A/E Firms: Is Your Marketing Expense Delivering Value?
July 17, 2020
Most small architecture/engineering (A/E) firms find it challenging to secure enough work to stay busy. Why? In part because by most estimates, there is a 25 percent oversupply of available A/E firm hours in the U.S. as compared to workload. In other words, the U.S. economy supplies approximately 75 percent of the work needed to keep all firms nationwide busy.
This means that if you are looking to start an A/E company, or keep your company operating, you have to be good at bringing in new projects. Anyone who has worked at a small firm will tell you that the culture is, out of necessity, intensely focused on business development.
For that reason, what we’ve found is that there is an attitude that “any marketing is good marketing” and therefore there are few, if any, controls over marketing spend. It is, as they say, a shotgun approach to marketing. Unfortunately, to be successful, firms have to have a laser focus on the types of projects that they are most skilled in and prepared to tackle.
Marketing Effectiveness as a Measure of Success?
Ask most decision makers in A/E firms to list the statistics they believe are most critical to success and you can count on not hearing “marketing effectiveness” mentioned often if ever. But, as we’ve learned, being able to determine whether money spent on marketing activities is helping you land new projects is critical to achieving business objectives.
That’s why Factor AE allows you to enter a potential future project as what’s called an “opportunity” and log what we refer to as “pursuit time.” This creates a helpful distinction between general marketing expenses like your website, marketing materials, advertising, and sponsorships, which are overhead, and expenses related to trying to close an opportunity. In fact, when you create an opportunity, the system asks you to estimate how much time will be spent on pursuing it—everything from meetings with the client to presentations to rudimentary designs used to demonstrate your expertise.
There are many benefits that come from tracking pursuit time, not the least of which is developing a sense for whether the marketing cost to land a project may exceed the revenue generated from a project. We find that that’s a situation too many firms find themselves in too often! And, not only is the net loss on these projects painful to absorb, you have to consider the lost “opportunity cost,” meaning that while chasing this job you weren’t pursuing others that might have made a profit.
Ultimately, firms find that getting a better handle on their marketing expense helps them develop a reliable set of “Go/No Go” criteria for the kinds of projects they want to go after.
"We’ve learned, being able to determine whether money spent on marketing activities is helping you land new projects is critical to achieving business objectives."
Understanding Gross Profit Sold
To help you assess the value of marketing dollars spent, Factor AE uses a figure called gross profit sold (GPS). GPS enables a change in mindset from top line revenue to profit potential within projects.
The calculation of GPS begins when an opportunity becomes an active project. It uses the total dollar amount that the client has agreed to spend minus any pass-through expenses like sub-consultant fees (in other words, the net fee) minus the total anticipated cost to perform the required work.
It is the job of people who are selling work to maximize the GPS on every project rather than just maximizing the top line fee. Having GPS as the measure of ROI on marketing activities is almost as cornerstone to a firm’s success as earned value analysis. And the two are tightly related, as GPS not only helps you gauge marketing efforts, it also sets the standard for what your project manager has to achieve on the project. This prevents situations where a project is sold too cheaply and consequently the PM has no chance of achieving the firm’s standard gross profit goal.
Two Types of Marketing Expense
Basically, there are two types of marketing expense that successful firms track:
- New client marketing. This is money spent toward landing a client your firm has never worked with before. This is the kind of “chase” that people involved in business development love.
- Client maintenance. This is money spent nurturing existing relationships that are already producing work. Every project in Factor A/E has non-billable time for client maintenance built in by default, and PMs are required to use that time.
Putting the focus on client maintenance provides a number of benefits. For one thing, selling new business to existing clients is much more cost-effective (a margin of approximately 7 to 1 in our experience). Plus, while many people in a firm may not have the right personality for approaching potential new clients, their expertise in their field and comfort level with an existing client who appreciates their work positions them perfectly to ask about new opportunities with them.
Factor AE measures the effectiveness of new client marketing by taking the total cost of traditional marketing and dividing it by the GPS on projects that were landed. For client maintenance, the ROI is calculated as the total cost of that time divided by the GPS of repeat business.
So, the goal of Factor AE is to empower (and encourage) firms to go after larger “wallet share” with existing clients as opposed to burning so much time and energy on chasing new ones. Yes, you have to land new “greenfield” business periodically to replace departing clients and to grow your firm, but keeping existing clients happy and expanding those relationships to include more work is much more profitable.
GPS and Key Metrics
GPS and its relationship to other metrics can be very informative. Revenue per person and revenue multiplier are the leading indicators of whether or not GPS and gross profit produced (GPP) are in sync. If GPP is less than GPS when the job is done, that means you’ve run the project over budget and have had write-offs. Then other metrics will drop. If GPP is greater than GPS at the end of the project, your PM has done a great job of lowering costs without reducing the fee. Then other metrics go up.
Is your marketing expense paying off? It definitely pays to know!
Determine if Your Marketing Expenses Are Delivering Value with Factor AE
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