Understanding unit economics is one of the most critical jobs you have as a leader. It sets the entire tone for the business. It can either provide you with fuel, or it can put you in a constant ‘chase’ mindset.
About a decade ago, I was the COO of a large firm, and the CEO would drill this old saying into my head every week.
"You can’t go broke making a profit."
First, you have to make sure you are getting accurate data on each job. The only thing worse than having no data is having incorrect data. It can destroy a company. You have to ensure the accuracy of the data.
You can do this in a variety of ways; when I bought a landscaping business in late 2020 and had no clue what I was doing or how the business made money (we didn’t, we were losing money), I jumped in the truck and rode around with crews and started logging everything we did in a notebook.
How long the drive from each property was, how long we were at a gas station, how much fuel we used per day, what the duration of each property was, etc. I started charting every data point I could think of until I realized which ones mattered and then reviewed the data and realized we were losing money on 30% of the jobs we had.
We obviously grew and started implementing software as we got bigger and things became easier.
My point is, you don’t need Aspire or ServiceTitan or whatever to do this. You can get a pen, a notebook, and your iPhone to do this.
In the business we have now, we use ServiceTitan, and one of the things we continuously ask ourselves is, "Is the source of this information right?”
Is the data we are reviewing accurate? Well, we saw this week how sometimes it isn’t, and you have to dive in and reverse engineer everything.
Second, if the information isn’t correct, you are battling an army while blindfolded.
We are maniacal freaks about data. Our target Direct-GPM is 55%; we had a job that landed on that. Okay, job well done, moving on.
Well, we ended up finding that we missed an input in cost, and when we corrected it, it actually dropped the D-GPM to ~45%.
Now, in a silo, is that a big deal? No. It is not the end of the world. It probably wouldn’t even be noticeable in the grand scheme of things. But, what if it happens 1 in every 10 jobs? Or 1 in 5?
We review data in real-time, daily, weekly, and monthly. We are data freaks. We use data as a basis for our decision-making. We want facts, not subjective thoughts.
If we mess up 1 in every 10 jobs, it has the chance to distort our GPM. What happens at that point?
When we do daily reviews, we judge the team on incorrect data. This affects our view, both good and bad. The same thing goes for weekly reviews. The same thing goes for month-end reviews.
Now, think about the human side; our team is thinking we have X% gross profit all month long because that is what our reporting says, and then we realize as we close monthly financials that our GPM is 2-10% lower than anticipated.
We just wasted a month of review opportunities, performance initiatives, etc.
Maybe it causes a misrepresentation of job type profitability, and if we had accurate data, we would not be pushing for that specific job type, etc. It has a MASSIVE impact.
Bad data compounds.
Okay, lastly, assuming you have the accurate data, you now have the ability to select profit. I say it this way because it is not as common as one would think. I speak with a lot of business owners and CEOs, and I am always shocked when I dig in and realize that XYZ service or XYZ job type or XYZ division is either a) losing money outright, or b) not making the money the owner thinks it is and is running at a much lower margin.
This sounds so simple, yet it is very complex. We want to make money from everything we do.
If we can do that—being profitable on every single thing we do—we can then make sound decisions and investment opportunities inside the business.
Choose profitability. Understand job costs.
About a decade ago, I was the COO of a large firm, and the CEO would drill this old saying into my head every week.
"You can’t go broke making a profit."
First, you have to make sure you are getting accurate data on each job. The only thing worse than having no data is having incorrect data. It can destroy a company. You have to ensure the accuracy of the data.
You can do this in a variety of ways; when I bought a landscaping business in late 2020 and had no clue what I was doing or how the business made money (we didn’t, we were losing money), I jumped in the truck and rode around with crews and started logging everything we did in a notebook.
How long the drive from each property was, how long we were at a gas station, how much fuel we used per day, what the duration of each property was, etc. I started charting every data point I could think of until I realized which ones mattered and then reviewed the data and realized we were losing money on 30% of the jobs we had.
We obviously grew and started implementing software as we got bigger and things became easier.
My point is, you don’t need Aspire or ServiceTitan or whatever to do this. You can get a pen, a notebook, and your iPhone to do this.
In the business we have now, we use ServiceTitan, and one of the things we continuously ask ourselves is, "Is the source of this information right?”
Is the data we are reviewing accurate? Well, we saw this week how sometimes it isn’t, and you have to dive in and reverse engineer everything.
Second, if the information isn’t correct, you are battling an army while blindfolded.
We are maniacal freaks about data. Our target Direct-GPM is 55%; we had a job that landed on that. Okay, job well done, moving on.
Well, we ended up finding that we missed an input in cost, and when we corrected it, it actually dropped the D-GPM to ~45%.
Now, in a silo, is that a big deal? No. It is not the end of the world. It probably wouldn’t even be noticeable in the grand scheme of things. But, what if it happens 1 in every 10 jobs? Or 1 in 5?
We review data in real-time, daily, weekly, and monthly. We are data freaks. We use data as a basis for our decision-making. We want facts, not subjective thoughts.
If we mess up 1 in every 10 jobs, it has the chance to distort our GPM. What happens at that point?
When we do daily reviews, we judge the team on incorrect data. This affects our view, both good and bad. The same thing goes for weekly reviews. The same thing goes for month-end reviews.
Now, think about the human side; our team is thinking we have X% gross profit all month long because that is what our reporting says, and then we realize as we close monthly financials that our GPM is 2-10% lower than anticipated.
We just wasted a month of review opportunities, performance initiatives, etc.
Maybe it causes a misrepresentation of job type profitability, and if we had accurate data, we would not be pushing for that specific job type, etc. It has a MASSIVE impact.
Bad data compounds.
Okay, lastly, assuming you have the accurate data, you now have the ability to select profit. I say it this way because it is not as common as one would think. I speak with a lot of business owners and CEOs, and I am always shocked when I dig in and realize that XYZ service or XYZ job type or XYZ division is either a) losing money outright, or b) not making the money the owner thinks it is and is running at a much lower margin.
This sounds so simple, yet it is very complex. We want to make money from everything we do.
If we can do that—being profitable on every single thing we do—we can then make sound decisions and investment opportunities inside the business.
Choose profitability. Understand job costs.