An interesting note came in that asked honest questions about markup and sales. It was interesting because he mentioned both our method of calculating markup and the method recommended by another consultant.
His note began:
See below a link to the description of capacity based markup. . .
I could be getting ahead of myself as we have not sold very many projects using the mark-up method as of yet (we were formally an hourly rate handyman contractor). Now that we are getting into bigger projects with subcontractors, we’re looking for the right markup system to use.
I read your book ‘Markup and Profit Revisited’ and I completely agree with the math for markup. The problem is I’m having trouble selling jobs at the 1.51 markup that we need. So to be honest, it may just be my sales and lead numbers that need work 🙂 If that’s the case, I may need some help there.
So all in all, I’m not exactly sure what my question is, but I may need your help to become a better salesperson and marketer. Let me know what services you offer in that regard.
Thanks for your time Michael,
This writeup by the other consultant compares our markup method with the capacity based markup method. I don’t agree with all his characterizations of what we teach but that’s okay, everyone has an opinion.
I’ve been aware of capacity based markup for many years. Basically, overhead expenses are recovered on estimated labor only, rather than all estimated job costs (labor, material and subcontractors). I’m sure it works for handyman type jobs and maybe specialty work where the total job price doesn’t creep up over the $6,000 – $8,000.
There are many possible ways to price your jobs, and I won’t take serious issue with any of them as long as they:
- Allow you to recover all job costs, overhead expenses, and make a reasonable profit,
- Are based on your business’s overhead and profit needs, not someone else’s,
- Don’t require hours and hours of number crunching, and
- Result in a straightforward formula with little risk of a math error.
I will take issue with choosing a markup calculation based on which one gives you the lowest price, because that’s the road to failure.
The writer recognized that the issue might be his selling, not his markup, and I’ll agree with him. Right now many contractors who are marking up their estimated job costs between 1.5 and 2.0 are booked out for several months. (If your estimated job costs are $1,000, a markup of 1.50 yields a sales price of $1,500; a markup of 2.0 results in a sales price of $2,000.)
What often happens is the salesperson is more concerned about low price than the client. Their frequent comments about low price lead the client to focus on price, not value, and the sales call goes downhill from there. That’s why it’s important to know how to conduct a sales call and keep the focus where it belongs.
Sales is a skill, and skills can be learned. Many home and building owners today consider price to be low on their list of priorities. If they can get a contractor to call them back and show up for appointments, they’re happy. Our book Profitable Sales, A Contractor’s Guide has helped many contractors learn how to sell their services.
One step in a sales call is setting the budget. In today’s market with rapidly increasing material and labor costs, it’s even more important to set the budget early in the sales call because it’s very likely their expectation will be lower than reality. That’s when you can educate your client on a reasonable budget for their project and determine if they can move forward.
I don’t believe in gouging clients; I believe in charging the price that recovers all your costs and results in a reasonable profit. You aren’t in business to spend time fussing with numbers; those who do that have lost focus on what’s important.
You’re in business to provide a service to your customers and make a profit doing it. Without a profit, your business won’t survive. Don’t spend hours fiddling with your numbers; invest the time in your sales skills. You’ll see a far greater return on the investment.
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