- Is your business scalable?
- How do you make pricing/fee decisions?
- Do you have a 12-month growth plan?
- How will the new services you are rolling out impact profitability?
- How many people do you need to hire if you add 130 units and lose 23 units in 2017?
- Is your company ready to hire a Business Development Manager (BDM)?
- How much profit can you count on by the end of the year?
If you are asking yourself these questions, congratulations! You are a successful entrepreneur looking to blow the lid off of your business and set your business on on the path toward:
Constant Growth and Constant Improvement
(A phrase we borrowed from our client, Matthew Greeves of EJF Real Estate)
Here at Fourandhalf, we solve marketing and growth for property management companies, and now we’d like to help you realize more profit and model your company growth to take maximum advantage of every new lead and new unit under management. If you already know these key ratios, jump onto part 2 of our post: applying the property management KPIs
Introduction to Property Management KPIs
Establishing and tracking Key Performance Indicators (KPIs) is the first step to using data to enable growth and the success of your business. We use these very same metrics here at Fourandhalf – all the way from working in a garage five years ago to a 24-person, multi-million dollar company. We’ve grown by carefully and deliberately tracking our KPIs and modeling every new product and initiative against our Unit Economics Model (UEM).
Many companies underinvest in marketing and end up stagnating their growth (Yeah, yeah, we are a marketing company, so of course we’d say that – but Fourandhalf suffered from the same ailment early on). The truth is, if you don’t know how each incremental dollar of input connects to the output, you are flying blind. Marketing is a key function of your business, but if you don’t have these metrics dialed in, it’s hard to recognize how much you can afford to spend on marketing, and how much your organization can scale.
The model as a whole is fairly complex, but if we break it up into small chunks, it is super manageable.
Let’s go to KPI school! (Your business depends on it)
Let’s start with the first 3 key metrics:
- CAC – Customer Acquisition Cost
- CLV – Customer Lifetime Value
- ACV – Annual Contract Value
Customer Acquisition Cost (CAC)
Businesses are born and die on CAC; it is the backbone of every marketing campaign because it tells you what you’re actually paying, on average, per new client. You can calculate this by door or by owner, but we recommend running both metrics. If you also increase your average number of doors per owner, you can earn more revenue from each customer.
So here’s how you work on CAC: Choose a time period, like 12 months. Open up your Profit & Loss for the period and total up your owner marketing costs and your owner sales costs. For example, how much did you pay a sales person for that 12 month period? If you are the one that does all the selling, take the appropriate portion of your salary and commit it to sales expense line. Add all of your marketing and sales costs and divide the total by the number of owners you brought on board during that period. This will give you your owner CAC. Divide it by the number of doors you acquired to get your per-door acquisition cost.
Sales and Marketing Costs for 2016 – $140,000
Units under management acquired in 2016 – 80
$140,000 divided 80 equals $1,750
Your 2016 Customer (per Unit) Acquisition Cost is $1,750
Annual Contract Value (ACV)
We use this metric to figure out the average amount of money you’ll receive per unit over a period of 12 months. It requires only simple math and it helps you figure out if your business really works. You get this number by taking your total revenue for the period and dividing by the number of units under management at the end of that period.
Total revenue for 2016 – $1,200,000
Ending Units under management as of 12/31/2016 – 360
$1,200,000 divided 360 equals $3,333
Your 2016 Average (per unit managed) Contract Value is $3,333
How does your ACV compare to CAC? Do you pay back your customer acquisition cost in 15 months or less? We’ll discuss on how to use these ratios later in this series.
Customer Lifetime Value (CLV)
This metric can truly tell you the health of your business. To find your Customer Lifetime Value (CLV, sometimes called CLTV), you will take your average annual contract value and multiply it by the average number of months your customers stay with you – owners, not tenants. That can be tricky. If you’ve been in business for 10 years, you can look at how long your customers have stayed over the course of those years. You’ll be able to track it and get a good average. But if you can’t do that, use a number like 42 months (three and a half years), which is the national average for property management companies. Once you understand your CLV and CAC, you have some serious metrics to continue perfecting your operations and figuring out where and how to spend your marketing budget.
ACV ($3,333) divided by 12 equals $227.75
Average number of months unit stays under management – 42
$227.75 x 42 = $11,665.50
Your Customer Lifetime Value is $11,665.50
Every phone call you miss from a prospective lead, equals the value of a gently used, low mileage 2010-2012 Toyota Corolla S. Ouch. Knowing this number changes the optics through which we view our businesses, doesn’t it?
If you are ready to apply these KPIs for your property management business; getting into unit economics, and seeing how long it takes your customer to pay back their acquisition cost, read on below!
Applying the Key Property Management Ratios
In this portion, we’re talking about Applied KPI, applying the indicators we discussed above. We’re also going to review the Unit Economics Model, which will help you make projections and manage your business all the way down to the profit per unit numbers.
Establish a Sales and Marketing Plan Using These Key Ratios
In the first part of this series, we established your CAC, and that’s going to be the number you start with to create a marketing budget that will have an impact on your business growth. So, multiply your CAC by your desired growth. In our example, the CAC is $1,750, and the goal is to grow by 80 doors.
$1,750 x 80 = $140,000 = Your Sales and Marketing Budget
With a growth budget of $140,000, you can effectively plan to grow your business by 80 doors in the next year. You’ll want to set aside money to pay a Salesperson or a Business Development Manager (BDM) to sell your property management services. That will cost you around $75,000, which leaves you $65,000 for your marketing plan.
Applying these figures will provide you with a sales and marketing plan based on numbers and not on wishful thinking.
How to Validate Your Marketing Channels
Once you know your budget, you can use your ratios to validate a marketing channel. Maybe you’re wondering whether you should start an AdWords campaign or continue using Google Ads. Here’s how to figure out the mathematics behind this decision:
First, you’ll need your average cost per lead. Providing you have your metrics or you’re using LeadSimple, you’ll know what that number is. For our example, we’ll say that your average cost per lead is $160, and your closing ratio is 20 percent. The amount you spend on marketing for a single owner is $800. You can get even more refined in your data if you can factor in the average number of units a single owner has under your portfolio. For the sake of this calculation, we’ll go with the industry average of each owner having 1.5 units, which will make your marketing spend per unit at $600.
Add in your sales cost, which we will say is an average of $500 per unit. Then, you’ll add the sales cost and the marketing spend per unit and you’ll find that your average CAC for Google Ads is $1,100. Compare that to your average CAC ($1,750), and the numbers look good.
Finding your monthly contract value (ACV/12 = MCV) and using that to divide your CAC (CAC/MCV = payback period) you can figure out that it takes 3.96 months to pay back the acquisition cost you paid using AdWords. So, this is a buy-buy-buy scenario.
This is one of the reasons you see so much money and investment flowing into the property management business. The industry is blowing up because the metrics really work. It’s a recurring revenue stream that gives you all this LCV and ACV, and you only pay a small CAC to acquire it.
The Property Management Unit Economics Model
We’ve used this exact Unit Economics Model to run and grow Fourandhalf. The numbers we use here are an example, or an average, across several property management companies. Right now, let’s talk about what’s involved so you’re familiar with the formula and you can find out what you’re making in profit per property.
You’ll start with the units you currently have under management. We recommend a 12-month period, so use your previous year numbers:
Beginning Units under Management: 300
New Properties Added: 80
Units Lost: 20
Ending units under management: 360
Total sales: 1.2 million
Calculate the property management related labor. The only salaries you should include are the property manager and assistant property manager, as well as the BDM responsible for selling property management.
Next, you’ll figure out your margin and your total expenses, which are variable expenses and fixed expenses. Variable costs include the maintenance coordinator salary, administrative assistants, or your bookkeeper. They don’t touch property management necessarily, but they support your business. Include your marketing cost and your software costs as well. The fixed cost will cover things such as office rent payments.
Property Management Related Labor: $720,000
Margin: $480,000 = 40 percent margin
Total expenses: $360,000
Variable costs: $300,000
Fixed costs: $60,000
Isolate your sales and marketing budget, which in this example is $140,000. This is part of your overall expense, but you’ll need to keep it separate.
The formulas worked into the spreadsheet will give you your ACV – $3,333 and your CAC – $1,750.
It will then total the sales from acquired customers, which is $266,667. The payback period works out to be 6.3 months.
This is important because you need to know how long it takes your business to payback the customer acquisition cost. Anything under 15 in a recurring revenue business is good. Anything under 8 is great. So in this business, the numbers are healthy.
After you establish your payback period, you can work on your monthly unit economics:
Average Sale per Unit per Month: $277.78
Labor Cost: $166.67
Fixed costs $13.89
Variable costs $69.44
You’ll establish your profit per property this way. You can also apply your operations plan to this model. If you need to hire more people, you can determine how it will affect your bottom line.
This model is flexible and allows you to really incorporate mathematical precision when you’re making decisions. There is art and science combined to make your business predictable and successful.
Contact us at Fourandhalf with any questions about marketing for property managers, KPI, or this series we’re bringing you.