Norm Brodsky on Weighing Prospective Clients
My husband and I run a small studio that does branding and packaging design. We seem to attract a lot of start-ups and small businesses—enough that we haven't had to pitch a client in more than three years. The problem is, I feel like we spend way too much time talking to and preparing estimates for prospects, only a small percentage of which turn into clients. This is wearing me down. I can't figure out why we aren't able to convert more prospects to clients. I earnestly want to grow my business, which is about five years old. We must be doing something right to get so much interest, but I feel we're doing something wrong, and I don't know what it is.
—Yael Miller, Co-Owner, Miller Creative, Lakewood, New jersey
As regular readers of this column know, I'm a numbers guy. I believe you need to look at the numbers to understand what's really going on in a business. Yael Miller thought she was spending too much time with prospective clients. So naturally, when I spoke to her and her husband, Reuben, one of my first questions concerned the rate at which they convert leads into customers. "It's a little less than 22 percent," Reuben said.
"Well, I have some news for you," I said. "That's a really, really high percentage."
"OK, that's good," Yael said. "But..."
"No, that's not good," I interrupted. "It's beyond good. It's great. In any business, turning one out of five prospects into clients is amazing."
"But it takes a lot of time," Yael said. "Maybe we're just too small to handle all the requests we get."
I asked them to take me step by step through what they do when contacted by a potential client. Almost all of their leads come through their website. Yael interviews each prospect for about half an hour. Reuben then prepares an estimate, which takes about an hour. After reviewing the estimate, about 1 in 5 calls back to accept it and moves on to the next step—the preparation of a full proposal, which serves as a contract. Reuben said he spends about 90 minutes on each of those.
"What about the four who don't call back?" I asked. Yael said she tries to contact them but rarely succeeds. That's another 15 or 20 minutes per prospect. "OK," I said, "so the two of you are spending an average of about an hour and 45 minutes on each prospect who does not become a customer. Is that right?" They agreed. I asked them how much they charged per hour. They said that they used an hourly rate of $150, which covers various costs, including their time. We figured out that they were probably paying themselves about $70 per hour. Multiplying that by 1.75 hours, we calculated that each lost prospect was costing them somewhere in the neighborhood of $122.50.
With that number, we could convert the time that the Millers were spending on lost prospects into a percentage of sales. It was simply a matter of multiplying the number of lost prospects per year by $122.50 and then dividing the result by the firm's annual revenue. The lost prospects, it turned out, were costing them about 6 percent of sales. "But don't think of that as wasted money," I said. "It's more like an investment. You're not paying for salespeople to get clients. You don't do any advertising. So 6 percent of sales isn't much. Without it, you wouldn't have any sales at all."
"So what's our problem?" Yael asked.
"It's how you're allocating your time," I said. "You shouldn't be spending a minute on chasing lost prospects. Your time's too valuable. A clerk can do that. And maybe you can have someone else qualify the leads you get from the website. But don't change the process, because it's working, and you don't want to screw it up."
They thanked me and promised to keep in touch.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.