10. What’s a good margin for your business?
How to measure your margins
Things you can do to maximise your margins
How discounts and reduced prices impact
your margins and your profits
2/04/2012 10
13. Maximise current profits
Maximise current revenue
Maximise quantity of units sold
Maximise profit margin
Quality leadership
Partial cost recovery
Survival
Status quo
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15. Price is based on the production cost plus the
profit margin
Critical starting point for many established
SMEs
Need to get your cost analysis right
Eg: ABC Blinds
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16. ABC Blinds Pty Ltd
Cost per Blind Unit
Inputs:
- Materials 150.00
- Director Labor 75.00
- Overhead allocation per unit 68.75 see below
293.75
Overheads
Turnover 1,500,000
Units sold 4,000
Overheads – total 275,000
Overhead per unit 68.75
Pricing is therefore $ 352.50 20% mark up on total costs
or
Pricing on variable cost is therefore $ 352.50 60% mark up on variable costs
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17. Pricing for a project
Extension of cost-based pricing
Eg: Catering business
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19. Price based on the effective value to the
customer relative to alternative products - ie
brand, quality, physical attributes, service, style,
ease of purchase
Eg: IT Solutions
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20. IT Solutions Pty Ltd
Original price $750/month 9,000 Not profitable
Cost per Client for annual licence
Inputs:
- Materials 25.00
- Director labour 6,600.00
- Overhead allocation per unit 3,466.67 see below
10,091.67
Pricing is therefore $12,110.00 20% mark up on total costs
or
Pricing on variable cost is 60% mark up on variable
therefore $ 12,110.00 costs
Value Based pricing
Monthly charge $ 1,000.00 up from $750 per month
to cover:
- IT services and consulting
- Data Security management
- Any query at any time
- Immediate resolving of system down issue
Plus on costs, for example 'System down' outside IT service company's control,
then:
- Hourly charge based on cost recovery of $75 per hour.
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22. Working backwards
Variable vs fixed costs
Activity-based costing – cost of sales based
what goes into delivering the service/product
Eg ABC Blinds
Are there redundant costs in your P&L?
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23. Hard costs eg advertising
Marketing Costs Soft costs eg people
Maintaining existing clients
Engaging
a client
Win client Lose client
Systems/operations (sunk cost)
Service client (labour)
Produce outcomes
Invoicing
a client
Addressing queries
Collections Accounting
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24. SMITH ELECTRICALS PTY LTD JUL AUG SEP OCT NOV DEC JAN FEB MAR APR ANNUAL
ACTUAL RESULTS ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL
FOR PERIOD ENDED APRIL 2012
Fee income 135,000 186,250 250,000 215,000 200,000 125,000 60,000 90,000 142,000 113,750 1,517,000
Cost of sales 59% 56% 54% 74% 55% 52% 25% 50% 56% 53%
Costs 80,000 105,000 135,000 160,000 110,000 65,000 15,000 45,000 80,000 60,500 855,500
Contractors 9,500 6,000 2,500 3,500 6,500 23,750 700 4,000 1,000 7,500 64,950
Perm staff 37,500 36,563 33,500 35,500 35,500 33,500 29,070 27,637 27,637 27,500 323,907
127,000 147,563 171,000 199,000 152,000 122,250 44,770 76,637 108,637 95,500 1,244,357
Gross margin 8,000 38,687 79,000 16,000 48,000 2,750 15,230 13,363 33,363 18,250 272,643
5.93% 20.77% 31.60% 7.44% 24.00% 2.20% 25.38% 14.85% 23.49% 16.04% 17.97%
Fixed costs
Total expenses 17,450 16,915 19,471 212,102 19,112 20,070 17,102 17,882 19,297 15,425 192,825
Net profit -9,450 21,773 59,529 -5,102 28,888 -26,320 -1,872 -4,520 14,065 2,825 79,817
Fee income schedule
No# quotes 89 58 62 65 64 58 53 59 29 58 815
Success rate 59.55% 32.76% 33.87% 78.46% 81.25% 60.34% 54.72% 55.93% 110.34% 60.34% 61%
No# orders/month 53 19 21 51 52 35 29 33 32 35 498
Average price of job 2,547 9,737 11,905 4,216 3,846 3,571 2,069 2,727 4,375 3,143 3,035
Total income 135,000 185,000 250,000 215,000 200,000 125,000 60,000 90,000 140,000 110,000 1,510,000
2/04/2012 24
We’re in business to make moneyI have worked with many fast growing businesses that have failedWe need to price to drive profits to be sustainableEg Big 4 banks with interest rates
Not advocating to cut costs, that’s not what today is aboutAbout managing profits
Ask what kind of businesses are in the room
Ask the room how they determine profit Define revenue v profitMaking business decisions on what we believe is profit but isn’tBusiness focus on revenue thinking good revenue = a strong businessProfits are more important than revenue Being profitable is having profitable cash flow – but how do we price for this?
This may seem basic but too often businesses do not focus on profits or pricing which can lead to failureYou will make different business decision based on what you believe your profits to be
Why they can’t pay their ATO debt and have problems with cash flow – cash loss of $253,303If you don’t understand your profit how can you price to be profitable
Real question is how much cash do you want to be taking home? Explain profit to income conceptStart with your bottom line and work backwards
Working from the bottom upIf you’re always chasing growth in turnover you may never have profit – unsustainable business model
between 10-15% is a good margin – depending on your type of businessHigh volume business 5%Service based business 15-20%Gross marginConstruction businesses should aim for a 50% gross margin – too many sitting on 40% and not making profitService businesses – wages should be 40%, fixed costs 30-35%, leaving a profit margin of 15-20%
Not here as a marketerMaximise current profit – taking into account revenue and costs. May not be the best objective if it results in lower long-term profits Maximise current revenue – no regard to profit margins. The underlying objective is to maximise long-term profits by increasing market share and lowering costs Maximise quantity – maximise the number of units sold or the number of customers served in order to decrease long-term costs Maximise profit margin – attempts to maximise the unit profit margin, recognising that quantities will be low Quality leadership – use price to signal high quality in an attempt to position the product as a quality leader - Using pricing to target certain clients Partial cost recovery – a business that has other revenue sources may seek only partial cost recovery Survival – in situations as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the business to remain in the market. In this case, survival may take a priority over profits, so the objective is considered temporaryStatus quo – business may seek price stabilisation in order to avoid price wars and maintain a moderate but stable level of profitPeople don’t buy on price – they buy on perceived value
Every business should understand their costs - including costs of production Too many businesses don’t price to cover costsgive Harvey Blinds as an example of cost-based pricing
Understand the complete value chainThey changed their quoted prices – increased prices by 15% and also looked at ways to streamline production to reduce costsGained profit of $150K an increase of $300K
Understanding all the details that go into your end quoted price to ensure you cover costs and end up with a profitgive Regatta as an example of project pricing
Devil is in the details – identify the value and whether you can deliver the project profitably Many businesses run risk of under quoting when not doing a cost analysis
Relevant in the service sectorGet the client to understand the value of your servicegive ISN as an example of value-based pricing
give ISN as an example of value-based pricing
Comparative pricing – matching your competitors. Can be dangerous – good for winning sales in the short term but often isn’t sustainable Psychological pricing – base the price on factors such as signals of product quality, popular price points and what the customer perceives to be fair eg $9.99Market penetration pricing – setting the price low to attract customers and gain market share. The price will be raised later once market share is gainedLoss leader – is a product sold at a low price (cost or below cost) to stimulate other profitable sales. Eg supermarketsVersioning – creating a line of products that includes different models including basic (lower quality, off-peak), premium (higher quality, faster, priority service) and tailored (meets customer’s unique needs) differential pricing – Selling the same product to different customers for different prices eg cinema tickets – full price, student price, seniors price eg waterMany more
Business owners focus on revenue first then cost – what if you had the mindset of ‘what is my cost base and then assess the revenue needed to cover these costsWhat costs are variable as opposed to what costs are fixed – give examples Activity based costing – explain Use Harvey Blinds example Challenge them to review their P&L - what’s redundant now and what will be redundant in the future – business models are changing
