It continues to shock. The sheer amount of business owners that use the ‘shoulder check’ as their primary, if not only, means of working out the pricing of their product or service. Many can’t believe their eyes when looking at the financials every month (or in some tragic cases – every year) and the bottom line continues to look bleak even though they are relatively ‘busy’.
Checking around a bit to see where similar companies are with their prices is OK – even encouraged, but for knowledge and awareness only – not to force you into a price war panic where you’re focused on ‘winning’ the sale with no regard or realization for your own profits.
Here, (shared with his permission) is an account of how a business owner of 10+ years excitingly closed a $10,000 sale and ended up with $192 in profits:
- a 1.92% net margin
- quoted and prepared estimate based upon his perception of what others are charging for similar type jobs
- sold job for $10,000
- paid two techs $29/hr for 14 hrs each
- paid 3.5 hrs of indirect office support at $18/hr
- paid $5000 for product (‘sweet 100% mark-up!’)
- paid $32.50 in equipment amortization
- paid salesperson 10% commission, or $1000
- has a company average of 29% fixed expenses as a percentage of revenue, so $2900
This fellow had never truly understood the difference between ‘mark-up’ and ‘margin’ and would keep telling me his gross margin was 100% , to which I’d keep saying ‘no – you mean your mark-up is 100%’, and then he’d come back with ‘whatever – same thing’! … I can assure you he is no longer saying ‘whatever’ and is determined to never allow the above example to occur again. Surely in this example you might be saying that this is actually a decent gross profit margin for certain industries, and that it is the fat 29% overheads that are the problem … yet the true point here, however, is that he could not comprehend where the revenue was going, as he was so confident in his marking things up.
Whether you need to get better at pricing your products and services, OR you have your pricing dialed in tight but you’re the only one in your company who can prepare quotes and estimates – strongly consider working with a simple a pricing tool system before sending estimates or quoting on services. Set it up with your company’s target gross and net margins so you can see exactly what you’ll be making BEFORE you announce your price.
More sales doesn’t always mean more money. When your pricing system is your own perception of ‘what we need to charge to win the job’, you’re on the path to ‘winning some work’ but ‘losing the game’.