September '15

For the Business of Apparel Decorating

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20 || P R I N T W E A R S E P T E M B E R 2 0 1 5 Such a mistake should not go unrectified, but it should teach you something. In an indirect way, you have just tested the market for all that it could bear. Of course, a "test" with a sample size of one does not mean you should immediately raise all prices. Still, it is an indicator that you may be able to fetch a better price. A more likely example is when a prospect asks for a quote and leaves saying, "Let me think about it. I'll be back." Sure enough, two weeks later that same prospect returns and places the order and offers, "You know, I checked other places and this is by far the best deal." Interpret that as there are others out there who are selling it for more. BALANCING PRODUCT MIX WITH GROSS MARGIN GOALS Just marking up all products with one flat gross margin percentage may ensure a healthy overall profit for your com- pany but you will inevitably be priced too high on commodity-type products (those with low demand and abundant supply). Converse- ly, you will be too low on very specialized items (those with high demand and limited supply). Think of gross margin as your pulse. It can easily tell you the well- being of your business, a particular sale, or a product line you carry. Some people have a strong healthy pulse, others have a slow weak one, while others have no pulse at all. We typically refer to the last group as dead. A business with a near zero gross margin should have their Last Will and Testament up to date. The formula for gross margin is: Gross Sales Revenue – Cost of Goods Sold Gross Margin = ____________________________________ Gross Sales Revenue Where Gross Sales Revenue = total money collected from sales, and Cost of Goods Sold = total materials, labor and any other production costs. Simply stated, the gross margin is the differ- ence between the cost to produce something and its selling price, divided by the product's price, expressed as a percentage. For ex- ample, if you sell something for $100 and it cost $60 to produce it, the gross margin on that product is 40 percent. $100 – $60 _________________ = 0.40 or 40% $100 Based on a Philadelphia Investment Firm's study of all com- panies in North America, more than three-fourths have a gross margin between 25 and 40 percent. In my discussion with screen printers, the industry average is in the 40–60 percent range, with contract printers hovering around the 40 percent mark, and cus- tom shops commanding margins of 50 percent or more. No one can tell you, precisely, what your gross margin should be, but you do have one. Make it your business to know exactly what it is and what direction it is heading at any given time. When you have a unique aspect to your products or services (state- of-the-art quality, guaranteed delivery, or unconditional warranty), be sure those items carry an equally superior gross margin. For example, if you set a selling price of three to four times the cost to produce the item, those products would enjoy a 67 to 75 percent gross margin, respectively. You may need that level of profitability on "your specialty" to offset the sale of low profit items that you are obligated to offer. Remember, too, that it is easy to lower the price on a product that is not selling well or fast enough. It's certainly easier than trying to raise the price on a newly introduced item after realiz- ing potential profit. Naturally, underpriced products will have the highest de- mand. Right now, I'll bet your shop is full of orders for low margin items and that is monopolizing most of your day. This workload leaves you no time to produce the high-profit gener- ating goods needed. In time, you squander your chance to be profitable because of a deteriorat- ing gross margin. YOUR PERSONAL BUSINESS TRAINER continued on page 81

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