Holly DeVito is the CEO and founder of Sum of All Numbers, a bookkeeping company that specializes in helping entrepreneurs increase their profits. Her burning question is how to change from a word-of-mouth business to a faster growing, marketing savvy company, all while no longer being the person doing face-to-face sales. Clate and Scott walk her through lead magnet ideas—and some equations befitting the name of her business—while discussing how much money is the right amount to spend to acquire new customers.
Mentioned in this Episode: Profit First by Mike Michalowicz
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Clate Mask: Welcome, everyone to this episode of the Small Business Success podcast. I'm Clate Mask.
Scott Martineau: I'm Scott Martineau, and we're cofounders of Infusionsoft. Today, we have a hot seat with Holly De Vito. Holly, how are you doing?
Holly De Vito: I'm doing well. How are you guys?
Scott Martineau: We're fantastic.
Clate Mask: Doing great.
Scott Martineau: Let's kick it off, why don't you tell [00:00:30] our listeners a little bit about your business?
Holly De Vito: I'm Holly De Vito, I'm the CEO and founder of Sum of All Numbers. We are a bookkeeping company that specializes in helping entrepreneurs increase their profits. We've been in business for about 12 years now, we're a virtual company, and we work with businesses all over the world.
Scott Martineau: Great.
Clate Mask: Okay, Sum of All Numbers. I like it.
Holly De Vito: Thanks.
Clate Mask: Very good. [00:01:00] What's the pressing issue you're dealing with right now that, hopefully, we can help you with, Holly?
Holly De Vito: We have grown the business to about one and a half million in revenue-
Clate Mask: Great. Congratulations. That's awesome.
Holly De Vito: Thank you. I've grown that almost all by myself as the CEO and founder. We're at about 400 clients, we're ranked within the top 100 accounting firms in the United States by Into It, so we've [00:01:30] grown it to a good size, but I want to grow it bigger. I want to take over the world, Pinky and the Brain style.
Clate Mask: Yeah, that's great. Yeah. Congratulations on your overnight success story.
Holly De Vito: Yes, exactly, overnight success, 10 years in the making.
Clate Mask: 10 years in the making, that's right.
Scott Martineau: You said you're all virtual, did you tell us how many team members you have?
Holly De Vito: I did not. I have 14 team members right now that all work from their homes.
Scott Martineau: Great.
Holly De Vito: [00:02:00] We've grown the company doing one-to-one networking, we don't do taxes, so we've done networking with CPAs, and that's our biggest referral source. Right now about 90% of our business comes from CPAs, tax advisors, lawyers that work with high tech businesses and small growing businesses. We work with businesses between about one million and five million in revenue.
But as we grow, [00:02:30] that's obviously a slower way to growth, and so we're really struggling with how do we market and grow on a faster scale than ... Right now we bring in anywhere from 5 to 10 new bookkeeping clients a month, which is quite a few for a bookkeeping company, but we want to be able to grow faster than that and more consistently, obviously. We're a monthly service company, but obviously during tax season things get a little bit busier [00:03:00] because it's at the front of people's minds, and so we don't know how to grow from that one-to-one networking and growing to marketing in a larger scale because, as I always say, if it's not done on a 10-key, I don't do it.
Scott Martineau: Nice. You get these referrals then, from CPAs, tax advisers, attorneys, what percentage of their clients, who need bookkeeping, do you think [00:03:30] they're sending to you? In other words, do you have pretty good saturation or do you think that maybe ... Okay.
Holly De Vito: We probably get, I would say, one or two, or 10%, of their clients at the most.
Scott Martineau: Okay. Yeah, just one quick thought would be if you ... Anytime you're doing marketing, you got to get in the mind of your perspective customer, in this case you're working through the CPAs, and tax advisers, and attorneys, [00:04:00] well, one thing you might think about would be what can you do to make it ... The reason they may only refer one or two, and maybe they have 20 clients who need bookkeeping services, is they don't really care abour your business. They, the CPAs and ... As much as we want them to care about our business, they don't, so we've got to do everything we can to make it as easy as possible.
One thought might be to say, and this is a little bit of a two-level thing here, but if you get really clear on resources that are really helpful [00:04:30] for business owners, and offer those resources as a value add that, say, an attorney or a CPA could give out.
For example, you create a guide that's the top five mistakes people make that cost them in their taxes each year, or something like that. Something like that as a resource that the CPA could give out to their clients. You essentially give them a lead generation magnet, a lead-gen magnet that they could then [00:05:00] give out on your behalf. It might be something to test, and maybe you test it with one or two of the people that have sent you clients in the past. Then, you need to think about maybe reminding them ... It will naturally become not on their mind, so what can you do to followup with those people to make sure that they're continuing to send you ... You've done the work to create the relationship, follow up a little bit to make sure that you're top of mind for them. That's one thought.
Clate Mask: I [00:05:30] think it's a great thought, I think using a lead-gen magnet to through your partners is a great way to do it, and it can really make you attractive to new partners who see you as bringing value as opposed to just asking them for referrals. I like Scott's suggestion.
This is the thought that's in my mind, you want to grow your business, and this might sound crazy, but are you sure you want to grow [00:06:00] it by more customers, or do you want to grow it by more value per customer? The reason I'm asking this is I think the natural thing is always to say, "Well, we want more customers." Of course, everybody wants more customers, but in your business, your business is very much about the relationship, there's a lot of one-on-one work, I imagine that's done, and you're a cost sensitive person as the Sum of All Numbers leader, so I my [00:06:30] thoughts are about, what are you doing to drive up the growth of the business with the existing client base that you have? Is that something that you feel like you're giving sufficient attention to as opposed to just getting more customers?
Holly De Vito: Yes, I will say that the hard part with ... because I don't actually work with our clients anymore, we have account managers that work with them, trying to get bookkeepers to upsell [00:07:00] clients on anything is very difficult. They don't want to do anything.
We've recently become profit-first professionals, and so ... Do you guys know the book Profit First?
Clate Mask: No, but I love it.
Holly De Vito: Put it on your reading list, Clate.
Clate Mask: Sounds great.
Holly De Vito: As a speed reader, you'll be able to read it in two hours.
Clate Mask: That's getting right at the point I'm talking about, it sounds like you're already focused on that, and I'm sharing this also for the benefit of our listeners, you can grow [00:07:30] your business by adding more customers, but you also grow it by adding more sales per customer, more products, more services, but more sales per customer. It does require upsell. It can also be done with raising your prices, it can also be done by attaching additional services at the point of engagement with the client or the customer, bundling things together.
I'm glad you're thinking of it that way, I'm glad you're thinking profit first, if you have the challenge, [00:08:00] or any of our listers have the challenge, of the upsell problem where people are averse to it, maybe it's actually a matter of bundling or doing multiple things, or raising the price from the beginning of the engagement so that you don't get into that problem. Okay, so lets-
Scott Martineau: Another thought might be, could you create some type of follow-up and offer ... That instead of your bookkeeper having to actually have the conversation maybe they could at least identify likely candidates [00:08:30] and then flag them for follow-up, either you or ... Maybe not you personally, but somebody else who's more prone to sell?
Holly De Vito: Yeah, that's what we're doing so far. Again, [inaudible 00:08:43] one-to-one conversation, so that's the hard part that I'm having as a service business is because I don't have a software or a product that we sell to the masses, is how do we grow without it being a one-to-one conversation? [00:09:00] I don't know if that is a solution to that.
Clate Mask: There are solutions.
Scott Martineau: Let's talk a little bit about numbers, so me ask you what is the sum of all the numbers? No, what's your average customer value?
Holly De Vito: Right now it's about $850 a month.
Scott Martineau: Okay. What would you say the total lifetime value of a customer is?
Holly De Vito: I don't know. I don't have great metrics [00:09:30] to measure that because clients stay with us ... We have some clients that have been with us for 12 years. Clients stay with us long term, so they're usually here at least a year.
Scott Martineau: Great.
Clate Mask: I was going the same place you're going, Scott, because when you asked the question, I don't know if we can solve that problem of delivering the service, and it's very one-to-one, how do you get [00:10:00] efficiency and scale, and growth out of that kind of service? There's absolutely things that you can do, but let me just put a quick plug-in for tracking your lifetime value, it's going to be an estimate because you're not sure exactly how long customers stay with you on average, but you can begin to approximate it, and if you'll just track what your customer lifetime value is ... The first thing is to see what [00:10:30] your customer value is monthly and then estimate the number of months on average a customer is with you. By tracking those two things, it will just get you in a place where you're measuring the customer value and your profit-first mentality of your people will begin to recognize that it's not just about revenue, it's how long do we keep that customer? How much are they paying us? That tracking of that measure, just tracking it, will help that number improve.
We [00:11:00] say all the time around here, where performance is measured, performance improves, and then when performance is measured publicly, it improves dramatically. If you can get that measured and get that reported so people are seeing it, that will help a bunch.
But let's talk specifically about what you can do to improve that. Did you want to go into that for a sec, Scott?
Scott Martineau: Well, one way to estimate, by the way, your lifetime value ... Because, I think one of the things you're saying is, "I've got people in recurring. I don't know how long they're [00:11:30] going to last because some of them been with us for a really long time." There's a really short, and this isn't perfect math, but if you take the total recurring revenue ... Let me make sure I get this right, divide that by your average turn rate, the rate at which your customers are leaving you, so the total number of customers you leave ... You've got 400 customers, if you had four customers leave you this month that would be a 1% turn rate. If you do that math, that'll give you an [00:12:00] average lifetime-
Clate Mask: Your customers are with you on [crosstalk 00:12:03] 100 months because you think about if I had 400 customers and I lose four ... I know this is a funny way for people to think about it, but it really is powerful-
Holly De Vito: Do you see the confusion in my face?
Clate Mask: I do, I do. If you've got 400 customers ... By the way, this is really powerful for anybody who has a subscription business to get an estimate of what your lifetime value is. You take that 400 customers, if you're losing four in a month, you're losing 1%. [00:12:30] What that means is if you had 400 customers and you lost 1% every month, by the end of 100 months, they would all be gone. On average, your customers over time ... That means your average is that a customer is with you 100 months.
Now, you know that you're going to have some customers with you one month, three months, 10 months, and others are going to be with you for the next 25 years, so it does come out to be an average. You're just going to have to take our word, and every software company's word [00:13:00] that does this and measures this turn rate religiously and focuses on it because it's all about that customer lifetime value, that ... What Scott has described-
Holly De Vito: Yeah, I've never heard that before. I like that.
Clate Mask: Yeah. It's a really powerful way for you to get an average. Then, you can say, "Well, if they're worth $850 a month, they're going to be with us 100 months, that tells me they're $85,000 is what a customer is worth over the lifetime."
Scott Martineau: I don't know if that's [inaudible 00:13:26]. Yeah.
Holly De Vito: [00:13:30] I look for a 10% turn rate a year almost, and the fact that about every year I look at our price and I look at our customers, and I fire at the bottom 10%.
Clate Mask: You're doing that proactively. Some are reactively leaving, I'm guessing. But however you do it, look at the attrition, the cancellations of your customers over time, and you might find that it's 2% or 2 1/2% or 1%, whatever it is. What Scott just shared with you is a really powerful way to get clear on your lifetime [00:14:00] value.
Scott Martineau: That was all just a step toward ... The reason that we do that is because when you go start thinking about moving beyond the relationships and networking, to actually doing a little more aggressive lead generation, you want to be clear what you're willing to spend. A lot of times people are really afraid to spend money at all-
Clate Mask: To acquire customers.
Scott Martineau: To acquire a customer, and I think you got to be clear. For example, let's say that you did all the math and you determined that your average customer value was $ [00:14:30] 12,000 ... I don't know, maybe that feels a little bit low, and then you would evaluate, "Okay, what's our net profit on that?" Then, what's the acquisition cost we're willing to go spend in order to acquire these customers? Obviously, you then have cash questions like, how many can we try to go but? But when you think about marketing, that's one of the things you're going to do is you're making investments to go essentially buy customers, so getting clear on what you can [00:15:00] afford to spend and making sure that you're not underspending or overspending is really important.
Holly De Vito: Is there a number that a business should be spending?
Clate Mask: That's a great question. We get that all the time. I'd say it depends on how fast you're trying to grow and how much cash you have to invest. If your sales and marketing combined, so all of the sales expenses, all the marketing expenses combined, if that's somewhere in the range of 20% to 30%, you're in the right ballpark. [00:15:30] If you're-
Holly De Vito: Of your revenue or gross profit?
Clate Mask: Of the-
Scott Martineau: The life, you're talking about the lifetime value.
Clate Mask: You can look at the lifetime value, yeah. Now, if you've got it down lower than that, you're probably not spending enough to grow at the rate that you could. If it's higher than that, you probably got a business that's going to be a bit unhealthy-
Scott Martineau: Sorry, did ask of the gross or the net? Is that what she said?
Holly De Vito: I said of the gross profit or the revenue.
Scott Martineau: I think that's really up [00:16:00] to you, but I would say probably your gross profit.
Clate Mask: I actually get it two ways if you've got a subscription business, the one way is to look at revenue as a ... Sorry, the customer acquisition costs or your sales and marketing costs combined as a percentage of total expenses. The other way to look at it is your sales and marketing costs, sometimes referred to as the customer acquisition costs, the CAC, as a ratio to the lifetime value. If your lifetime value is $12,000 and [00:16:30] your customer acquisition cost is $3,000, then you've got a four to one ratio there. That's considered a good solid ratio. If you can do better than that, great. These start to get a little slippery when people don't fully include all of the cost of sales and marketing, and they're not being honest. Since I'm talking to the leader of the Sum of All Numbers, I feel liberty to share a little bit more of the detail of it.
But a simple way is to look at sales and marketing as a percentage of total expenses. [00:17:00] You generally don't want to see that number growing over 30%, unless you're willing to go negative for a period of time and be unprofitable. Now, why in the world would we want to be unprofitable when we just talked about profit first? Well, if you're going to acquire a customer who's going to pay you $850 a month, it might take many months before you actually recover the expense to acquire the customer, but if that customer is going to stay with [00:17:30] you for a long, long time, that's a worthwhile investment. That's why you might be willing to spend more to acquire a customer. It's the reason why sometimes software companies aren't profitable in a season because they're investing more than 30% in their sales and marketing to grow faster. That's a number though, that if you get higher than 30%, you better be confident. If you get higher than 30% of your sales and marketing costs as a percentage of total expenses, you better be [00:18:00] confident that the lifetime value, the recurring revenue coming from that customer is worthwhile. In other words, it's paying off in future periods.
Scott Martineau: Maybe for the last numbers [inaudible 00:18:13], let's just take a little step back and [crosstalk 00:18:16] we went a little deeper in that than I thought we would. Be clear on how much your customers are worth to you, decide how much you're willing to spend to acquire a customer.
I just want to make sure we point out a couple of other things I hinted at earlier, but then the general [00:18:30] approach that you're going to use as you're going to use education to attract the prospective customers by understanding the problems that they're facing and offering to them educational information in exchange for their contact information, i.e., create a lead right in that exchange is really important. You got to make sure you're delivering really valuable information.
The reason it's really important we know what we're willing to spend is because as we're trying different things, I wouldn't go say ... Even if you said, "Hey, I'm willing to spend $1000 [00:19:00] to acquire a new customer," I don't know if that's even close in your ballpark, but if I am, I'm not going to recommend that you go sign up for a $40,000 test. I would be testing in small increments. But you need to be able to have the tracking in place to say, "Okay, I have an idea about a strategy, I want to go try it," and you're going to be tracking things like, "All right, what was the cost to generate a lead and how many of those converted to customers? What was our total acquisition cost in terms of the marketing spend?" [00:19:30] Then, you're comparing. You start small, do small little tests, small little tests, and as you start to see something get traction, then you can increase the investment there. Just couple thoughts.
I have one more, maybe ... It's totally down in the weeds as a tactical suggestion, which I'll share with you, but any comments or questions that you want to bring up?
Holly De Vito: Not right now.
Scott Martineau: Okay. We've bored you to tears. The sum of all fears.
Holly De Vito: I like numbers, I can [00:20:00] do this part. It's the copyrighting and the other stuff I don't understand.
Scott Martineau: Here's what I'm imagining is going on in the case where somebody is considering hiring a bookkeeper, and I don't know. This is something that would be good for you to understand by looking at your current customers and seeing what would happen before they came to us. My guess is they probably either just lost their bookkeeper or they're contemplating whether they want to hire, because I'm the business owner and I'm tired of doing it myself, maybe you're working with slightly larger ... But [00:20:30] I would imagine that your service [crosstalk 00:20:34] What was that?
Holly De Vito: Or their wife does.
Scott Martineau: Yeah, she's like, "Forget you. I'm not doing this another day." I think one thing you might consider is test focusing on where people go to find bookkeepers or how they search to go ... When I'm going to search to find a bookkeeper or consider whether I should hire a bookkeeper, that's probably an area that I would focus on educating. That's a big question, is it time for me to hire a bookkeeper? [00:21:00] What's the best way to hire a bookkeeper? Where to hire bookkeepers? Maybe think from a Facebook ad standpoint, or Google ad words, this seems like that might be an area, and you'll discover more as you talk with your clients to understand what was going on for them, but that's just a thought. That's a version of entering into your prospect's mind to understand what's going on for them and then offering up some education.
Clate Mask: Thanks, Scott. I'll just summarize a couple of my thoughts for you. We talked about customer [00:21:30] lifetime value and tracking how much a customer is worth, we do that really for two reasons, one, so that you can measure and you can gradually increase what that customer is worth, and two, so you can understand what to invest in the acquisition of that customer.
What I would share with you is two things, one, and I talked with this, but instead of trying to upsell the customer along the way, try to increase what it is that you're offering to the customer from the beginning [00:22:00] so that you can drive up that $850 average. The second thing that we haven't talked about is when you know what the customer is worth, the referral fee that you can pay ... That's the customer acquisition expense. We've talked about it purely from the standpoint of more CPAs referring you, and Scott said ... I don't know if you're allowed to do that, maybe you are, maybe you're not, what I'm thinking though is more about your customers and getting [00:22:30] them to refer other businesses, other customers. I think there, you can be very liberal, very generous, once you understand how much a customer is worth to do something that pays for them to refer and maybe pays for the client to refer.
We found many times, and I think this is [inaudible 00:22:46], a lot of small businesses that people don't really like to be incentivized and get something to send their friend to you. Some do, but many more like it when they get incentivized to send you a client and their friend that they're referring [00:23:00] to you also gets a benefit. I would encourage you, once you understand your lifetime value and what you can afford to pay in your customer acquisition cost, to get very generous in what you create as a referral program that's specially made for your clientele that you want to send more key customers to you.
Scott Martineau: Months free for you and your friend.
Holly De Vito: I still remember that Infusionsoft sent both me and the person that referred me to you, $500 [00:23:30] Apple gift card. That was 100 years ago.
Clate Mask: Awesome. Very cool. That's the concept, doing something both in ... Once you understand what the customer is worth, you can be very generous there. I would encourage you to be more generous than you think as a starter to really grow.
Scott Martineau: Holly, we're out of time, but you've been just a pleasant ... Just you've been fantastic. Frankie, you're an amazing individual. He can't hear us now but-
Holly De Vito: I threw him out of the office. He's not even here anymore.
Scott Martineau: All right. Well, if [00:24:00] we end up cutting that out, people will not know what that meant, but that's okay. Yes, thank you, Holly. Good luck to you as you grow your business. Congratulations so far.
Holly De Vito: Thank you.
Scott Martineau: All right, we're going to call this a wrap for this episode of the Small Business Success podcast.
Clate Mask: Thanks for listening. Don't forget to rate us, write a review, and subscribe to the podcast on iTunes. If you're looking for more ways to grow your business, check out our knowledge center at learn.infusionsoft.com. That's learn.infusionsoft.com.