Good morning! Jon here with today's Toolbox
tip and today I want to talk about
difference between "MarkUp' and 'Gross
Margin.' I see lots of people doing it
wrong and I'm here to say if you're
doing it wrong or calculating it
incorrectly, you're costing yourself
money, you're leaving money on the table
instead of putting it in your pocket
where it should be. I'm Jon Dale. I'm
from Small Fish Business Coaching. I run
the Tradies Toolbox Coaching program for
the owners of trades businesses who want
to grow and want to be more profitable.
Now lots of tradies talk about margin. 'I
add a margin, I had a 15%
margin to the other trade and a 20%
margin to materials and labor.'
But actually what they calculate is markup
and when you do that, you're costing
yourself money and let me explain why.
Okay, the point of today's video is, 'Markup
bad, Gross Margin good' and also the
right way to calculate it. So let me show
you with the aid of this excellent
diagram I prepared earlier.
Calculating markup, which is what some
people are calling margin, you calculate
a percentage of your costs and you add
it to your cost to make a sale price.
When you calculate Gross Margin, you take
the same percentage but it's a
percentage of the total sale price which
of course is more. It's a bigger
number so you get more and you make
more money. The total sale price is
a bit more expensive and your margin is
a bit more happy days. A bit more
money for you, more profit, and more
margin in the job for you to take home
and most of your customers have happily
agreed that percentage margin so
you should calculate it the way they've
agreed which is also happily the way
that gives you more money, should you not.
Let me illustrate it with a bit of a
diagram (I'm sorry) by calculating some
margins for the two ways. Okay, I'm going
to use $8000 of costs
and I'm going to use a margin percent of
20%, mostly because it made
nice, easy round numbers.
Okay, calculating markup, it looks like
this, cost of $8000,
calculating the markup of
20%. 20% or 0.2
times $8000 is $1600,
add it to the 8,000 makes a total sale
price of $9600 each,
easy peasy.
Margin calculation is slightly different,
bit more complicated, and if I confess I
always forget how to do it and have to
look it up. Your sell price is
equal to the costs divided by 1 minus
your Gross Margin (GM). 1 minus the Gross
Margin of 20% is 0.2
and so it's not 0.8. 1 minus is not
0.2 it's 0.8 so 8000 divided by
0.8 is 10,000. Check your
calculator if you don't believe me.
So sale price of $10,000 compared to $9600
and a margin of two thousand instead of
$1600 right? The same margin percent is
$400 more in your pocket.
I hope that made it simple and made it
obvious. I also hope that you're not
sitting there going, "No, they'll never pay
the extra Jon," because they will.
That's bollocks and I'll tell you why.
You're not showing them 2 prices side-by-side
and saying, "would you pay the more
expensive one?" aren't you? You're only showing them
the $1000 price. They've
agreed that percent margin is fair and
reasonable because you told them that
you charge that margin. It's only 400 bucks on
$10,000, we're not doubling the
price or anything, it's a very minor
difference. And my final point, people
aren't as focused on price as you think,
when they're choosing the trade. I'm
not saying that price is not important
and it's not to say they won't try and
make you be cheaper but it's not as
important a part of their buying
decision as you think. And most people
choose their trade, choose the one they
trust, choose the one they like, and then
make sure the price is okay. And that's
in the commercial environment and a
consumer environment.
So I hope I persuade you to use Gross
Margin calculation instead of a markup
calculation every time because a markup
calculation, particularly when you say
margin but you calculate markup, is cheating
you. You're cheating yourself out of
money. Now my coaching is about helping
people make more money, make more profits
in their professional trades businesses.
I want you to take your turn now and
come back to me and make a comment below,
and tell me whether you use margin or
markup when you're calculating your
margins on a job. And the second
question is, if you're using markup are you
going to change? Write it in below. See you!