Transforming Your Painting Business Through GP to CAC Ratio Mastery with Mike Gore-Hickman

Like you got to do it yeah , it's super important .

He's doing these little workshops I don't say little , um , but yeah , they're big workshops uh , in in las vegas and uh , I got a chance to go to one and you went to one . Was it back in july or I went ?

Well , one of the big things that came out of this was the LTGP to CAC ratio , which is a bunch of you know , letters and acronyms there and I know that was something that we were both kind of pumped out , pumped about coming out of that event . Could you what are some of the takeaways that you had in regards to that event and that ratio ?

It's like GP , which is gross profit over CAC , which is cost required customers , and it's a ratio . It's like a singular number but it's a heavily packed number . I mean , there's like a lot of things that go into figuring out what this number is .

But once you know what your ratio is , it all becomes a game of how can you maximize that ratio so that you're enabled to scale ? And I mean , a lot of people think in the way of , like my marketing spend is at 5% , or marketing spend is at 10% and that accomplishes . I think that gets you most of the way there .

But a lot of people kind of forget about gross margin , gross profit , when it comes into calculating marketing expense . Like you can pay , you know , get 10 to one for a job on revenue , but if your profit margin is only 20% , then you're only you know , only making a two to one .

So that's really it's like how can you decrease your costs , acquire a customer fully , fully considered costs to acquire , which is is like your , your whole marketing department and your sales rep , if you have one , and your sales costs and then your gross profit per over a period of time , not even for job , but like over a month or something like that .

So this is like on a monthly basis .

If you only have five minutes to look over your financials , if you could just have your admin person or whoever just boil everything down to this ratio over , like you said , this past month or this past quarter , this is like great , because it really just tells you what you need to know if you're on track or not yeah .

So when you subtract those two things out , what's left over is your gross profit margin . And then to most folks , when they talk about gross profit margin , they're saying in a percentage , because you're taking that gross profit margin , dividing it by the revenue to get your percentage there . So that's first is understanding what GP means . That's gross profit .

And then the other part is the customer acquisition costs , which is really your marketing costs , everything you need to get leads and then , plus your sales costs , everything to close the deal , basically paying your salesperson . Usually folks are paying them . Either it's you or maybe you're paying your salesperson commission or base salary with commission .

So marketing costs plus sales costs is your customer acquisition costs . So everything you need to spend money on to close the deal is essentially what that is . And then the relationship between these two things . Like you said , I think Alex Hermosi recommends a three-to-one ratio which makes sense to me , and that's basically to illustrate the example .

It would be like 45% gross profit margin and 15% customer acquisition costs , and so if you had that you'd have a three to one ratio , because 15 goes into 45 three times . So that would be , and that's kind of like a typical healthy painting business somewhere around there . But that's kind of the way I interpret his approach .

And I'd be like if you had those kind of margins on marketing , you can just scale up what you're doing and double down on it and get way more and still be profitable .

So if you're a , I guess that's a good point because a lot of folks listening they might not have a salesperson , so they might not have really on their profit and loss , they might not have a salesperson on their profit and loss because it's them , so really you would just have marketing costs on your profit and loss and so you could either basically do what

you did like just look at your marketing spending , compare it to your GP and so , like you said , like a 10 , 10% marketing spend of revenue . You know , compared to your , your GP , you get like a five to one If you want to make sure you have enough room for it .

Cause maybe you want a salesperson because you want to grow , maybe you do a plug number for the salesperson . Like , typically the folks that I'm working with that are , you know , have a $2 million businesses that that are paying salespeople . They they have , they're paying about 8% of revenue of whatever the salesperson closes , about 8% .

So they're paying them maybe a bit of a base salary with some commission and it comes out to about 8% of what they close with all the payroll burden and everything put in there .

So if your marketing spend is at 10% and then you're the salesperson , you could use that 8% plug number so you have room for when you do hire that salesperson , and so your customer acquisition costs altogether would be like 18% , and then you can use that as a . Does that make sense ?

Anything over two is scalable , but um alex recommends it being like between like above three , above five is excellent , and he said the most money in his life that he's ever made is when those numbers were outsized . So like a 40 to 1 and 80 to 1 I think he saw for a little bit during gym launch crazy walkers , crazy .

Facebook doesn't really allow for that type of returns anymore , which is why he sold it at the perfect time .

Yeah , that's great , and their customer acquisition costs are below 15% . So that's right around that five , that five x . So it's possible . A lot of folks might not realize like these numbers they sound crazy , but they are actually achievable .

But like you need to learn to read a financial statement . They're not very difficult once you kind of get oriented with them .

I'm sure Daniel's got some trainings on them , but like it's like for the only one you need to look at is like your income statement or your profit and loss Same thing and you just like , literally line by line , add up , like on a monthly basis , you get your month in P&L , which means profit and loss , and it's like add up everything associated with

marketing and sales . So like your Facebook ads okay , add it up . Your Google ads okay , add it up . Your sales commission okay , add it up your flyer printing costs , add it up . You get that total . And then you look at your gross profit okay , how much your gross profit should be a pretty clear line item .

And then you just take your gross profit divided by that , totally fully considered marketing and sales . You know acquisition cost and that will give you your ratio . So when I first calculated I looked at my last month , my last three months and then my last 12 months and found that they were all a little bit different .

But it allows you to kind of spot trends when you're looking at it , um kind of dialing , a more like holistic , longer term approach .

It's basically you're changing your business into a money printing machine where you know , okay , if I put $1,000 into my business , I know I'm going to get $3,000 out in gross profit , and so it's kind of a powerful ratio and concept . Once you kind of wrap your head around it and , like you said , do the analysis and see where you are .

And then I think what we should probably talk about next is how do you actually improve it Now that I know where my gross profit to customer acquisition ratio is maybe I'm at two to one how do I get it to three to one or four to one ?

So reduce the no , sorry , increase the numerator and decrease denominator , so increase the gross profit , decrease the cost to acquire , and so you have levers for both of them . Um , so we could definitely jump in . I set my workbook here that I was looking through just to see if there's any other notes I wanted to add .

But , like , do you want to start on the top , on the gross ?

Mentally , a lot of folks have certain stories they tell themselves about how much they can charge , but that's one in theory , easy way you can increase your gross profit is simply look at your pricing , how you're pricing things .

This is a lot easier when you see a like a I don't know like I can draw it out , but like if you have a 15 percent net profit and you increase your prices by five percent , your net profit increases to 20% , which is 25% increase in net profit .

So 5% increase in price equals a 25% increase in net profit , and so that's just like one example of how you can get an outsized return by just increasing your prices , keeping all of your other costs the same .

So I think it costs them like $33 an hour after you incorporate payroll taxes and workers comp $33 an hour for a painter . And then they were charging the client . Their charge rate was like $66 or $68 . So they were good there , but found out that the materials they weren't marking up 100% .

They were only marking it up like 10% , and so it was like that's your issue right . There is that you're not marking up your materials , and so that's why you're not hitting your gross profit margin target because you're not pricing it right .

Yeah , so a simple change , you know . Now , moving forward , hopefully they'll get closer to 45% or maybe even 50% .

Um , if you take like we do it like on a like after basis um , you take like a ten thousand dollar job and say it takes 120 hours to complete , right . So you take that ten thousand divided by 120 and you get your total . In this case it's like 83.33 . I just did that earlier today , I didn't do in my head .

So $10,000 job takes 120 hours , that's an $83 charge rate . Now , in a healthy business you want your charge rate to really be between 75 and $90 , depending on your cost of labor and cost of material .

But , like you said , it equals like doubling your cost of labor and doubling your materials and potentially even adding an extra 15% , and that will get you to the charge rate where , once you pay off your paint , once you pay off your labor , you will have about a 50 to maybe even a 52% gross margin .

But you got to charge the customer twice of what it costs you at least , maybe a little bit more .

You need to charge yourself out at the same rate that your other employees are being charged out at so that you can because I'm assuming if you're listening to this type of podcast , you want to get off the tools one day .

You need to charge yourself out so that you can replace yourself as a painter one day , because , I've said this a million times , painting is the least effective , the least productive thing you can do in your painting company . As a business owner is the worst thing that you can do .

If you want to get off the tools , nothing wrong with painting , but if you're trying to chase profit which is what is this called the profitable painter podcast you got to get off the tools yeah , exactly , great point .

So don't , yeah , so include what you would the fair market value of if you had had to hire a painter to replace you , or , like we were talking about the salesperson , if you had to hire a salesperson to replace you .

Include that into your calculations so that you have the margins built in so that you can get to the next level , because you have enough profit available to pay that person , even if you're doing the job right now .

You can pay your painters less . You can train them to be more efficient so they paint faster . You can put them on a piece rate system so that your labor costs are fixed . I'm not going to get into how to do that today , but you can put them on a piece rate system . You can create a bonus system so you can motivate them to get the job done quicker .

Again , create a bonus system so you can motivate them to get the job done quicker against you're not paying overages on labor and then decreasing material costs .

You can also bonus your painters on uh , your your painters or your job site manager or your crew leader , whatever on um materials as well , if they keep it under 15 or keep it under 10 or whatever uh , in order to make them more efficient .

Also training them on how to like actually use the paint at the bottom of the can instead of calling in another gallon when they're just finishing the last bottom corner , like help them be creative and give them some ownership over the cost of the materials on the project , or else they're going to just be wasteful , and that's really what you want to avoid .

Did you know you can reuse rollers like just like in a roller sleeve ? You can reuse rollers for like 10 projects . You can just wash it and reuse it , but most people just huck them away and use like multiple per job .

Once it's complete , it's up to you to manage the budget of the material . So as long as you're using the right products and you're efficient , you'll get more money for your labor . If you're efficient with materials and you can do that even if they're using your charge account right Cause you can track .

If they're using their , your Sherwin Williams charge account you would just track what they purchased on your your Sherwin Williams charge account and then subtract that from what you pay them . So if they , if you're paying , you've told them you're paying them $5,000 for that project and they they spend a1,000 in materials , you give them $4,000 the difference .

So I know folks have done that for subcontractors . But , to your point , the biggest thing is paying your folks or incentivizing them and paying them correctly , not overpaying them , and figuring out creative strategies to incentivize them to get things done efficiently .

The painter gets a day rate , they get paid every single day , and like they have no incentive to work harder or faster or be manage their materials . Well , it's just like they get their day rate and that's it . And maybe it's 500 bucks a day and and that's all . So it's bonkers to me . I actually know it wouldn't be $500 per day , it would be .

It would be more like yeah , like between two and $300 a day . I was thinking for a crew yeah , like between two and $300 a day . I was thinking for a crew yeah , like two to $300 a day .

But yeah , you got to compensate for the behavior that you want , and if you don't even consider the behavior , which is be cost efficient and get done fast with high quality , then you're never going to get those behaviors , or if you do , you're getting lucky .

So they like agree , and then they start the project and then then like , oh , I actually need more money . Um , and I'd love your thoughts on this one .

If you have budgeted hours , like using production rates , and you have budget budgeted hours on your work order , especially if you're using something like DripDrops or PaintScout where you can show the budgeted hours by surface and say I've budgeted 20 hours for the siding , 10 hours for the windows , 5 hours for the railing windows , five hours for the railing all

these everything's broken down by hour and if the sub comes back to you and says , oh , this you didn't , you're not paying me enough , you can point to the work order and say , okay , where specifically did I not budget enough money ? Like are you not able to paint the windows quickly enough ?

Or because a lot of times I it seems like subs are just have a feeling that they're not getting paid enough . But you know it seems like subs um , or just have a feeling that they're not getting paid enough .

Make sure that they're they're minimizing time between tools , that they know how to apply paint properly , like they're representing you and your company . So if you've never even seen them paint like I know people who have subs they've never even seen them paint . They just like assume the job gets done and like cross their fingers and hope that it went .

Well , right , like you got to get on site , work with them . Watch them work . Make sure they're following your process and not their process . Like , how do you get , how do you get your job painted ? Do you do you first coat , prime , or do a first coat and then patch and then spot prime and then and then paint ?

Or do you wall sand and then patch and then spot prime and then two coat and then go around and do like how do you do it ? And like , make sure that they're following that process . They can't just go cowboy their own way . You sold a specific job with a specific process . Are they using plastic or paper or drop sheets or tarps ? What are they using ?

Make sure it's done your way . Because you're selling a product to a client , a solution to a client , make sure that you're delivered on that solution the way that you sold it .

They were just like resting their rollers against the , the brick home , like not just just completely trashed the in the job site in like 30 minutes and that took me many hours of just like with a wire brush on on brick and concrete . It was uh a nightmare . So I still wake up in a cold sweat every night . Yeah , thinking of that is similar thing .

girls working for me once and , uh , they were good painters but I never properly trained them how to spray . They were , they were w2s , but I never properly trained them how to spray .

And like , I was going away for the weekend and I wanted to get them set up on this job site and actually it's really embarrassing because it was the outside of a sherwin-williams . So we actually got the job to paint a sherwin-williams and I set these girls up with a sprayer . They never sprayed before and then I get a call from my rep .

I'll never forget that call . He's like mike , these girls he put on the site , like do they know how to spray ? I'm like , oh , yeah , yeah , they got . I'm like , well , I'm looking at the wall right now and it's like there's a lot of thick spots and like it's really not done . I'm like , oh , it's still , it's still drying .

He's like , no , I know what I'm looking at and it is not good . You should come here and I was on the highway . I was going away for the weekend . I've had to turn around and drive home . Oh man , yeah , it was not . But don't assume , your team knows how to do something that you've never actually seen them do .

What are some things that we can do to decrease customer acquisition costs ?

Rather , should have said , you know , just like , test out different offers continuously and see which ones are bringing you the lowest cost of lead , lowest cost per estimate . Um , for offline marketing , what we and I'm honestly offline marketing we find you get way better return on investment than online marketing .

So things like door-to-door teams , flyers , door hangers , uh , strategic partners , things like that , um , you need to get clear on your current cost of acquisition per channel . So like , where are you actually spending your money ? Where are your leads coming from ? So , doing your best on like a weekly basis to keep track of that .

Doubling down on your lowest cost channels , you know , cutting your highest cost channels . And again , testing . I'm a really big fan of like niching down on your marketing campaigns . So like doing a flyer campaign and a door to door campaign around like stucco homes , where we just advertise . We just advertise stucco homes . We have a stucco specific flyer .

We have before and after picture for stucco . We just target stucco homes like high average job size , high gross profit . My guys are really good at it , we know how to , like you know , churn them out . Then maybe in the winter season we'll do a cabinet campaign and interior painting campaign .

So we're just going to be targeting interiors and cabinets and just like showing people before and afters of the projects that we're trying to get . Well , things like that get pretty good . Uh , return on investments , um , and like knocking you can't really beat knocking , door knocking when it comes to cost acquisition .

And then sales like a lot of the times people don't formalize their sales process . I actually did a webinar earlier today and I asked who's presenting on the spot versus who's like texting the client the price later on .

And like over half the people that were in this webinar who've been following us for a while , we're still not presenting their jobs on the spot and like this is a cardinal sin in my mind .

Like you're missing out on so much opportunity if you're not just like doing up your numbers in your vehicle , going back in and presenting your job and your proposal to the client . All you have to do is like people are like it takes too long to do my numbers . It's like okay , tell the homeowner hey , you know what , know what ? This is a big project .

It's going to take me about 45 minutes to write out the proposal . So I'm just going to run in my truck , I'm going to write out the proposal , get my numbers , get you an exact price , come back in , show you the price . If it looks good , we can book you in . How does that sound great ? They don't want to follow up another time .

They don't want to text . They're going to have questions like when else have you made a ten10,000 decision without having someone to talk to ?

Those are the probably the same people that are not presenting on the spot and so , yeah , they probably can't charge the rates that they need to charge to hit 50% because they're just sending an email and not presenting and building trust and building value in the sales process and they're just sending an email like three days later or something .

So say , 7,000 of gross profit , you're a seven to one LTG Bukak .

Now if you follow a really really great sales process and ask for the job and pre frame the clients and like , send them sales literature and then ask for the job and do all that stuff and you go from three jobs out of 10 to five jobs out of 10 , well , you just went from 15k to 25k for that same thousand dollars , almost doubling your sales efficiency ,

bringing that gp to cac ratio from a seven to one to a . What does that bring it to a 25 000 , 12 , 12 , like over a 12 to one ? Yeah , yeah , and that's just on the sale . That's . That's a sales thing . That's not spending any more money , that's just changing what you're doing .

But a lot of the times it's not that the leads aren't good , it's just that their process , their sales process , isn't effectively converting their leads to prospects and then effectively converting the prospects into closed deals because they're just losing . You know , they're not being efficient with what they're getting .

So , like you said , improving your sales process will make those the same . You're spending the same amount of money . You're just improving your sales process and you're getting more , more return on your investment from your marketing because your sales process is dialed in . Yep .

They do admin call in for for companies and sales calling and stuff and they call new leads . I think it's 24 times in the first 72 hours and they have have like an 80 lead estimate conversion rate for facebook leads . But like , just call them over and over and over and over and over and over .

And if you don't like , don't , don't assume it's a no until they tell you no , just just assume it's a hey that you caught them a bad time , like when my dentist calls me . They need , she needs to call me like a hundred times to get a hold of me . I'm always in meetings or doing podcasts or like just busy with my kids or whatever .

But like my dentist calls me and I'm like in that like five minute period where I'm like I feel like talking to my dentist or the secretary or whatever , so I pick up , I'm like , yeah , sure , let's schedule the appointment , okay bye . So it's not like I don't want it , but it's just like I have other priorities .

I'm busy , everyone's busy and like , let's just like , do them the service . They reached out , they wanted something , so be persistent , and then , uh , convert that lead . Just gonna take some time right earn it .

Uh , so it was just , I think , a mind shift , shift change with , with , uh , with some folks is you're , you're not annoying people . They reached out to you first . You're just trying to connect with them to help them further . Yep , awesome , um , cool . Well , I think anything else on gp to cac ratio that we haven't covered yet , so increasing gross profit .

And it's like , unless you're hitting like a three to one ratio or better , you probably shouldn't start pouring a bunch of money into marketing yet , because we got to fix your gross profit , we got to make it a little bit higher so you have more room for your profit and paying your overhead costs or- .

So before you , I guess one of the takeaways would be before you push the gas to try to scale your business , make sure that this ratio is is looking good over you know , a month or maybe a couple of months , and and then , once you feel comfortable like you can maintain a three to one ratio or better , then you can really start pushing the gas to scale to

the next level three to one ratio or better .

So if you're looking to reduce your uh , your gp to cash ratio , and improve your sales process , um , we actually like have a sales mini course . We typically charge for , but I'll give anyone who listened here to the end it for free .

So if you , I'll send over the link after and you can put it in the chat or in the description or whatever , um , and it has , like the setup call framework , the estimate framework , like all the downloads and spreadsheets and everything and um , so that way , um , you can just like learn how to increase your uh , your sales efficiency , just like what we talked ,

but actually have the training behind it .

Every time I see Mike's stuff , it's amazing . His events , the free stuff that he's given out is really top-notch , so definitely download that and get that stuff . It's great , so cool . Well , I appreciate your time , mike . Any last thoughts before we let you go today .