Service Based Business Society Podcast

Tiffany-Ann Bottcher (00:01.646)
Hello everyone and welcome back to another episode. Today we are talking about metrics. Metrics that matter. So often we end up tracking so many data points in our business or none. I've seen that too. And we oftentimes pick up different metrics that we need to track.

from different mentors, different things on social media, different methods, things that we've picked up along the way. And so often we're tracking the wrong things. So today we're gonna talk about four different metrics that are frequently spoken about in the online space and why those might not apply to your service-based business.

And then we're going to talk about five metrics that you absolutely should be tracking.

And it's not that, you know, the four metrics that I'm going to say, you know, maybe aren't as important. They're great. But oftentimes it comes down to, you know, time and place. So I'm going to tell you a little story. Recently, we were sitting down, my husband and I were having a glass of wine with someone that he has known for a very long time.

and you know, a younger guy recently just got married. Super exciting. Congratulations. And they're purchasing their first home. Now we live on the west coast of Canada, which happens to have one of the most expensive, you know, real estate in North America. Not the most expensive, but very expensive. And with rising interest costs, rising, you know, the housing bubble, all of these types of things.

Tiffany-Ann Bottcher (01:57.358)
young people purchasing homes is becoming less and less attainable right now. So here we have these this younger couple they just got married and they actually purchased a home quite some time ago. And the house was being built and hadn't yet been finished. So house build is way behind schedule.

And now, since they decided to originally buy the home, interest costs and whatnot have skyrocketed. So their mortgage payment is going to be significantly more than they originally planned. Keep in mind they've already got a deposit on the place, things are moving along. And someone else in his life is giving him some advice and they're talking about, you know, the down payment on the house.

and this and that and how it needs to be significantly more and you know it needs to be well over 20% down if it's going to make sense. And so now you know this guy is sitting there and we're having a glass of wine and he's like oh I can't I can't make it anymore like it that's all I have right now. And my bit of advice was you know.

you have to realize where the information is coming from. So it turns out the person giving him the advice owns a number of rental properties, very well off, established. And my comment at that time was his advice may be wonderful, but is it the right time of that advice for you? So sure, if you're buying, you know, your third rental property,

and you know and the thought is maybe if you put you know significantly more than 20% down you can you know change up the numbers a little bit in the equation. Sure his advice is not wrong. His advice is not wrong to say the more you put down you know the lower the interest rate or the lowest the interest expense rather will be because you're carrying less mortgage and you know overall you can amortize your mortgage for less like

Tiffany-Ann Bottcher (04:18.93)
Is the information wrong? No. But the information comes from a place of wealth. And here you have a young couple who is starting out who really, you know, they started down the path of purchasing a house when it was less expensive and now here we are and they're making it work but they just don't have any more at this moment.

It doesn't mean what they're doing is wrong. And the advice, although reasonable advice, was misguided based on the timing. And so why am I sharing this story at this moment? Well, because a lot of the metrics that we often track online or are recommended by some very talented people are often at the wrong time. Lifetime value of a customer.

If you're in your first few months, you don't have a lifetime value of a customer because most people have only ever purchased from you one time. This is not something you can track. Any future, you know, metric that you're going to use now is all speculation. You don't know the lifetime value of a customer. You don't even have any, you don't have any idea. Your business is brand new. Lifetime value of a customer can be incredibly powerful.

Because what can lifetime value of a customer tell you? It may say, you know, if your life, your average lifetime of a value of a customer is $5,000, you know, and it costs you $100 to acquire that new customer and their first sale is 125, you might say, well, I only made 25 bucks, that might not be worth it.

But if you know that over the next three, four years, they're gonna spend another $4,000 plus with you, well, then it's worth it. At the wrong time in a business journey though, it's not useful. You don't have this information. You know, other metrics that come along with that is, you know, customer acquisition costs.

Tiffany-Ann Bottcher (06:36.498)
in order for customer acquisition costs to be relevant, you need enough data. You know, your business starts out, you've got some referrals, you've got some, you know, old connections, you've got different things. You know, all of those types of things really do influence your customer acquisition costs. It's not until you have a repeatable marketing process that has a cost associated that you can truly track your customer acquisition costs. You know, if you're doing, you know, you're running Google Ads,

anything that you know that, you know, my cost per lead, if I spend 50 bucks, I'm going to get a new customer. It's not until you have a repeatable process that you have done more than a handful of times that you can even track that. Again, it comes down to timing. Great metric when you have the appropriate data. You know, going back to my story, great advice, not great time. You know, another one, cost per click.

We recently were running ads for an agency client. It was actually an add-on to an additional service that we were working with them on. And they ran the ads for two weeks and then said, oh, nope, that's it. We don't wanna do this anymore. Here's the thing, it takes a little bit of time for ads to be optimized, to be able to test with enough people. The ad girls.

Talk about a hundred people hitting a funnel before changing it. That a hundred people need to see something the same way before you could make a small change. And that a hundred people need to see it with the new change in order to truly know if that had any real influence. You know, something happening once or twice is not enough to say that there's correlation between a change and the result.

So it comes down to same thing with cost per click. You know, sure we can track it over specific campaigns, we can do different things, but if we're really going to be using that data, we need a large enough sample size that it actually makes sense. And the last one is pure profit as a number. You know, I made $5,000 profit. I made $10,000 profit. Sure.

Tiffany-Ann Bottcher (09:01.698)
But on its own, what does it really tell you? What were the sales? Is your, you know, did sales go up? Did sales go down? You know, if you sold a million dollars and you made $5,000 profit, are you happy? Was it worth it? Because the liability, stress, and effort that came from selling all those sales to have such a low profit in the end.

Maybe it's not worth it. You know, so profit on its own without context, that's super helpful.

So now we're going to dive in and we're going to talk a little bit about the metrics that are helpful. Now keep in mind that, you know, those that we first talked about, the customer acquisition cost, the lifetime value of a customer, you know, overall cost per click, profit, all of these are great metrics when used appropriately. At the right time in the business journey when the sample size is large enough to actually provide data. But...

if used too early, if used on too small of a sample size. Honestly, the information is not useful to managing and running your business. And if we come back to, you know, data and what is it useful for? Well, driving data-driven decisions. What do data-driven decisions have, you know, what is different about these than just, you know, making that

fly by the seat of your pants type decision is that you can make a decision with confidence. You know, data plus intuition is the best place to be. But when you want to go a direction and you have data to back you up, that is the right direction, amazing, beautiful, confident business decisions get made in this place. So let's talk a little bit about what are those five metrics that you should be tracking. You need to know your overhead costs.

Tiffany-Ann Bottcher (11:03.65)
What are your overhead costs? These are the costs that if tomorrow you stopped selling, your costs on these items would continue. Things like your website, whether you make sales or not, your website cost, it continues, your email domains, your utilities, your rent, your office rent, if you rent a space.

your you know administrative or overhead office team you know whether you sell or not they will continue to show up for work and you know you will have a continued cost you need to know what is your overhead cost now it should remain fairly consistent depending on certain fluctuations but if something fluctuates with sales it's typically not an overhead cost

So really getting clear on what are direct costs or cost of sale and what are your overhead costs. You know, if you have materials that go into something you sell, the more you sell, the higher those materials will be. That's not an overhead cost. That is a direct cost. Understanding and differentiating between the two is very key. So typically, if when sales go up, a cost of something goes up,

Or if sales go down, the cost of something goes down, this is most likely a direct cost. So think about a bakery, the more bread you make, the more flour you will use. Saying, oh, flour's over budget, meanwhile sales are also over budget, isn't helpful. When we look at overhead, it typically only fluctuates in a significant way if you're making a operational change. You rent a bigger warehouse.

your rank goes up. You hire another office team member, that cost goes up. You know, you decide to do a new website, that cost goes up. Not always linked to the sales.

Tiffany-Ann Bottcher (13:13.718)
The other one we're going to talk about there is direct costs. And what is your direct cost per billable hour? Very important. One of the number one things that I see when reviewing financials, when reviewing overall profitability of a business is...

what is the cost per hour, including all the extras? So if you have employees and you pay them $25 per hour, the actual cost to the business is significantly more.

We recently had a client who had one person on payroll. Now, if you add payroll to your QuickBooks account, there is a cost of adding payroll, the payroll module, and there was a cost for per employee each month. Well, this employee, so there was only one person on the payroll, and this person only worked about seven hours a week. At the end of the day, the cost of maintaining payroll.

having the payroll module, having this person, you know, on the system, doing payroll, all of these types of things, the cost was just not worth it. This person wasn't working enough hours to justify taking on this expense. So we need to know what is the direct cost per bill or hour? So, you know, if you have a employer portion of specific taxes, you know, whether you're in the US or whether you're in Canada or in another part

Do you have a worker's insurance? Do you have vacation pay or sick pay that are perhaps a percentage of work? Gross pay, whether you have in Canada, it is CPP and EI that have employer portions in the states. We've got all sorts of different things depending on the state.

Tiffany-Ann Bottcher (15:13.978)
Ultimately, there are many costs that go with the base hourly cost. It's important that we factor those in. In Canada, there is a so many stat holiday days and sick days that are mandated, sick days at least in BC, that are mandated that these are paid. So, you know, if you are paying people but they are not working, those costs need to be worked into the hours that they actually do work.

which increases them. And so we need to know what are those direct costs?

Most often we see this significantly understated in planning, and it's not until we really work out what is the total cost to the business per hour worked, that they start to realize, hey, this actually isn't as profitable as I thought, and I might need to readjust here.

So it really ties into what is the revenue, expected revenue per employee versus what is the revenue per employee. These are two metrics. So we've got, you know, and they tie in together. So we'll call them one for our list of five, but they really are two different things. What is the expected revenue per employee and what is the actual revenue per employee? You've got these two pieces working together. You know, if you sell your average hour,

let's use round numbers at $100 per hour and you work, you know, they work eight hour days, well, you know, that person is expected to make $800 sales per day. So if that person is only selling, you know, $550 per day, that comes down to now a point, a metric, that we need to track and review and improve upon because if they have capacity for $800 a day,

Tiffany-Ann Bottcher (17:07.294)
and they're only selling 550 per day, we need to know why. Very important.

The next piece we need to look at is the processing and carrying costs of the sales. This is another area that is often understated. So if you have a processing, you know, a payment processor that charges 3% on each payment, you know, there's so much debate in the online space, hey, it's a cost of doing business, or should you be billing that back to the customer, or should you...

you know, be looking for a processor that doesn't charge anything. Some people say, hey, I don't take online payments because I don't want to deal with the processor. So there's so many different options there. But at the end of the day, no matter what method you end up with, we need to know what that is. Because if your end, you know, your job, by the time it's all said and done, has a five percent profit and three percent of that is going to go to the payment processor. Well, now you're down to two.

And if you did all that work for 5% and then all they did was run the payment and they got 3%, you got a problem. And so you want to make sure that processing cost is worked into your pricing or that it's billed back to the client. There's so many arguments for and against these different options. So whatever best suits your business. But no matter what the option is, you want to make sure.

that it is included in your planning. You know, I recently was looking at a customer and they offered a discount for purchasing off of their website. So they have a retail store, but they also have a website. Now, most of the clients would purchase off the website, but then they would go into the store to pick it up. But they would get a discount for purchasing on the website. Sounds great.

Tiffany-Ann Bottcher (19:04.446)
You know, they would purchase on the website overnight, the office team would, you know, pack it up, and the person would pop in and pick up the order. It seemed like a win-win for everyone, except that the discount for purchasing online was 10%. And the additional cost, so the difference in payment processor on the website versus the payment processor in store, was 2%. So every time someone purchased online,

they were actually 12% less probable than had someone just come into the store and picked it up. But here's the challenge, they were still coming into the store to pick up the material, the product. So this is where, you know, we need to be aware. It doesn't necessarily mean that we wanna change anything. There might be great benefit to them purchasing online. You might decide it's worth it, but you want to have the knowledge.

to make the right decision. You want to have access to the right information to be able to make an educated data-driven decision. Very important to at least have access to the information. Sticking your head in the sand and saying, I don't know, doesn't solve any of these problems. We want to know the information and you may decide, hey, I'm okay with it. But that is a confident, knowledge-based, data-driven decision.

Okay, last one, very important for this specific time of year. Everybody starts thinking about it, and if you haven't started thinking about it, now is the time. We need to talk about the tax rate. How much taxes do you pay? And what do you pay the taxes on? Because there's many, many different variations here based on whether you're in the U.S., Canada, or in another country.

You know, you've got income tax on your personal as a business owner income tax. Now, whether you're taking the money out of your business as, you know, a paycheck with payroll taxes, or whether you're taking it out as dividends or draws, you know, there's some form of tax to whatever money you are taking out personally. But then there is also tax on the business income. And to what effect?

Tiffany-Ann Bottcher (21:27.082)
really depends on the type of business you have. You need to know what your tax rate is on the different types of income and whatnot. There's no black and white answer here. There's nothing that I can say on this podcast that would apply to every person in every region. Other than, you need to know what the tax rate is on money in certain places. Because in some...

types of businesses, you know, you may pay significantly more tax based on how money is. You know, this is that, you know, at the end of the year when people are like, oh, I'm going to go out and buy a bunch of stuff because I want to drive down my profit and therefore pay less taxes. And in some instances, it might be a great time to do a little bit of investing, but making sure you're investing in the right things. One of the pieces that I've seen in the past, people go out and buy a whole bunch of new inventory.

Well, typically inventory is not an expense until you sell it. It's maintained as inventory, which is an asset. And so oftentimes, you know, making these types of purchases without a plan really just creates a cashflow problem at a what is an expensive time of the year. Over Christmas, depending on where you are, you've got, you know, one to two stat holidays. Most times, even if it's not a stat, businesses are closed.

You know, you've got holiday parties and client gifts and Christmas cards and, you know, less working hours. And oftentimes, if you're a service based business, depending on the industry, you know, you may work less. Someone who paints the inside of someone's home. Well, I can tell you that, you know, you don't want between Christmas, you know, and New Year's, when you have a bunch of people over and all your Christmas decorations up, you don't necessarily want a painter in your home.

Now, that doesn't apply to everyone. Some people might say, hey, I go to a tropical destination over Christmas, my house is empty, this is the perfect time to have my house painted. But not always. It will really, some industries will not work as much over Christmas because people are busy. Houses are busy, lots of different things going on. But then there may be other industries where that is the opposite. Christmas is a crazy busy rush and they'll be super, super busy. So...

Tiffany-Ann Bottcher (23:51.362)
You know, knowing exactly the tax rates can be super helpful. And while it might be too late in the year to really affect your tax amount owing for 2024, you know, now is a great time to start planning for 2024 so that you can be making the right decisions, you know, having, you know, whether or not you should be paid out through payroll or a dividend or a draw.

These are the things that you should be planning out with your tax accountant so that you can be strategizing on how to grow your business while keeping and maintaining the most amount of profit in your pocket and not just paying it out all in taxes. So, you know, these are the five metrics that every business owner should be tracking. You know, we've got what are our overhead costs? This applies from the second you start your business because typically the earlier you are

when you start to really invest in certain overhead expenses, when you don't, you know, you haven't created all of these different things yet. Website, getting a phone, you know, investing in business cards, emails, all these types of overhead parts of your business. We talked a little bit about direct cost per billable hour, making sure you know the true cost per hour worked. Looking at the revenue per employee.

What is the expected revenue versus actual revenue per employee? This can be very telling about the organization and efficiency of your business. Processing and carrying costs. So this includes payment processing. It also includes interest expense. So while interest expense is can be used as a tax write-off in your business, at the end of the day, interest rates are high at the moment.

And sometimes the total carrying cost can be very crippling to a business because it still has to be paid. Even though, yes, that expense can reduce your tax owing at the end of the year as taxable expense, it still can negatively affect cash flow in that moment. The other thing we often see when it comes to the processing carrying costs is when people have a lower cash balance or cash flow is weak,

Tiffany-Ann Bottcher (26:11.454)
and they start processing payments and lots of the different payment processors will allow you to transfer the money a little early to your bank account so that if it's typically a four or five day processing time, they'll say, hey, you can ask for us to request it in two days, but by the way, it's going to cost you an extra 1.5% or something like that. We see a lot of money. A lot of money gets spent on things like this.

And oftentimes business owner doesn't really conceptualize how much is being spent for that rush payment. So something to be very aware of what is the processing carrying costs of doing your business. And the tax rate. You should know exactly what your tax rate is for money that you take personally, as well as money that stays in the business or is business profit. Very, the tax rates will often be different.

The tax rates themselves and how that works will be very dependent on your area. But it's important information to know because if you are looking at your budget for 2024, which by the way, now is the time, you know, and you've decided, hey, my business is going to make 6% and then you look at the tax rate and the tax rate is 10%, your business is actually at a loss, but it will look.

profitable through the whole year until you get to the end, send everything off to your accountant, they send you the information, you say, hey wait a minute I thought I was profitable last year, you add it in the tax entry and suddenly it's costing me money to be in business. These metrics that we're describing all will prevent those types of situations from happening. You know, when we talked about direct costs per billable hour.

On multiple occasions I have seen where when we actually add the total cost of the payroll, when we add in all the extras, the labor rate that we are selling at is just not high enough to cover all the costs and still offer even a marginal profit.

Tiffany-Ann Bottcher (28:18.762)
Knowledge is power, and we have to have the knowledge so we can make informed, confident, data-driven decisions.

Tiffany-Ann Bottcher (28:29.014)
Well guys, we're gonna wrap it up for this week. Coming up, we have one additional episode next week. It is going to be an incredible episode where we're talking all about personal branding with a very special guest. And after that, we will be breaking for our Christmas hiatus and be back in Shiner Ring. So that's all for now.