ProfitCoach’s data is incredibly useful, but the goal isn’t to win every metric. It’s to choose the benchmarks that match the business you actually want to build.
I’m back from the best NARPM Broker/Owner Conference that we’ve ever had, or at least for as long as I’ve been going over the past decade. If you missed it, you really missed out. Huge credit to Brad Randall and his committee for what they put together. I’d tell NARPM that they need to force Brad to chair the committee every year, but he’d probably kill me.
So, for the next few weeks, you’re going to get a lot of content from me that is centered around things I heard at the conference. We’re starting off this week with a discussion on benchmarks. I was watching a presentation by Brad Johnson of ProfitCoach, and he said something that I’ve long believed: you shouldn’t be trying to max out every benchmark in their Benchmarking Guide.
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When I used to work with consulting clients, one of the first things we would usually talk about is this Benchmarking Guide, because it helps to guide you toward fixing your most obvious deficiencies in your business in a very tangible way. But it’s also a bit overwhelming for the average property manager. You get this huge PDF document with dozens of different KPIs, each with its own benchmark, and you seem to be off on nearly ALL of them. You feel like you’re running a terrible business, when the reality is a little bit different. So let’s talk about that.
The Benchmarking Problem
The NARPM Benchmarking Guide, available below — hopefully, NARPM doesn’t care that I’m sharing it, because it’s one of the best marketing tools they have ever had for being a NARPM member — developed with the help of ProfitCoach, lays out metrics for your PM company in six different “games”: Profit, Labor, Pricing, Growth, Experience, and Expense Management. Just reading all of that, you probably feel overwhelmed, and you haven’t even read the report yet.
The average PM company owner starts to dig in and gets the impression that they’re so far behind, and they need to rush to catch up to “win” all of these “games.” To be clear, the way this is laid out is very helpful, because it helps to bring clarity to the different levers you have to increase the efficiency and profitability of your business. But it’s also a LOT to take in all at once, and even more to accomplish if you’re trying to do it all at once.
But here’s the thing: you aren’t supposed to win every game all at once. Hell, you aren’t even supposed to win every game. We’re currently in baseball season, so let’s use a sports metaphor. In baseball, the best team in history as far as win percentage was the Chicago Cubs, way back at the beginning of the 20th century, when they had a 76% winning percentage. In the modern era, the Dodgers hold the record with a win percentage of just over 71% in 2020. Right now, my hometown Braves are leading the entire league, but they only have a 68% win percentage as of this writing. I write these a few days ahead of time, so don’t yell at me if it’s changed by the time this is released. So, looking at all these numbers together, we can see that the best of the best sit somewhere around 70%. So why do we think in business that we need to be at 100% to be in the lead? That expectation isn’t realistic, and it’s why you feel overwhelmed.
Why Benchmarks Matter
Back in the “dark days” when I was getting started in this business, we were all just engaging in a bunch of trial-and-error. We had conferences where we all got together and shared what we thought were best practices, yes, but in reality, these were just educated guesses. We had absolutely no data to back up anything. ProfitCoach didn’t even exist yet, and a benchmarking report of any kind wasn’t even a gleam in anyone’s eye. All of this was just “WAGs” — Wild Ass Guesses.
The advent of the benchmarking report changed all of that. Suddenly, we had real data that was verified by an actual accounting firm from real property management companies. This was a complete game changer. Instead of making our best guess at what worked and what our numbers should be, we finally had real numbers to shoot for.
Without these benchmarks, we would have no way of knowing exactly what a good profit margin is for a PM company, or how many employees it should take to manage a given number of units, etc. All of these numbers vary heavily by industry. For example, a really solid retail company dreams of a 5% profit margin. Yeah, don’t go into retail. On the other hand, the banking industry would feel depressed by a 15% profit margin. Wells Fargo is currently at 25%. If you’re running a PM company and you’re looking at this incredibly wide spread with other industries, you’re wondering where exactly we should fit into the mix. Benchmarks bring clarity to that.
However, benchmarks are not gospel. Like everything else, context matters. If you’re running a boutique, high-touch PM company, you shouldn’t be shooting for the same margin as a big corporate PM company. If you’re a solo operator managing 100 units, you’ll be doing yourself a disservice to only expect the profit margin that the 800-door PM company has. So you can’t just know the benchmarks, you have to understand how to apply them and where you fit in.
There Is No Perfect Company
Let’s talk about where these benchmark numbers come from. The way ProfitCoach establishes the benchmarks is by looking at their dataset and finding the top 25% of PM companies in each metric. That bolded part is important. This isn’t the top 25% PM companies overall. It’s per metric/benchmark. What that means is that you are looking at a group of companies in the top 25% that is frequently different for each metric. So a company can be top 10% in one metric, while being in the bottom 40% in another.
This is very important to understand when you’re working on improving your business. I’m not going to tell you that it’s impossible to be the top 25% most profitable company while also having the top 25% in lowest churn rate, but I am going to tell you that it’s highly improbable. Most likely, putting yourself at the very top of that metric with a 5% churn rate is going to require you to give up some revenue to keep cheaper clients. That’s just one example in which one benchmark can be incompatible with another, but there are many such examples.
A vendor quotes $800 to fix an HVAC unit. Is that fair? Most operators genuinely don’t know.
Should I repair or replace? How urgent is this? What does waiting cost? These decisions get made every day without market context, without benchmarks, and without predictive cost data at the exact moment it’s needed most. And investors notice.
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Values also come into play here. Look at the DLER metric, for example: Direct Labor Efficiency Ratio. This metric, in plain terms, shows how much revenue you receive for each dollar spent on customer-facing labor. It is basically impossible to reach the benchmark number in this metric while using entirely US-based labor. It’s simply too expensive. But some companies consider hiring US-based labor to be a core value of their business. To them, hiring only Americans is a moral thing. Understand that I’m not defending that notion, I’m just stating a fact of what some PMs feel. If that’s your core value, then you are wasting your time trying to chase that DLER benchmark. You’re just never going to get there. You have decided to make a trade-off. You are accepting lower labor efficiency in order to hold on to your core values. You need to understand that when using these benchmarks.
Benchmark Tug of War
I’d like to break this down into a few key areas where specific benchmarks pull against each other, because I think a lot of PMs struggle with understanding how these different benchmarks interact with each other.
Growth vs. Profitability
It’s true, ProfitCoach has shown that it is theoretically possible to grow fast and also have strong profitability. However, this is not typical. While some companies have done it, this is also highly dependent upon circumstances. I have referenced in past articles Grace Property Management, Marc Cunningham’s company, recently acquired by Rhome. The last time I asked him, Marc was spending only 1% of his budget on marketing. In other words, he essentially doesn’t have a marketing budget. Grace has been around for so long now and has such a strong reputation in Denver that they don’t need to market. The leads just come in organically. But unless you also have a company that’s been around for half a century, this isn’t a good guidepost for you. You won’t be able to add hundreds of doors without spending money on sales and marketing.
Typically, to grow fast, you’re going to have to spend money. That means sacrificing profitability, at least for a period of time. That doesn’t mean that you have to lose money. In fact, you shouldn’t lose money. But if you are trying to hit the benchmark on profitability while also trying to add 30 doors a month, you’re likely to be disappointed in one of those results.
RPU vs. Churn
I am never going to reach the benchmark number for churn. This is a reality I have just learned to accept, because I care too much about my Average Revenue Per Unit, or ARPU. As far as I know, there is only one PM company in America that brings in higher RPU than my company, and that’s Tal and Aaron Kramer’s company in my city. I’ve also had to accept that I’m never going to reach their number, because they only manage Class A properties, and I like managing Class C. Again, trade-offs.
The reason that these two are connected is that many owners and tenants are simply price-sensitive. In order to bring in over $500/mo per door, especially while one-third of my portfolio is Class C properties, I have to charge a lot of ancillary fees. While we can keep churn down by being really good at what we do and producing great results for our clients, we can’t keep churn down to the absolute lowest possible value that these top performers in that category produce. With lots of ancillary fees, some owners are going to churn out because they hear of a cheaper PM down the street and want to gamble on them. And some tenants are going to churn because they don’t want to pay $150/mo for that pit bull they have; when tenants churn, there is a higher risk of owner churn. That’s just a reality. So I’ve just had to accept that if I want this high RPU number, I’m never going to be the best in the industry with churn. That doesn’t mean that we don’t care about churn. We do what we can to keep it down, and we’re currently sitting at only 11%, but it has been one hell of a slog to get there. We had been over 20% for years, and only by an intense focus on churn improvements have we managed to get it lower. But we are never going to beat the benchmark number of 9%. Just getting to 11% required Herculean effort, and frankly, I doubt we’ll be able to maintain that number long-term. I’m happy just to keep it below the average of 20%. This is a trade-off I have consciously made.
Labor Efficiency vs. Service Model
You can’t be all things to all people. This isn’t just true in PM, it’s true in every industry. If you want to offer Ritz-Carlton-level service, you can’t do so while staffing your hotel at Holiday Inn Express-level staffing. These are just mutually exclusive goals. High-touch service requires lower labor efficiency by its very nature.
Now, that said, you don’t necessarily have to sacrifice profitability in order to offer that top-notch service. You can pair that service level with higher prices in order to maintain profitability. This is what Ritz-Carlton does. When I stay in Vegas, I frequently stay at the Ritz. When the Strip is dead and nothing is going on in the city, I might be able to book their most basic room for $500/nt. Meanwhile, the Vdara right next door is offering me free rooms. Now, the Vdara is still a great property with solid service. But they damned sure aren’t the Ritz! Marriott, which owns Ritz-Carlton, has made this its premier brand of hotels after acquiring it, and the service level is absolutely unparalleled. So if you want that level of service, you’re gonna have to pay up for it. Big time. This is how Marriott makes it worthwhile to own this premium brand. It has sacrificed labor efficiency in order to boost service levels, while simultaneously charging extremely premium prices in order to maintain profitability. All these things work in concert, pushing and pulling against each other. Smart business is all about finding the right balance of all the available factors to produce the results that you’re looking for.
Unit Acquisition Cost vs. Growth
A PM company that is absolutely obsessed with keeping its UAC, or Unit Acquisition Cost, low would never be able to enter a new market. The simple reality is that opening a new market requires you to accept a much higher acquisition cost for a period of time, because it takes a while to build a reputation and get organic leads coming in when you’re new to a market. You’re going to have to pay a BDM to build up that market while she’s not getting organic leads, which means the growth is likely to be slower. You’re likely going to have to spend a lot of money on paid lead sources unless your BDM just happens to be the best cold caller in history. It’s just going to be expensive.
Again, this is a trade-off you make. When you’ve maxed out your growth potential in your current market and you’re looking for new markets to branch into, you’re going to have to accept that it requires you to spend a lot of money, which means the cost to acquire each new unit is going to be much higher than you’re used to paying. Yes, Grace Property Management can add 100 doors this year without much effort in Denver because it has that reputation and brand recognition. But if it wants to open a new market here in Atlanta, that 1% marketing spend is going to be a thing of the past. If you are used to spending only $500 per new door in your established market, you’re likely going to have to triple that number when opening a new market. That’s okay. It can pay off in the long run. But you need to understand this going in, otherwise, you’re going to be very frustrated that you’re not hitting the benchmark.
The Real Question: What Business Are You Trying to Build?
You shouldn’t be asking yourself, “How can I hit all of these benchmarks?” The real question is, “What benchmarks should I focus on for the kind of business I want to build?”
And there is no right or wrong answer about what type of business to build. You can be successful with lots of different kinds of businesses. There’s room in the world for both McDonald’s and Chipotle. But Chipotle would be a miserable failure if it were trying to optimize for the same metrics as McDonald’s.
Do you take personal pride in a high-touch boutique experience for your clients and residents? Then you’re never going to be hitting that benchmark DLER number. Are you like me, viewing that ARPU metric as a score you’re trying to run up? Then you’d best forget about hitting the churn benchmark. Do you want to grow as fast as possible so you can exit for the highest raw dollar amount five years down the road? Then trying to maximize your ARPU and PPU, or Profit Per Unit, is the wrong goal.
Everything in life is a trade-off. Business is no different. Before you can determine what benchmarks you need to focus on, you need to decide what kind of business you’re trying to build. Only then can you determine which benchmarks are actually relevant to you. That doesn’t mean that you ignore the other benchmarks. They are still guideposts for you to see if you’re completely outside of the realm of reasonableness, but they are no longer goals for you to hit.
What I recommend is a two-part project. First, you sit down and determine what your end goal is. This will tell you the kind of business you want to build. If you are trying to exit, that’s a different goal than if you’re trying to build a family business that will still be in your family for generations. After you determine the ultimate goal, the next thing to figure out is which benchmarks are most relevant for that goal. We’ve all heard of a “tech stack.” I’m telling you to build a custom “benchmark stack.” Each company should have a different benchmark stack. Again, that doesn’t mean you don’t track the others outside your stack, but you don’t focus on them. You don’t allow them to negatively impact your morale. Because they aren’t relevant to your ultimate goal. When you meet with your team, those aren’t the numbers you’re talking about. You focus on your own benchmark stack and make that your north star.
Final Thoughts
We all attend these conferences and come away feeling like we’re falling short in certain areas. In many cases, this is an illusion. We only feel like we’re falling short because we’re comparing ourselves to businesses that aren’t the kind of businesses that we want to run. Setting aside the benchmarks for a moment, let’s look at another new report that was presented at Broker/Owner: the PM Trends Report that Peter Lohmann and Jordan Muela put together. If you read that report, you’ll see that lots of owners want phone calls. If I want to minimize the churn at my business to hit the benchmark churn number, this report is telling me that I need to start making more phone calls to owners.
But the thing is, that’s not the kind of business that I want to own. I view phone calls as antiquated nonsense. I’m not interested in the kind of owner who wants a phone call. I was recently on a webinar where this number was discussed, and my friend Bob Abbott was in the chat saying, “I only want the clients who are okay with talking to AI.” Bob gets it. He’s always gotten it. While everyone else was chasing benchmarks, Bob has always been the guy building the smaller company with the higher profit margins and the maximum efficiency. He doesn’t want to be on phone calls with owners. He wants to be skateboarding on his own halfpipe, which he built in his backyard, while his AI and RTMs talk to owners. He knows who he is and what he wants his business to be. And he doesn’t allow flashy benchmarks to distract him from his goals.
That’s the ultimate benchmark, folks: your own benchmark. The benchmark about what is going to make you personally satisfied in the business and lifestyle that you’ve built for yourself. Matt Whitaker over at Evernest always wanted to build a giant company. That was his goal and what was going to make him happy. He accomplished it. That’s fantastic! But I would be miserable leading Matt’s life, constantly talking to investors and trying to raise money to keep growing. That sounds like pure hell to me. But for him, that’s the life he wanted. He made it happen by focusing on the right things. You just need to figure out what is going to make you happy, and which benchmarks are going to get you there. It’s a different answer for every different reader of this publication.
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