Print This Post
If you read the two previous blog posts (Markup, Margin and Why You Should Care and Using Gross Margin to Price Jobs? Better Use It Correctly), you understand how markup works and how gross margin works. Today we’ll look at the numbers to see how to avoid one of the major mistakes made by contractors in calculating the sales price for their work.
Are markup and gross margin interchangeable? Is a 1.55 markup the same as a 55% gross margin? No, here are a few examples using a job cost of $100.
Example 1:
Using a markup of 1.55 will give you a sales price of $155. ($100 x 1.55 = $155)
Using a margin of 55% will give you a sales price of $222. ($100 / .45 = $222)
Example 2:
Using a markup of 1.35 will give you a sales price of $135 ($100 x 1.35 = $135)
Using a margin of 35% will give you a sales price of $154 ($100 / .65 = $154)
(Remember that when using gross margin to calculate your sales price, you have to subtract your gross margin from 1, and divide your job costs by that figure. If your gross margin is 55%, subtract .55 from 1 to get .45, then divide your job costs by .45. This was covered in yesterday’s blog post.)
What if you want a 30% gross margin on the sale? If you mistakenly believe you can get that by multiplying your job cost of $100 by 1.30, you’ll get a sales price of $130. Using gross margin properly, divide $100 by .70, and you’ll get the correct sales price of $143.
As you can see, how you define the process and the number you’re after makes a huge difference in the resultant sales price of your work.
So which should you use? It doesn’t matter AS LONG AS you use it correctly. In my opinion, markup is easier to use. It is almost always easier to multiply than to divide, especially when you are with a potential client attempting to make some quick mental calculations.
Let’s say you’re on a sales call, looking at a job, mentally trying to ballpark the price . . .
Using markup – “The job cost will probably be about $30,000, my markup is 1.60, that’s 6 x 3 or $18,000 added to $30,000, the job will probably run about $48,000.”
Using the equivalent gross margin – “The job cost will probably be about $30,000, my gross margin is about 38%, round it to 40%, that’s 4 x 3 = 12 or $12,000 added to $30,000, the job will probably run about $42,000. Wait! If it’s 40% I have to divide the job cost by .60, 30,000 divided by .60 . . . . “
Get the idea?
I’m a firm believer in keeping things simple. Gross margin works and will give you the correct sales price, but you are more apt to make a calculation mistake and that mistake can cost you money. In my opinion – use your Markup and Profit, or use your Margin and Lose.
On a scale of 1 to 10, with 1 being the easiest method to compute the sales price of your service or work, markup is easily # 1. Using a gross margin is at least a 6 on this scale and should be avoided. Let your bookkeeper and your CPA wrestle with the math and computing margins, etc. You are not in business to do math problems. You are in business to provide a service to your customer(s) and make a profit doing it.
Remember your markup and how to use it, then put your energy into staying focused on getting to the contract. Stay focused on sales, my friend, that is the way to make it through this crunch.