Key Metrics: Correlations, Causations, and Necessity Part 3

Corey Adams

I don’t often write multi-part articles, but this one took a bit of explaining. I promise this is the final part of this one. If you have read the last two articles, we have been discussing what happens when you grow based on quality and margins. If you haven’t seen them, here is a quick synopsis.

As a company grows, their quality produced becomes less. It is a fact. Great companies keep their quality above acceptable, while others lose control and find themselves on the wrong end of the call-back wars. In addition, in order to grow a company, we must lower margins. It is how bigger projects work. 

The final component that I like to think about when deciding which way a company should go is specialization. How specialized you are within your own trade can dictate the other two metrics. Highly specialized companies tend to make a higher margin, but less volume. A low specialized company tends to create high volume, but less quality control. These three metrics play off each other like a symphony of reality within a business.

Specialization has a few factors to consider as well. Your market can determine your level of ability to specialize. In large markets, there are companies that only replace water heaters, that is it. They thrive as they go to source for a water heater repair or replacement. In a rural area, that doesn’t work so well. I live in a rural area, and we still offer quite a few services but have specialized in other ways. We now focus on remodeling and tenant upfit for our commercial services. This allows us to fine-tune our numbers and create lasting relationships with GCs. Our repeat business is high.

Specialization can also be affected by your growth desire. If you want the sky as your limit, you will need to manage your offerings as such. It really isn’t rocket science, but it is a factor in how you want your company structured and how you want your company to grow.

In order to bring this all together I have the following equations to help you understand.

High Quality = Lower Gross Sales = Higher Margins = High Specialization

Lower Quality = Higher Gross Sales = Lower Margins = Low Specialization

To use this as a framework for your business, you only have to do one thing: figure out what metric is most important to you, then work the equation. Trying to get High margins with low quality does not work. Just like low specialization does not equal high quality. 

Ask yourself, “what do I want out of my company?” Do I want tons of gross sales? Higher margins? Etc. The answer will lead you to the right equation and can direct your growth efforts in the most efficient way possible. 

I will tell you that either equation works. There are thousands of companies on each side of this, and none of them are wrong. Where companies fail is when they try to fight the natural laws of business. 

There is some gray area, and that is actually where I like to have our company. I look at this sort of like a supply and demand chart and find where all items intersect, that is the box I live in. I want to produce on the upper end of quality and margin, but know that I need a few service offerings, my gross sales will always have a limit. 

The best part about living in this box, or the intersection of all metrics, is that if need be, we can change our metrics at will. If we need more work, we can lower margins without a huge sacrifice. If we need to clean up our backlog, we can be more selective on the jobs we bid and at higher margins. It is truly a year-by-year balancing act. I am aware that it doesn’t offer me exponential growth, but it does provide me with a company I can accurately predict profitability, and the flexibility to change on the fly. It is my happy place. 

Every company has different goals. Who am I to tell you what your goal should be? I know plenty of business owners that are happy doing $1 million gross at 30% net margins. I know just as many that are shooting for the stars and doing over $50 million gross a year. 

The framework laid out in the last three months is the guide I use to help my company meet my goals, and what anyone can use to meet theirs.