Front Office: Am I charging enough?

Photo By Tima Miroshnichenko from Pexels

This question keeps popping up in conversations, in my head, at meetings or events, and not just regarding closet companies but many other small businesses. I have had this conversation at Chamber of Commerce meetings, homebuilder association meetings, vendor/supplier meetings, and, of course, at our Closet Expo.

I imagine all of us wrestle with this dilemma. We tend to bring emotion into the picture. We all have highs and lows; each of us feels confident at some point and riddled with doubts at another point! In this article, I will take the emotion out of the equation.

What anyone in business charges a customer is made up of just a few components:

  • Material Cost
  • Labor Cost
  • Overhead Cost (i.e., fuel, 
    insurance, or rent)
  • Profit=how much we want 
    to make

Add it all up, and that is the Selling Price!

But, the most important components, and the ones that most often cause this question to be asked, are “How much will people pay for what I provide?” and “How much am I willing to accept?”.

You must decide what your answers are to the “WHERE” questions! Where do you want to be in the marketplace? Where do you feel comfortable? Where will you have the greatest opportunity for success?

Think of the brands Ford vs. Rolls Royce. They both make cars, but the amount they charge is quite different. Is Rolls Royce charging enough? They have few competitors; their customers are not motivated by price and will usually buy. On the other hand, if Ford charges the wrong amount, they will lose sales to a different car manufacturer if it is too high, and they will lose money if it is too low.

How do you decide what is right for you?

The cost of material and labor will vary depending on the job. Gross profit is left over after you pay for the materials and labor.

  • $1,000 Selling Price
  • $400    40% Material Cost
  • $150    15% Labor
  • $450    45% Gross Profit

The cost of your overhead will remain pretty consistent whether you charge or sell enough or not.

If you remember from my previous article and/or seminar “Magic #’s,” the goal is to maintain a consistent gross profit. In the example above, the $450 gross profit is what you have left to pay all of your bills. Your decision is where you want to be. You can have a lower gross profit on each job, but you will need more sales/jobs to cover your overhead and profit. Or, you can have a high gross profit with fewer sales/jobs but lose more sales because of price.

We all know people or companies who decide who/where they want to be. For me, I prefer to avoid extremes. I do not want to be the cheapest or the most expensive. I believe in the 80%-20% rule, and I feel like the best place to be for me is with the 80% of the potential customers right in the middle. Not the highest 10% nor the lowest 10%, just in the middle.

The percentages vary slightly, but generally, the percentages for material and labor are consistent from job to job. With this said, the problem most people have in business is that they incur too much overhead expense and find they cannot sell enough jobs to get enough gross profit to pay for those expenses.

For example, if you buy a new truck with a monthly payment that is too high or sign a lease for a building or showroom that is too high, and your sales do not keep up, you quickly get into trouble. Those decisions are long-lasting, so you need to know the answers to your WHERE questions before making those long-term decisions. 

To determine your selling price and feel good about it, all you need to do is add the material and your expected labor cost and divide this by that percentage. So, in the example above, adding the material cost of 40% and the Labor Cost of 15%, these two total 55%.

  • $550 divided by 55% equals $1,000

Now you say, hey, you started with a selling price of $1,000 to get the cost of 55%. That is true. It would help if you started somewhere and then adjusted. I have seen gross profit as low as 22% and as high as 80%. Start somewhere between 45% as the lowest and up to 60%, and keep track of your success rate each month.

If your success rate/closing rate is too low, it might be because your price is too high for the market. Are you including too many “upgraded” features, like soft close drawer glides, and your competitor is not? If your success rate is too high, consider raising your price slightly. Then, see how your gross profit is for the next month.

Your goal should be to have your gross profit in the 50% range and your net profit in the 10% range. 

Of course, everyone and every company is different. I share this only as a guideline to begin your search for where your numbers should be.

To provide some context, Walmart has a net profit of only 2.2%, but that is $13 billion in net profit! Amazon has a net profit of 7%, with $33 billion in net profit, and Apple has a net profit of 25%, which equals $94 billion.

Keep track of your monthly numbers, and review, modify, improve, and change until you get things the way you like based on your answers to your WHERE questions! 

In my next issue, I will follow up on this theme and share thoughts on “How Much Business I Lose.”

 

Have something to say? Share your thoughts with us in the comments below.

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About the author
Tim Coleman

Tim Coleman is division manager of SCE Unlimited Chicago, a div. of IBP. Coleman founded his closet organization company in 1988 and ran it successfully for nearly 30 years. In October 2020, he took the helm at SCE Unlimited, which offers wire and wood organization systems, hardware and accessories.