Sign & Digital Graphics

November '12

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the gross margin for those periods. Is your GM headed up, down or remaining steady over time? You need to know. Gross Margin Versus Markup Often, I hear markup and gross margin used interchangeably. This is a common misconception. Markup is the percent of a product's cost that is added to it to come up with a selling price. In the previous example, if that product cost $0.40 to produce and you applied a 50 percent markup (in other words, added $0.20) the selling price would be $0.60. But, the gross margin for that product would be 33 percent: ($0.60 – $0.40) ÷ $0.60 = 0.33 or 33 percent The table below shows the relation- ship of mark-up to a selection of gross margin percentages: Gross Margin Markup Multiplier 20% 33% 40% 50% 60% 75% 25% 50% 67% 100% 150% 300% 1.25 1.50 1.67 2.00 2.50 4.00 The multiplier associated with a desired gross margin is important to know. If you know how much a product or service costs, you can quickly calculate a profitable selling price using the appro- priate multiplier. If you need a multiplier for a GM not listed above, you can deter- mine it using the following formula: Multiplier = 1 ÷ (1 – Desired GM) So, the multiplier for 67 percent GM is 3: 1 ÷ (1 – 0.67) = 3 For example, if the COGS for produc- ing 12 signs is $60.00—because each sign costs $5.00 to make and you want to real- ize 67 percent GM on that order—charge $180.00 for that order. $60.00 x 3 = $180.00 or $15 per sign On a related note, don't reveal to customers how easy it may seem to pro- duce a simple sign. Invoke the famous movie line from The Wizard of Oz: "Pay no attention to the man behind the cur- tain." If you indicate to the client that it takes little to no effort or time to produce their order, you give them no reason to pay a premium—and proper—price for your toil and expertise. No Magic Formula For Success There are only two variables that can affect a change in gross margin—the COGS and the price you are charging and collecting for your goods and services. A rise in materiel or labor costs will cause a drop in GM. Consequently, you will need to raise your prices in a timely manner to sustain a healthy gross margin. Making price concessions without lowering the costs to make your wares will also result in a deterioration of gross margin. In this case, you'll need to learn to master the art of making your prices stick, so you don't get stuck. There are no guarantees that you will realize a bottom line net profit by main- taining a desired gross margin for any length of time in your business. Rising fixed expenses—a.k.a. overhead—or out-of-control variable expenses (such as overly-aggressive advertising costs or runaway maintenance charges for equip- ment) could quickly eat into what gross profit you have been able to capture. With some careful control of the expense items in the lower half of your profit and loss statement, you could turn a hand- some profit at the end of your fiscal year. Contrary to some people's belief, the primary reason you are in business is to make a buck this year and for many years to come, not merely generate profitless revenue, provide jobs for the economy or to find something for your employees to do with their time. If you think the days of the 1,000-piece order is long gone but your customers only want to pay the 1,000-quantity per piece price, you are going to need to get tougher or risk going out of business. Along this jour- ney of getting into shape and becoming lean and mean, you should find a way to measure your progress toward suc- cess easily and often. Remaining aware of your gross margin is simply one indi- cator—not the only one, mind you—of the overall state of your business's health. Good luck! SDG SIGN & DIGITAL GRAPHICS • November 2012 • 85

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