Marketing. It's something we (obviously) love and believe in. Wholeheartedly.
In this episode of The Digital Exec, we sit down with Greg Crabtree, author, speaker and consultant, to discuss the concept of marketing and money.
If you're wanting to dip your toe in marketing waters but just aren't sure how much you should spend, this episode is for you. We cover topics ranging from why companies underspend on marketing to how most businesses are the same and more. If you want to know more about seeing marketing as a process and how to implement it within your business, you'll want to listen!
Michael Reynolds: Okay, we're live. Michael Reynolds here with Spinweb with episode number 8 of the Digital Exec. I'm here with Greg Crabtree. Greg, how are you today?
Greg Crabtree: Pretty good. Thanks for having me.
Michael Reynolds: Great. So glad you're here, Greg. You and I met at a recent conference, the Digital Mastermind Conference in Vegas. I read your book, Simple Numbers, Straight Talk, Big Profits! This book is phenomenal. It has three of my favorite things. First of all, one thing is simple. I like simple, especially when it comes to Math. I love straight talk. I love telling it like it is and being very open, blunt, and honest, and getting to the issues. Of course, who doesn't like big profits? Again, three of my favorite things. To those who are watching or listening, go get a copy right now. Even if you stop watching this and don't ever watch the show again, go buy this book. It is phenomenal.
You're the author of this book. You own a very successful CPA firm. You're a speaker. You're a consultant. You help businesses basically get their financials in order in a very simple, successful, no-nonsense common sense way that leads to big profits. Is that correct?
Greg Crabtree: Yeah, that's correct. I think the big thing that MicroFlash was missing for the years that I was in it, you kept thinking there's got to be something more here. When I started looking at it, and I start asking the question why. Why do we do this? Why do we have to produce financials? Those people think, oh we got to produce financials to get a loan. What if, just think crazy here, what if you produce financials to make a profit?
That's really the whole purpose behind the data, is telling you information that you need to know to change your actions to what is necessary to run a profitable business. We basically flipped it around and said, "You know, filling out tax returns and doing financial statements are well and good, but at the end of the day, our main purpose is to help you run a profitable business that causes tax implications from that profitability. Once we clear the tax implications, what you have left over, you build wealth with. Just as much as you said people love to make profits, I think there's very few people that don't want to have the opportunity to build wealth with their efforts.
Michael Reynolds: Your book really changed my business. I'm still working through a lot of the exercises you're outlining there. Already, I'm seeing tremendous results. I really appreciate that. I'm going to be spending a lot more time digging through it.
First of all, let me just give your website quickly for those who want to check it online. Seeingbeyondnumber.com. They can find you there. Your CPA, your consulting firm is there. Your book is there. Lots of information there. Definitely go there and check out more information on Greg as we talk, or afterwards.
Greg, the specific topic I want to cover today is marketing spend. In your book and in your presentation, you highlighted a specific ratio, you say, that you like to see companies spending about 2-5% of their annual revenue on marketing. Is that correct?
Greg Crabtree: Correct, yeah. One of the things that we get the fortune of doing is we get to look into the intimate details of hundreds of businesses all across the US, some in Canada, and some even in other countries. What's interesting is you start to see that for all that people think business is different, no, it's really the same.
The first key is understanding is all revenue real? When I went through the presentation at our event, I talked to people about using this example. It's actually on page 22 on the book. Comparing a $20 million construction company to a $3,750,000 services business. I contend those two business are exactly the same from an economic perspective. In reality, the direct cost that are not built around labor, materials, subcontractors are the two primary things, any of those direct project cost is such that those are really pass throughs.
If you have a high, high pass through-oriented business like a construction business, I contend that they really don't sell materials. They're just the purveyor of making sure the right materials were purchased and delivered to the site and used properly. They don't do the things that the subcontractors do. They actually just organize who does it and have to stand behind their work. There's a little bit of risk. At the end of the day, they don't pay their subcontractors typically until they get paid. They typically take a draw against the project to pay for the materials. There's no economic risk or no cash flow risk in the process.
As we're studying these concepts and looking at businesses from completely divergent industries, we said if we fail to route all of these direct costs and get down to our definition of gross profit, and then you start looking at those business from there down as if they were the same. It is amazing, the similarities across industries as to how these businesses look. Then, you start breaking it down. What are the functional elements of how that business works? Obviously, direct labor is the first big key of driving the business. Obviously, the thing is, you got to have a marketing engine. If a business has minor direct cost, we want to see 2 - 5% of marketing as a percentage of revenue. If you've got one of those high pass through businesses, we want to see that 2 - 5% of marketing spend as a percentage of gross profit. The exception is, typically, you're seeing some online business. They get up closer to 10 - 12%.
The theory behind that is, this is really where the fallacy was when people started creating online businesses and thinking, oh well, you don't have any bricks and mortar. You ought to be just phenomenally profitable. Guess what? What people started to realize is that physical location that had a sign on it was actually some marketing value. People saw you. They noticed you. You're part of their routine. People will see you. To a large degree, all these companies started to realize that to stay relevant, they had to spend what they were going to spend on facilities, they had to now spend on marketing. That shift occurred.
Michael Reynolds: Why is it that- this is a topic that I'm really interested in. I see a lot of these $50 million a year companies, for example. Ideally, some of them should be spending about a million a year minimum on marketing. It seems like spending $50,000 just blows their minds. They just can't fathom that much spend. Why do so many companies underspend on marketing? Why do we, as a whole, a lot of times seem to devalue it?
Greg Crabtree: There's a lot of brain damage around their efforts of going into it. What they try to do is go in on the cheap. They go in, dip their toe in with no real strategy. I wrote a piece on a blog back in the spring that said, we started analyzing our client base. We found that of our clients that were growing profitably, which meant that they were greater than 5% year over year growth in revenue. They were greater than 10% profitability. The one distinct characteristic of all of those businesses was not the industry they were in. It was the fact that the CEO was spending more than 50% of their time focused on marketing and sales. Primarily marketing, not as much sales. Then, of the companies that we had that were profitably stable, that means it's a company that's plus or minus 5% revenue growth, but they were over 10% profitability.
Overwhelmingly, those CEOs were what we call operations-focused CEOs. They had sold everybody they know. They were focused on operations, and they were stuck. They kept saying, we got to go hire a salesperson. I said, "Listen. It's not about hiring a salesperson. Sales is largely a systemized process of closing a qualified lead. What you don't have are qualified leads. When you think that you're going to solve your problem by taking a salesperson and making them what we call a business developer, what you've done is created the most expensive form of marketing ever created, which is a human walking out, one to one, saying, "Hi. My name is Greg. I sell accounting. Do you need accounting? Please. Please help me do some accounting for you. I sell accounting." That's a business developer. That doesn't translate. You've got to be disciplined to separate the functions and be excellent in each one of those functions.
I'm a big advocate of separating out that marketing function to where it has to have its own focus, its own strategy. It's really the lead horse in the wagon train. If you don't have that, then you may have the best widgets in the world. You may perform the greatest service in the world. Nobody knows about it. Other than you get lucky and you have some good word-of-mouth, that's great. Are you performing up to your potential?
Michael Reynolds: I see this over and over. Companies say, "Well, we want to grow." What do they do? They hire salespeople. They don't think about marketing. You really hit the nail on the head when you say that people do this in reverse. They say, "Oh well, we're going to hire a salesperson to go out there," and like you said, walk into offices. "Oh, do you need x, y, z services." People say no. And they wonder why they're not growing at the rate they would like to, because they don't have qualified leads.
I love the fact that you point out that the first step is really marketing. If sales has nothing to work on, no leads to close, they're going to be very limited in their success. You see that over and over.
Greg Crabtree: Once you warm people up to this idea of marketing, how do you spend it? We believe that it's the moral equivalent of a farmer trying to plant in parched earth. You go out and you pour water on parched earth, it does not sink in. It runs off because it hasn't been conditioned. Marketing has an element that is a lot more farming-oriented in the sense the you have to till the soil. You have to put the right nutrients in it. You got to plant the seed. You got to get the rain. You got to till the weeds. You got to nurture it to then get the harvest. It is one of those things that it is not a one pop, and "Oh, now I'm famous and I'm going to get all these results." You got to do it consistently.
This is my challenge to all the people who sell marketing services. Listen. I know that your motivation, you'd love to sell a $100,000 project. Guess what? Most of your customers who need your services aren't positioned to spend $100,000 all at one time. Our contention is, it probably wouldn't be that much good. What you have to do is come up with a strategic spin. We really like to see companies that strategically spin that fixed percentage on marketing month after month after month. They run different campaigns, but the idea is you're changing it up, you're breaking the ground up, you're getting it loose. You're putting some fertilizer back in it. Throw a little chicken manure in there whenever you can. Really, at the end of the day, what you're trying to do is be consistent and be out there.
You got to change your messages. You can't just say the same thing over and over again, because people get conditioned to it. It's that discipline of having the strategy and then faithfully executing it, and then working with partners who are really good at understanding, "Hey. Here is my spending constraints." I will tell you that all businesses can spend more than they tell you they can spend. Then again, I think part of it is we have to then circle back around what we want to see as result.
People love to measure hits through website and traffic conversions and all these other wonderful detail activity metrics. Here's my litmus test. I'm going to look at the gross profit of the business on a three year rolling six basis. I got to look at the nearer term. I'm taking the last three-month moving average of the company's gross profit, and I'm looking at that trend compared to gross profit minus marketing spend. The idea is I don't want marketing going up like this, or gross profit going up like this. Yet, gross profit minus marketing spend is doing this, or even worse, going down. The idea is, yeah, I can get more traffic. But am I attracting the people that add profitability to my business? Am I attracting the right folks that I'm really trying to aim for as a business. To us, that's the ultimate litmus test. Sometimes, we have to move the time signature to where we may be doing this six-months average of revenue compared to the marketing spend of three to six months ago, depending on how long you think it takes for a conversion and action and all those kind of things.
Typically, if you're not getting in today's world, you're not getting activity within three to six months, you're probably not going to get it. Most of our online businesses, they get some residual impact, but they're seeing a 30-day cycle impact. Those are pretty easy to measure.
Michael Reynolds: There's a few points I'm really glad you touched on. One of them is that we see marketing as a process, not project. You really touched on that when you said that a lot of people would love to spend $100,000 on marketing and call it a big campaign. Really, it's about nurturing month over month. That's what we do in inbound marketing, of course, is we nurture month over month. At the end of the year, you might spend $100,000, but you've spread out over the entire year in farming and planting seeds, and then nurturing those seeds. That's exactly what we like to see.
The other thing you touched on was that it's really the responsibility of marketing and sales both to create the revenue. Marketing can bring traffic. Marketing can bring leads. Marketing can help those leads be qualified and set up for success for the sales team to take over with. The sales team is not running with them and closing them, you got a problem. Really, both sides of the equation have to be working in sync together.
That's one problem we often see is that while they might have a great sales team, but no leads. Or maybe they've invested in marketing, maybe with a company like us. But their salespeople don't know how to close them properly, or don't know how to follow up on the modern end on lead. You got a problem at disconnect.
Greg Crabtree: Whenever I've created a good scenario, it's when I've connected these sales people to the operations people who actually do the work and the marketing people. Everybody's working off the same page. I want the marketing people driving the kind of customer leads to our sales people that these are the optimal-type customers. I also want to make sure those sales people were selling what we do best. They may actually want to get to know the people who do the services to know what we really do best.
Now, I want the people who do the things that we do to make sure that they don't get stuck in their own little world inside the business and say, "Oh, here's what we do. Have you been out in the market lately? Here's what the market's asking for." The marketing and the sales team have to communicate with the operations team to keep them apprised of, this is the trends that are out there.
I'm a full believer that 99% of all businesses operate under one simple economic principle: price-led costing. The market determines the price that it will pay for something, good or service, and you have to make the cost fit and still make a profit. That's a harsh thing. As much as people want to say, "Hey, here's what I want to make. I only want to work this much." That sounds great in a fairytale world. At the end of the day, the market is a cruel task master. Only the best of the best can figure out how to do it, "Hey. Let's have good market-based wages. Let's be the best of the best." There's always going to be 80% that are doing it very poorly. We think it's pretty easy to out-compete just about any industry, if you really get focused. At the end of the day, that team has to be focused on that clear understanding of price-led costing is the dominant economic force in the marketplace in a free market.
Michael Reynolds: How do we get there? I talk to $15 million companies a lot of times. They're not even spending $50,000 a year on marketing. They're not anywhere near this type of spend. How do we get them there? Do we recommend a dramatic shift and restructure the company to do it very quickly? Do you recommend a gradual increase in marketing spend to get there?
Greg Crabtree: Actually, I think it starts with a strategy session, much like the way we work with our clients. We do a financial strategy session that starts every client. At first, we were thinking, well, who would pay for that. We kind of determined it's a necessity. We got to get deep. We got to do this deep dive really quick. We'll make it as fair and practical in pricing as possible. At the end of the day, until we dive inside and see what really makes all the numbers tick and what your history is, then we can lay out a strategy that says, "Now, what's the clear path forward?" I think marketing strategy is exactly in the same in the sense that you got to sit down and say, "Listen. Why are we here?"
There's a great story out there a guy named Kevin Elko talks about, what's your 68, which is a reason why. He tells the story of Jaromir Jagr, who's a hockey player for the Pittsburgh Penguins at the time. They were playing in the 2000 Olympics, and Jagr was a number 68. They're in the silver medal round, and the referee comes in and calls ice time. They're playing the Russians. He stands up and addresses his team, and he says, "Men, I've been waiting for this day all my life. I wear the number 68 because that was the year that the Russians invaded our country. My grandfather lost his life in the invasion. I dedicate this game today to all of our countrymen who lost their life in the invasion. They went out and they annihilated the Russians. They later went and beat the Canadians for the gold medal. They weren't expected to win at all. He had a purpose. He had a why.
We could talk about culture and all those things. Those are the great little sit around the campfire, the kumbayah stories and all that. Realistically, I think you guys in your industry have to tell the story of why do you exist. Why are you passionate about what you do? What problems do you solve in the world because of what you do?
Yeah, you got to make a profit to be sustainable. If you don't, you will be extinct. As you draw the stories out and then replay it, then it's the execution, then, of saying, here's the story we need to tell. Here's the constraint of the available funds to be able to tell that story. That's when they turn to professionals like you guys and say, "Okay.Here's my two constraints." Some of them need to work on a story. You probably want to cross that a few times. There's plenty of businesses, though, that have wonderful stories. They're just not being told. Once you have that story, and we got the constraint of here's the available funds, then you get into solving the problem of saying, "I got to live within these constraints." As you go through cycle to cycle to cycle, if you're successful, there's going to be plenty of funds to continue to tell the story, improve the story, refine the story, and be the one who owns it in the marketplace. That's the ultimate position anybody wants, is to be the owner, to be the thought leader, to be the market leader in whatever it is that you do.
Michael Reynolds: I agree. We seek out organizations that we can really get behind in terms of their story. We really want to work with companies that have a mission, that have a clear story, and that have a clear reason for existing and for serving the marketplace. We really love aligning ourselves with companies that can articulate that story, or let us help them articulate it. I really agree with that asset. What are some of the problems that occur when companies either underspend in marketing, or on the flipside, overspend in marketing?
Greg Crabtree: We've had clients with cases of the overspend. Those don't happen real often. When they do, it's dramatic. They're generating a lot of top-line activity, but just not the profitability. We get them to refocus and listen. Yeah, it's great that you're spending the money. We show them that gross profit minus marketing spend metric. Hey, the line's going down. It’s like, hey. You're generating more activity, and the ship's sinking faster. We got to change something.
Nine times out of ten, it's just as simple as getting them to focus on attracting the right customers. We don't win the game by getting the greatest amount of top-line activity. We win the game to get the right amount of gross profit in relationship to net profit. That's the part that has been totally missed in my profession's ability to explain financial information. Once we get them to focus on that, we get a classic case of a client that dropped their marketing spend. They're spending $1.2 million and losing money. We got them to drop back to $900,000. They dropped $2 million in revenue, but they went up $600,000 in profit. Just because they started attracting the right people.
A lot of it is understanding your business matrix,the thing that people get lost in is companies that do many things. It's real easy to say, "Let's do more of many things." Focus is a good thing sometimes. We have this idea. We call it a profit cube. We'll look at a business and say, "Here's the business in total. Here's the business by product, by location, by person, by line of business. You basically are taking the data and rotating it, looking at it and saying where are the opportunities, where are the under performers. The goal is, not sexy, you just try to get the bottom up to the middle. It's less likely that you're going to repeat the top performers as you are to eliminate the bottom performers. If you're pushing topline revenue, all you're doing is generating activity with no real net results. Sometimes, shrinking is the better thing. It's shrinking in a way that is not cost-cutting. It's just eliminating unproductive activity. That's the only thing you need to cut.
In my profession, you can quickly jump in, "Oh, cut this person. Cut that person," I find that most people are actually spending the right amount of money. They're just not getting the right productivity for what they're spending. We talked about our concept of the salary cap that I talked about in the book, in a sense that, hey. I got to get the right amount of output for every dollar of labor spent. I could care less how many heads you have. Body count is irrelevant to me in business. It is about for every dollar of labor that's being spent, what is the output that you get from that.
That's really where that alignment of the marketing team and the sales team and the operations team have to really get those pieces put together and say, "Hey. This is really what's important. Let's make sure we're talking to the right people." I'm sitting on a plane next to any US adult taxpayer, and I know something that can help them. That does not mean they're my customer. That definitely does not mean I want them as a customer. I want entrepreneurs that own businesses. We're going to take care of as much of their financial life as they want us to help them take care of. That's our focus. Somebody who just needs a 1040 done, just because we know how to do it doesn't mean that's what we want to do. Every business has to have that kind of a focus. That's really kind of how you win the game. Or at least what we think it is.
Michael Reynolds: One more question for you. Speaking of people, I'm glad we segued into this. A lot of times, the scenario is that we're working with a company and they have a marketing director. A marketing director is overseeing general marketing strategy, spend, et cetera for the company. We're a piece of that doing digital for them. We're doing inbound marketing. We're doing everything online for them. In some cases, we are the entire marketing system, or we're a big component of the marketing system. When you say, let's say they're spending x amount of dollars for inbound marketing. Do you count the marketing spend as including salaries of the marketing director, for example, or do you treat it separately?
Greg Crabtree: You really have to be all-inclusive when it comes to marketing. The thing is, that is an easy segment of the business to outsource. This is really like you have to look at it and say, "Where do I get the best value?" There are certain things and environments where it's good to have a person taking care of a particular piece of something because it has a high enough activity point and it repeats itself often enough that it makes sense.
I'll use accounting as the comparison. I spent three years, before I started my firm, as a controller for a bank. The first year, I was the novelty because I was the only accountant in this 130-person bank. Anything I said, they just believed. That was pretty cool. It's like you were law. By that third year, I had become assimilated into the masses of employees. I'd even started to feel some of my technical skills start to leave me, because I'm only working at one company. My universe has so limited interaction. I can read about it, that's not the same thing as doing it. We get to work across a couple of hundred companies on an active basis day in and day out. We have a lot of input. We have a lot of data. Same thing in your industry.
There are businesses that need a marketing director, but I'm not so big on building large marketing staffs because the problem is you tend to get in a routine. You don't get fresh ideas. You don't get a lot of those kind of things built out. It's just a different play that businesses run. My tendency is to gravitate to, "Hey. Spend less on internal marketing employees and go hire the professionals who are really in the marketplace who do this every day, who see they got many, many, many more business experience inputs as to what works and what doesn't." We find that those are the companies that tend to spend the least amount and get the greatest amount forward.
Michael Reynolds: This has been outstanding. Is there anything else you would like to add that maybe we haven't covered?
Greg Crabtree: Our process is pretty simple. We have our four pillars that we stand on that we cover in the first four chapters of the book. The first thing is clearing the distortions in your business. The big one that we talked about is, owner compensation is the one that everybody messes up. If you're not paying a market-based wage out of your business, that net income number on your PNL is worthless because it's not the true number. You got to get that done. You got to understand the revenue component and make sure you really pass it through revenue, or is this real revenue. Once you know your true profitability, set that profitability target. What is it for your business?
We think for most businesses, 5%, you're on life support; 10%, you're a good business; 15%, you're a great business. If you're using gross profit as your topline instead of revenue, we want to move those numbers up about 5%. It's like 10% is the percentage off a GP, 15 is good, and 20 is really where we see the- anything 20 or above is great as a percentage of GP for most businesses.
Once you get that business profitable, and the way to get it profitable is, as I said earlier, it is to get productivity out of all the labor that you're spending. Most of the stuff that you're spending on is noise level. We think marketing is a strategic spend. That's one that people are under spending on nine times out of ten. We got to get that up. Largely, it's about getting productivity out of your labor. Once you do do that, then once you're profitable and you're just dealing with what we call the four forces of cash flow.
Get your taxes paid first, get out of debt second. Go do your core capital target third, which we defined in the book as a simple number of how to calculate that. Once I've done that, then I get to harvest the profitability in the business to build my wealth either external to the business, or to truly reinvest it in the business to grow it farther and faster and better.
Michael Reynolds: Love it. I'm going to wrap up and make sure that you give us a shout out to what you do and how you help others. Again, your website is seeingbeyondnumbers.com. If you can just tell us about what kind of clients you work with and for those listening that may want your help, how do they know if they're a good fit to work with you and how do they reach out?
Greg Crabtree: Really for us, it's not about the size of the business as much as it is if you're an entrepreneurial business trying to be profitable. Our geographic area, our offices are based in Huntsville, Alabama, but 90% of our clients are not in Huntsville. We serve clients all over the US, some in Canada. We've developed a system to where we start each engagement with a planning session that does a deep dive into the business. Typically, that planning session runs between $6,000-$8,000 if it's done on-site. It's about $4,000 if we do it remotely. We have perfected ability. Most of our ongoing client support is done at remote through screen-share calls and those things. We go on-site whenever we need it.
From that standpoint, the key is to reorient your data. We've developed a process to build a model that reaches into your data. We don't have to waste time fixing your charts of account or anything. We basically just quickly re-tag it, point it to what we think it is, redisplay client's information to themselves. It's funny. It just triggers these storytelling things in their brain to, "Oh yeah, that's when this was happening. Oh yeah, that's when this was happening." It's like, "Oh yeah, oh I was such an idiot there." They see their business in a different light, so the numbers come alive and start telling the story.
If the numbers don't tell a story, then you're wasting time developing them. We build a model to where it also forecasts the momentum that the business is on and trajectory. From there, we start an ongoing process to where we help them get profitable. Probably about 80% of those clients that we do the consulting for will do the corporate and the professional tax returns. Some of them prefer to keep their long-term relationship with their local CPA. That's fine. We can't talk about profit without talking about taxes and cash flows. We'll always talk about it from a big picture standpoint.
Essentially, it's just this repeating life circle of business of going, hey. Get profitable, deal with the taxes, reinvest the wealth. Get profitable, take care of the taxes, reinvest the wealth. Trying to make sure that you always understand, here's where I'm at profitability-wise. Here's when the cash is going to show up. Then, what can I do with it? That's really what our role in life is, is to help keep that cycle in sync for the entrepreneur. They got more other things on their mind, and it helps them stay focused of knowing, "Don't go spending the IRS's money when you've had profit." All of a sudden, you've got the April 15th surprise. It's like, "No. I spent that money already." IRS is not a good creditor.
Michael Reynolds: Well Greg, you make it sound so simple. You give those of us hope that get blurry-eyed when we spend so much time in spreadsheets. I appreciate you giving us hope and making it sound simple. Really, you do break it down in a way that does give me hope that I can really start to enjoy working with these numbers again.
For those who would like to work with Greg or learn more about him, again, seeingbeyondnumbers.com is Greg's website. I want to, again, point out your book. If you do nothing else today, get Greg's book. It is called Simple Numbers, Straight Talks, Big Profits! You can find it on Amazon. I've got the Kindle version here. Go get it today. Right now. Do not do anything else before you go buy Greg's book. I'm serious. It will change your life.
Greg, it is a phenomenal book. You're a phenomenal speaker. I really enjoyed hearing you speak at the conference. I really enjoyed our interview today. Thank you so much, it was a real pleasure.
Greg Crabtree: Thanks, Michael. I appreciate it.
Michael Reynolds: All right. Thanks, everyone. Have a great day.
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