On this week’s Dirty Secrets of Small Business, Adam Sonnhalter and Jack Mencini discuss margins versus markups. A discussion that they have with a lot of their clients and the whole concept of when a client is mis-pricing their goods and services…even with the best of the intentions.
As Adam explains it: You, the business owner, understand your true costs. As an example…Pricing your product at $10 and your total cost is $6 … profit is $4… then you have a 40% profit.
What often happens is that the owner says: “I understand my cost is $6 .. ” But, what they will do often is that they will mark it up by 1.4 for a 40% margin. $6 x 1.4 = $8.40 that would be your price and take out the $6 that is your cost and your profit would be $2.40 which is 29% profit and not 40% profit.
What they should be doing to get the margin is to divide $6 by .6 = $10 which is the 40% margin.
Adam stated that nearly half the people they work with make the mistake of doing a 40% markup which is not a profitable way to go.
Look at how you are setting the pricing. Are you doing it by looking at the margin you are desiring or by the markup?
Many small business owners contend that “I know I am making money on all of my jobs… I am making 40%”… when they are actually making 29% which is real money they are losing out on.
Understand your costs and the desired margins to run your business properly. Many businesses fail miserably because they just don’t understand the numbers and the difference between markup and margins which is crucial to profitability, productivity, sustainability and success of the small business.
Also, if you are overwhelmed with demand and want to get rid of some client business, raise your prices by 10-15% and it will chase away some of the demand and you will increase your margins. There is no better way to make profits then by raising your selling prices and reduce costs by efficiencies and a controlled way.
If you have way too much in demand… look to raise your prices by 5%, 10% or 15%. Don’t be afraid that you will chase customers away forever…. it won’t happen. It will be OK and you will have the right types of customers that will be right for the business.
Jack and Adam also announced that Dirty Secrets of Small Business is making the move to prime time! Starting on May 3, the show will air live on Wednesdays from 7:30 pm (EST) to 8:30 pm (EST) right after Tech Talk on WINT 1330 AM. The move to Wednesday evenings has the small business coaches, as part of the station’s must-listen-to lineup with other business shows scheduled to air in the evening time slots.
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If you have a success story or a question you would like to share, email or call (firstname.lastname@example.org or 877-849-0670). You can also call in during the show each week during April at noon (EST) – 1:00 pm on WINT 1330 AM, call 440-946-9468 to ask your question to the Maximum Value Partners’ coaches or tweet your question to @MaximumVP.