Simple Math, Huge Results: What's Your Profit Improvement Potential?

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ℹ ABOUT THIS EPISODE

Discover the Profit Improvement Potential hiding in your construction business! 

Wade reveals the simple math that shows why chasing revenue kills profits and how small 1% improvements across key areas can dramatically boost your bottom line. 

Learn why lowering prices requires 50% more customers to break even, but raising prices 10% lets you lose 25% of customers and still profit more. 

This CFO-level analysis will change how you think about pricing, customer acquisition, and business value forever.

⌚️ Key moments in this episode:

• 00:00 Introduction to Profit Improvement Potential
• 00:58 Understanding Business Metrics
• 02:41 Strategies to Increase Revenue
• 08:25 Cost Management Techniques
• 09:52 Valuing Your Business
• 13:32 The Impact of Pricing on Profitability
• 17:58 Conclusion and Next Steps

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Find all episodes and related links at ContractorSuccessForum.com.

Join the conversation on our LinkedIn page: https://www.linkedin.com/company/CarpenterCPAs

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] 

Wade Carpenter: Hey, before we jump in today, I want to give you a heads up. This is one of those episodes you're really going to want to watch on YouTube. Instead of just listening, I'm walking you through the Profit improvement potential model. A tool I typically reserve for my CFO level clients only. There's some visual math here that's gonna change the way you think about your pricing and profitability.

I know visual math doesn't sound exciting, but here's the thing. Every single time I show this to a contractor, I get the same reaction. It is an aha moment that shifts how they see their entire business.

So head over to YouTube and pull up the Profit First Construction Channel. It's brand new, so subscribe while you're at it for more videos like this in the future, like next week's episode, where we'll dive deeper into the Profit improvement model and how it works specifically for construction contractors.

Watch me walk through these numbers live and you'll see exactly why lowering your prices to win more work is actually costing you money, and why small 1% improvements in the right areas [00:01:00] can dramatically increase both your profit and the value of your business. Trust me on this one, you'll want to see the actual numbers in action.

Now, let's get into it.

Do you know the Profit Improvement Potential of your business? Not your revenue, not your backlog, the actual gap between what you're making and what you should be making? This is something I typically walk through with CFO level clients only, and I'm still surprised at the reaction it gets every single time.

This is the Contractor Success Forum and the inaugural episode of my new YouTube channel, Profit First Construction. I'm Wade Carpenter with Carpenter Company CPAs alongside Stephen Brown with McDaniel Whitley Bonding and Insurance, and today is gonna be a little different.

I've only given Stephen the topic and have never shown him this math. This is some voodoo simple math that you may have never thought about before. But I hope it changes the way you think about your business. So I know that's a tall order. Stephen, initial thoughts on what we're doing? Because I know I've [00:02:00] sort of left you in the dark.

Stephen Brown: I dunno, voodoo math sounds wacky. I'm excited and interested to see where we're going today.

Wade Carpenter: Today I wanna walk through a model, and this would be part one of two because when I showed this, we do have to adapt it for construction, but I think there's a lot of learning in this and thinking about how we can increase the value of our business.

So let's just say we had a business that did 3.6 million. They had Cost of Goods Sold 2.52 million, and Gross Profit, 1,000,080 or 30%. Their overhead was 770, and then that left them with profit of $310,000.

If you're listening to this, it doesn't matter whether it's 3.6 million or 360,000 or $360. The math is the same. So that's one thing I want you to remember. But if you hang in here, I think you're gonna learn something here.

Let me set the stage here a little bit. Let's just say this was not a contractor. This is just [00:03:00] a company that bought and sold proverbial widgets, whatever it is, that we bought it and then we turned around, marked it up and sold. One product. Given that for this type of business and we wanted to increase that bottom line, what would you start with? 

Stephen Brown: I would start by low and overhead expenses, I guess first thing. That looks a little high as far as revenue I'd start I don't know. I would look at the revenue as a percent, you're netting out a little under 10%. So I guess in the construction world, that seems pretty good to me. That might be repugnant to some of our listeners or it might be crazy high.

Wade Carpenter: In this particular case, we start breaking down that $3.6 million. Most people think revenue. This is the only way to, yes, you can cut expenses. Whatever it is. But what I wanna talk about today is how do we work on this revenue?

Let's just say we have a number of customers. We started with 300 customers, okay? [00:04:00] And on average they bought the two items at $500 each. Then they actually bought from us 12 times during the year, so that'd be $12,000 a year. So that 300 customers on average, paid $12,000. So they gave us the $3.6-- 

Stephen Brown: So we're on widgets, not construction. 

Wade Carpenter: Right. Like I said, I want to get some concepts down here first. Hopefully this math makes sense. So if we were looking to improve the bottom line and we knew that was the deal, I mean, what could we do? Most people think of adding customers, right? 

Stephen Brown: Sure. 

Wade Carpenter: How can I get more sales-- 

Stephen Brown: that's everyone's logic. 

Wade Carpenter: Okay. I mean if we were selling widgets, what could we do to just add customers? 

Stephen Brown: Lower our prices. Spend more money in sales and marketing. 

Wade Carpenter: Throw a sale out there. I know this is tough off little. 

Stephen Brown: Anything you can to make widgets more important and viable product. I think the first thing [00:05:00] most widget manufacturers would do was be cut costs to getting the customers.

Wade Carpenter: I know you said, okay, we're gonna try to increase profitability. But if we are trying to add customers, and the thing about that is that's something we'll get to is if we lower our price, what happens? We'll come back to that.

But if we're just trying to increase the number of customers, you've already said a few things that we could add new customers. But how can we also increase that number? I'm gonna stump you here, right?

Let me lift you off the hook a little bit. Everybody thinks, okay, I'm gonna add new customers. A study that was done a long time ago that said, and again, what ever it is for your business. If you started with 300 customers, and on average maybe a business would add 20% of new customers every year and lose another 20% of the customers, right?

Obviously, you could add a couple more customers and that's gonna translate to the bottom line. 2% more customers, that increases the value of the business.

If we added one new customer, [00:06:00] what does that do to our bottom line? Okay. So just 1% of new customers, that translates to like a $10,000, almost $11,000 profit. 

Stephen Brown: That sounds pretty good. Are you taking into account the cost of acquiring that new customer is already built into overhead?

Wade Carpenter: Right, and we're gonna get to that too. That's where some of the lessons come into this.

The other part of this is if you had number of customers and you're losing 20% per year, could we work on some things like retaining new customers?

Yes, everybody thinks let's get new customers, but can we work on reducing the number of ones that leave? So that's another way, even if we are not doing anything there, we pick up the phone and call them. Send a newsletter, do something to get that out there, like we care about our customers and--

Stephen Brown: It doesn't matter all widgets are exactly same. People do business with people they like to do business with. And you can always do something better than your competitor to keep a customer. 

Wade Carpenter: [00:07:00] Right. The point taken in construction, there's some customers that are maybe you have repeat business. I've had some contractors that go all over the country doing build outs, restaurants or gas stations or whatever it is.

The point here is what can we do to increase that bottom line? We can also think about instead of just increasing the number customers, we could also work on some things that you already mentioned, like reducing the price, but that would also send us the wrong way, right?

And we're gonna come to that because there's a big lesson there. 

Stephen Brown: Okay, so am I jumping around saying that you could also not worry about the customer number as much as just raise the price and then you risk running off more customers?

Wade Carpenter: Exactly where I'm going with this. But let's just say, if we increased our price by 1%, would we lose customers? Maybe not. But that 1% increase in price would translate, in this case, to a $36,000 increase in profit. And that's what I'm wanting our listener [00:08:00] to focus on today is, okay, what are the things that we can do to drive up the value of our business, right? And increase our profitability.

Whether it's 1% or 2%, and again, we're gonna get to the lesson where I hear all the time, I can't raise my prices because I'm gonna lose all my customers, or I'll never get a new job. Hang with us for a little bit.

Let's just say on average we sold two of them at a time, right? So we could work on that as well. The quantity we sell to them. Maybe we have some bundled offer where we just add one widget as a sale. That would be huge numbers here, a million dollars. Just thinking about can we bundle this? Can we get a bigger sale? Can we upsell? Things like that. 

Stephen Brown: Yeah I'm just in my mind trying to picture what a bundled widget looks like, but go ahead.

Wade Carpenter: We just gotta get a bigger or something to put them in.

Now, like I said, if they bought, I don't know what this is. Let's just say it was a Coffee of the Month Club or whatever. They came to us, and they bought 12 times a year at [00:09:00] that. We started working on okay, we sent out a mailer and did a sale or something like that.

And we're not talking about cutting prices. We got out there and we actually got them to increase the number of times they bought from us every year. What does that do to our bottom line? In this scenario it would put another $90,000 on the bottom line okay?

So hopefully you're seeing some of the different levers we're talking about pulling here for a widgets company. And again, we're gonna come back to the contractor thing, as well as we need to talk about price because there's a lot good things to say here.

Let's talk about our Cost of Goods Sold. Now this is oversimplification, but for our revenue, we sold it at $500 it costs us $350 piece. We're on average selling two of them, so it costs us $7,700 per thousand dollars sale that we had above, and again, the transaction frequency.

Can we work [00:10:00] on reducing the price? Whether it's working with our suppliers and cutting a deal, buying in bulk or whatever it is, right? If we're reducing our price by 1%, that would increase our profitability in this scenario by 62,000 or 20% no matter what we do. Okay. I want to keep this high level on this part.

You already mentioned okay, your overhead. We can cut our expenses, and what can we cut to increase our profitability? The relationship up here, if we add a dollar of revenue that doesn't translate to a dollar of profitability, right?

So if we are working on reducing our overhead, maybe we go cut out some subscriptions, move to a less expensive rent, we can work on that. But if we reduce our overhead by 1%, that's $7,700. That's a direct increase in bottom line.

Now I wanna [00:11:00] sort of put all this together. But before I do, we've had a few episodes in the last few weeks about mergers and acquisition and what happens, those kind of things. If you know anything on business evaluation, there's seven or eight common ways you would value a business, and a lot of times when you're doing an valuation, a valuation analyst would mix some of these ways together to come up with a value.

It depends on the industry and all that stuff. I'm not trying to get in the weeds here, but my point is, one of the ways you value a business is by a multiple of net income, right? If we have a business value multiple of three times and we can do some things to work on the value of our business like systematizing our business and making it so that somebody can have repeatable process, maybe if we get that multiple up to four and we're starting with that, we can increase the value of our business by [00:12:00] $310,000.

Now what gets interesting is if we open all this back up, one of the things that you've told me was if I raise my prices, I'm gonna lose all my clients, right?

Stephen Brown: It is possible. I guess it just depends on what your competitors are doing.

Wade Carpenter: Would you really lose a lot of clients we raised our price by 1%? 

Stephen Brown: Don't think so. I don't think everybody kinda expects a little bit of cost of living type of adjustment. You look at your homeowner's policy, don't they automatically increase the replacement cost value of your home by an arbitrary percent? So yeah. It's just a reality, isn't it?

So we're talking about revenue, is this going way toward our perception of our cost of revenue, or we try to look at this holistically and include the overhead expense? Like for example I'm gonna get rid as many employees as I can and overwork the ones I have. And by the way, they can work in the dark and they don't need any heating and air [00:13:00] conditioning. I mean, I love the chart, Wade. It definitely is a great way of showing how every little thing affects your bottom line.

Wade Carpenter: Right. I mean, there's a few lessons I want to hit here today and in the next episode, we're gonna bring this back to contractors.

But if we don't wanna bet our business on a 10% price increase, could we maybe find 1% here, 1% here, 1% there. And so that's where if I put 1% increase in each of these categories, maybe we're not going drastic on our pricing.

We work on getting 1% new customers or reducing our defections by 1%. In that case, it translates to $425,000 of profit, the 115,000 profit here additional. But our business value also would be increased by 358,000, right?

If we're trying to improve the profitability of our business and finding that potential, what we're looking at [00:14:00] is we don't wanna bet the farm on some things. I've seen some contractors go all in on say, a niche or whatever, and then things don't always pan out. But if we're trying to get to another level, and we've been frustrated by that, maybe we can work on some of these little things and they can translate into bigger-- 

Stephen Brown: Okay. I love that concept. And also from the perspective of the widget owner, you know that old expression, pigs get fat and the hogs get slaughtered. How much are you gonna stress the system and what will it bear? What will your organization put up with? I guess we'll talk about that too in the next podcast. 

Wade Carpenter: We will. But there was one big lesson I want put here that I'm just gonna reset all this. Because initially went in there to started talking about pricing.

What you said first was, okay, we're gonna reduce our prices to get more customers, right? And if we reduced our price by 10%, how many new [00:15:00] customers would we need to get to make the same level of profit? 

Stephen Brown: That's a great point. What's the answer? 

Wade Carpenter: There's some math here that I would really wanna show. But I want you to take a stab at it. We've got a 30% gross margin. Remember that if we raise our price, our cost hasn't changed per widget, right? Our 70% gross margin is going to drop if we reduce price by 10 percent. So given that we got the 300 customers, I want you to take a wild stab at how many customers we would have to gain to actually make the same level of profitability.

We'll put it in here in a second here.

Stephen Brown: I mean, first thing right off the bat is just looking at-- you're gonna decrease it 20%. So let's just use that number of increasing the number of customers by 20%. What would that do?

Wade Carpenter: So let's just say we decreased our price by 10%. That's all I'm looking for. If we didn't gain any customers, we [00:16:00] would be losing $49,000 as opposed to increase, that's a $360,000 swing. So we do need to pick up customers.

If we're looking at how to get back to where we were, and this is a big lesson for contractors, whether it's widgets or whatever. We think about okay, we're gonna make it up on volume. For the sake of time, if you want me to put the number in there, I mean, we would actually have to, any guess? 

Stephen Brown: I would say you'd have to increase the customers by 15%, because maybe there's some hidden costs for acquiring new customers.

Wade Carpenter: Even if everything stayed the same, then you would actually have to increase the number of customers by 50%. We're going from 300 to 450 customers, double our customers to make the exact same level of profitability at 30% gross margin. 50%. 

Stephen Brown: Why is that so high, Wade?

Wade Carpenter: Remember, we're only getting 30% profitability and [00:17:00] if we're reducing our price-- let me reset that. So if we are reducing our price by 10%, our gross margin is going to drop to 22% as opposed to 30%, because our costs of our widgets haven't changed. 

Stephen Brown: Oh, I see what you're saying. I see how net income's dropped by plugging that number in. You want increase the customers and make the same or more net income by decreasing prices and then creeping them back up later?

Wade Carpenter: The point is everybody thinks I'm gonna get more customers by decreasing my price, right? We're gonna relate this in part two to the contractors a little more. But the math here, you see why it's the wrong way.

But let's just take the opposite approach. Okay? So how many customers could we afford to actually lose if we raised our price by 10%? Everybody said we're gonna lose everybody, right?

Stephen Brown: Plug it in. What's the answer? You got me sitting on the edge of my seat.

Wade Carpenter: You don't wanna take [00:18:00] a stab at it?

Stephen Brown: So you're raising your price 10%. And how many customers can you afford to lose? I certainly wouldn't think it'd be 150 like it would cost to raise it. I would say you could afford to lose 30 customers. 

Wade Carpenter: 30 customers. Okay. So if we add 10%, and we did lose some customers, then we could actually afford to lose a quarter of our customers, 25%, I'll show you. So we could actually be working with fewer people. So we went from 300 customers to 225 and you see we're making the level of profit.

Stephen Brown: Wow, that's incredible. that from I'm fantasizing 25 that you lose are all jerks. People you don't like doing business with. 

Wade Carpenter: And I've seen contractors get in this, like, we gotta continue rolling through and pushing revenue through and taking it at whatever price we can get it, and it [00:19:00] becomes a spiral like this.

This is the main teaching moment I wanted to get to in this level. And again in episode two, I want to take this more to a contractor level, and relate this where you can see it. But I think that's a powerful lesson. There's two powerful lessons

Stephen Brown: I do too. What are we calling the second podcast coming right up?

Wade Carpenter: We're gonna be adapting Profit Improvement Potential to construction.

What did we learn here? We see the value of discounting or we see the value of increasing and you see how that sort of like spirals?

The other thing I would say is, if we are looking at little incremental, adjustments in our business, can we make those incremental adjustments? And in this case, we could increase the value of our business by $350,000 by making these small adjustments. So with that said, any takeaways? I know we're talking about widgets, but the idea is, I hope there, and again, this is stupid simple [00:20:00] math.

Stephen Brown: It is, and we've always talked in our podcast about the importance of not assuming that just increasing your revenues is gonna solve all your problems on your bottom line. We talked about that for years.

You have to always be analyzing not only what the marketplace does, not what other people are doing, but what you're gonna do. What you're gonna do to firm up your market share, and continue to do everything you're doing to a point where you can raise your prices 10% when you have to.

And you can strategically look at this. It's not a emotional decision or a decision made after you're already in trouble. It's pricing it right from the beginning.

Wade Carpenter: There's a lot of lessons other than just-- the prices are part of the decision, again, if our contractors are out there listening to this, I hope you got some aha moments. Again, stupid simple math, but maybe something you've never seen before. 

Speaker: before

Wade Carpenter: And I hope you'll come back for the next one because we are [00:21:00] gonna get into some more, I hate to call it stupid simple math, but a lot of times people have never thought about it from these dimensions. I really reserved this for my top level CFO clients, and I never really put this out to the world, but this is some powerful stuff. And I'm looking for, for contractors here, starting in 2026 when we're recording this.

I hope they take some lessons to heart. And if you know you have some questions reach out. We'd love some comments on this. We'd love for you to like, share, subscribe to both channels, not just the Contractor Success Forum and Profit First Construction. We do this every single week. We appreciate you and we will see you on the next show.

Thanks. 

[00:22:00]