay, so let's say we change this up just do some slightly larger jobs change it to 300k Now we only need to do 10 jobs Instead of 15.

Okay. So would you much rather do 15? Well, I'd sure as rather do five less job That's for sure. So Everything else being the same we just increase that average sale a little bit higher We can do fewer jobs across the year to make the same amount of money. Okay, so So first leverage point there. Next thing we're going to look at is your average conversion rate, and let's just say that we keep that the same. Let's say that you don't get any better sales, you don't have anything else in place to help increase that number there, that's fine.

Still sticking with that 10 percent, you need 100 leads to get to that 10 projects. Again, nice and easy math. Now we double that, takes you to 200, okay, or 16. 7 across the month. So we're not actually doing much of an increase here as far as your, uh, conversion rate. Your total leads that you need to achieve. Sure, it's going up a bit, but we're looking at a gain on the monthly, not too much of an increase. And again, if we just toggle that back, instead of needing 300 leads, because we're hitting that 200, 000 job, right, going down to 200 leads.

So we don't need 100 extra leads in order to hit that goal. Okay, so all of these things are leverage points, and this makes it really, really tricky, for example, running a small, say a fencing business or a, you know, a small job business doing just tubs. I spoke to a guy the other day, he was just doing shower installs and tubs. Okay. And I said to him, well, it's going to be really tricky to, to change that 5, 000 average sale, uh, and just do more of them because A, there's only so many people that need a shower or a tub.

And you need to really increase that. Otherwise you're just going to get super busy. So instead maybe look at whole, whole home or sorry, whole bathroom remodels. And that would actually help to reduce the amount of work that you need to do. So, now we're sitting at this 16. 7, again if we have this average industry, uh, cost per lead in here, that takes you to 50, 000 for your, um, total marketing spend, or 4, 100 in spend. Alright, so, another way of looking at this really, really easily is, would you give 5, 000 to somebody if they gave you back a 300, 000 project?

You probably would, right? And so when all the numbers are the same like this, and you know that how will these stay true throughout the duration, then you know that this would be a really good deal, okay? So one other thing we can look at here is your effectiveness of your marketing. And this is a big piece that most people don't really dive into, is if you do ads yourself, if you work with someone who doesn't work with construction, Uh, all day, every day. Let's say that you work with a marketing agency who does hair salons and dentists and that type of thing.

The sales cycle and everything involved in that is going to be very, very different. They're going to have to learn the industry and go through that whole process. And this is where most people end up as far as a cost per lead. Okay, now if I show you something really, really quickly. Okay, so this was the year total for, uh, January to December last year, we spent a total of 160, 000 on ads, generated 3, 100 leads across the board. This is across US, Canada, New Zealand, Australia, custom homes, home remodels, you know, large and small.

This averaged out to be 51 per lead. Okay. So when you get your marketing really dialed in, as far as knowing who you're targeting, the pain points that they have and everything else, which I'll cover in another video, it allows you to drop this number significantly. Okay. And so instead of having to pay 250 per lead, our average in there is 51, okay? Let's not even go with that, okay? Let's just go down slightly. So you're looking down here at 50, 000 in ad spend you need for your marketing, or 37.

5. Let's drop this down here instead, just say that it's 150, okay? Which is our worst case scenario. That 50, 000 drops down to 30, 000 that you need to spend across the year. So this is the difference in paying someone. You know, local, cheap, whoever else to do this. Sure, you'll save money on, you know, working with those people and, and the labor costs and everything else. But you'll end up spending more money on your marketing, because it's not as effective as it should be.

And instead, you're just giving that money away to Mark Zuckerberg or Google or whoever else you're spending with. Okay. Same thing over here, if we put that at 150, goes from 37 and a half down to 22 and a half, okay? So, this is all about making your marketing more effective. There's a ton of ways you can do that, which I'll jump into another time. But, now, let's say your marketing spend is 30, 000, okay? That puts your, your marketing budget monthly at 2 and a half a month, in order to hit that goal that you need to hit.

Again, more leverage points we can work on there, around your, um, Average, uh, dollar sale, your conversion rate, and things like that. But just lastly, I wanted to look at this down here as far as your return. Okay, now, obviously, uh, gross margin, we want to see this much higher. Most people should be in the range, uh, in the smaller jobs, you should be much higher around that sort of 30 percent mark. Um, but at a bare minimum, you should be at 25%, 20 to 25, okay?

That would put you, uh, For the same amount of effort, work and everything else, going from 150, 000 in profit to 375, 000, okay? So let's just say that that's where you were, that's fine. And we say that we grew the company up here, and instead of everything else, we doubled the profit. Hey, that's great, you know, but it could be better. So now let's say that because we've got all this new demand up here, we're able to raise our prices, we're able to work with better clients, able to have that line around the block, we can now put up our pricing here.

And so even if we bump this up to 20 instead of 25, we've just given ourselves a pay rise of 300, 000, or doubled our profit. So there's all these leverage points you can work on. Ultimately, it's just about knowing where you want to start, or where you're at now, where you're looking to get to, and what that looks like as far as success for yourself. Working out some of the numbers as far as where you're at, what you're looking to do in the future. Is it more of the smaller jobs, more of the larger jobs, combination of both, that sort of thing.

Uh, and work your way down there. And then ultimately this is going to give you some benchmarks of where you should be sitting going forward. Okay, so now just imagine spending all this money on marketing and only getting this sort of margin back for it. Fine, but not exactly what I'd like to do. I'd rather have a business that gives me more free time and more money. And this is wood. actually making some good profit out of this should be like. And again, this should be much higher, but we'll leave it at that.

10 to 1 return on ad spend. So if you went to the slot machines and you chucked in a dollar and got 10 back out, you probably keep doing that slot machine, right? So that's kind of same theory. Again, all the stuff stays pretty true along the way, as long as you've got all the systems in place. But that's how you set your marketing budget. And if I was to sum that up in just a really, uh, easy, simple way is. You typically want to look at a percentage of your total sales, uh, your total sales goal, your total revenue goal, right?

So, most people will need to spend 1 percent of their annual sales goal on marketing, or should be. Uh, and if you're doing less than that, then it's going to end up in running out of work and other issues. But depending on how aggressive you want to go and how much you want to grow, that could go up to 3 or 4 percent that sort of thing, and that's obviously pretty a rough gauge that you can do from it, or you can go through this way, which is a much better way to figure it out in a bit more precise manner.

So I hope that helps on setting your marketing budget. I'll leave the resources below. Feel free to grab those. Um, and if there's anything else you want to, uh, need some help with, just feel free to shoot me a message or contractorscale. com. Thanks guys.