How I stopped selling and made more money

In 2011, the company I was working at was at the brink of bankruptcy. I didn’t know it at the time, but we were just one payroll away from having to close our doors.

A year later, we not only survived, but had earned over $5M and expanded our team by 5x.

As incredible as that turn of fate was, I’m not here to tell you about how we turned things around and went from near failure to unequivocal success. I’m here to tell you about what came next.

Just two years after our meteoric rise, our profits had vanished entirely, we were forced to lay off half of our staff, and we were on life support - again.

How did things go from so good to so bad so fast? How did we get it so wrong? And what, if anything, could we have done if we could do it all over again?

To answer those questions, I’m going to tell you exactly what happened that led us to near disaster. I’m going to tell you about the false assumptions we made - ones that almost every business makes. And I’m going to show you how we ultimately turned things back around and saved the business from our second near failure.

A Too Common Mistake

To start, I want you to step in our shoes for just a moment by asking you a simple business question.

Let’s say you’re promoting your business by running a booth at a local farmers market or trade show. The booth costs $1,000 to run. If you sell a service priced at $250, how many appointments would you have to sell to cover your costs?

Go ahead, take a moment and write down your answer.

greeNEWit’s booth at a local green business event in 2013

If you’re in business or marketing, you’ve almost certainly done this calculation before. It’s a common line of thinking when deciding whether to pursue an opportunity or promotional strategy.

And most people get the answer wrong.

Back in 2012, we told ourselves that if we only sold four appointments at the event, we’d break even. Anything beyond that would be a positive return on investment.

Was your answer the same?

The reason that line of thinking is wrong is because even though our service was priced at $250, that’s not how much money we actually made.

To earn that $250, we had to first pay our technicians that serviced our customers. We had to purchase the products we installed in our customer’s homes. There were also fuel costs to get to and from appointments. And there were scheduling and bookkeeping costs to make sure appointments were set and we got paid.

When we took all of those costs into consideration, that $250 in revenue yielded just $25 in gross profit.

We didn’t need to sell 4 appointments to cover our marketing costs. We had to sell 40.

And we had no clue.

Why Small Businesses Don’t Know Their Numbers

At this point, you might be thinking to yourself, Brad, how in the world did you guys not know that your profit margins were so slim?!

But here’s the thing, a lot of businesses don’t. And they don’t because crunching the numbers isn’t fun. Sometimes, it can be a real pain.

In fact, I’ve worked with businesses large and small, and I’ve noticed something interesting. Counterintuitively, measuring profitability can actually be more challenging for small businesses than it is for larger ones.

To show you why that is, I want you to step back into our shoes and experience what it’s like to try and figure out how much of that $250 in revenue ends up as profit.

I’ll warn you, it’s not fun. But as you read the next few paragraphs, I really want you to think about what it would feel like to figure this out for yourself.

Take labor costs to start. Your technicians service appointments across multiple service lines. If they’re scheduled for your Multifamily service line one week and your Single Family service line the next week, how would you separate out how much labor cost went into each service? Your books only show you the total wages you paid out.

And what if your company vehicles get shared by multiple business lines? The gas cards just show how much fuel was purchased. How would you attribute transportation costs to each service line?

Back in 2012, this dilemma existed for nearly every expense category, from our labor costs to our inventory costs to our marketing expenses.

The same dilemma exists for nearly every small business I’ve ever worked with. Team members wear multiple hats and resources to get shared across the company. Being able to break out the unit economics of each product and service gets difficult fast.

This was why we didn’t know our numbers.

We were so focused on growth assuming our success would continue that we didn’t take the time to measure and understand the fundamentals of how we were doing.

And that was a big mistake.

Assumptions Kill Businesses

There’s an important word in that last paragraph that you might have caught - assume.

We did a lot of assuming back in those days.

We assumed that our signature service - our Multifamily Quick Home Energy Checkup (QHEC) - would continue to grow. And we assumed we’d have the same success by expanding our energy services to Single Family homes and commercial buildings.

Turns out, we were wrong. When those 2012 profits vanished and we had to lay off half of our staff, we couldn’t afford to assume any more. So I rolled up my sleeves and crunched the numbers.

Here’s what I found out:

Our Multifamily service was doing incredibly well. We spent only $13 to acquire each new customer and received $70 of profit in return. That’s a 5.4x return on investment. Not bad!

Our Single Family service, however, was worse than I could have imagined. Not only were we grossing just $25 per appointment, but those poor marketing decisions like manning the trade show booth meant that we spent over $100 to acquire each new customer.

We were losing money on each and every sale. By a lot.

The Growth Engine Formula

Profit is a precious resource for every business. With it, you have the means to grow your business. Without it, your fate is much less rosy.

The most fundamental way any business can leverage their profit is by spending it to acquire more customers. When you make more in profit than it costs to get a customer, that profit can then be invested back into sales & marketing for even more profit in return. Guaranteed.

I call this repeatable process the Growth Engine Formula (GEF), inspired by a concept in my all-time favorite business book, The Lean Startup by Eric Reis.

When I look at how effective a business’ Growth Engine is, I compare the profit it generates to how much it costs to acquire new customers. This return on investment is what I call a Growth Engine Score.

Our Multifamily service line had a Growth Engine Score of 5.4. Our Single Family service had a score of negative 0.8.

That discovery completely changed the trajectory of our business.

With Knowledge Comes Power

So what would you do if you discovered that the more sales you made, the more money you lost?

You’d probably think it would be a good idea to stop selling.

That’s exactly what we did. And it had an immediate impact.

But that’s not all we did. Using the Growth Engine Formula as our guide, we worked to increase our profit margin by upselling additional services and lowering operating costs through efficiency. And we found ways to reduce our acquisition cost by eliminating expensive sales channels and refining the more effective ones.

Eventually, we completely turned our Single Family service line around and went from losing $20k per quarter to profiting $20k per quarter.

And we didn’t stop there.

The Growth Engine Formula became the framework for measuring profitability across our entire business. And across all of our service lines, improvements driven by the GEF yielded over $250k in savings.

I didn’t know it then, but the GEF didn’t only transform our business. It transformed my career. Today, I use the GEF to help all sorts of businesses understand their Growth Engine and implement improvements that make their business better.

I absolutely love what I do.

If you’d like to learn more about the Growth Engine Formula and discover your Growth Engine Score, you can try it out for yourself with a free copy of my GEF tool. It’s simple, visual, and headache-free. I promise!