What’s more important, Gross Profit or Gross Margin?
In This Issue…
- Gross Profit vs. Gross Margin
- about a 2 1/2 minute
read, 485 words
Long ago, in small hifi shops across America, retailers enjoyed 30-35% margins on the systems they sold. Some even achieved margins of 40%.
And then came video. It started with VCR’s – big, clunky, initially-expensive machines that shared a common feature: GM of less than 20%. That seemed OK when the machines were priced over $1000, cuz you could make $200 on a single-box sale.
Of course, to sell VCR’s you had to sell TV’s, too. Like VCR’s, these were also a low-margin item. Newly-minted “AV specialists” figured out real fast they had to come up with new ways to bolster low video margins. But they also justified the lower margins with the added volume & GP dollars that came with the category.
It’s almost 50 years later, and many video products still have low margins. And some companies still want to think that it’s the GP that’s important, not the GM. You can’t, after all, pay bills with margins.
True enough, but here’s another truth – you can’t make enough profit without margin. The math is simple. People costs in most AV companies (including direct labor) run 35-40% of sales. Rent and other operating costs run 12-18% of sales. That’s 47% costs, on the low side; 58% costs on the high side. How much money can you make on a 54% GM?
The answer is simple: less than you can make on a 60% margin. Which is less than you can make on a 64% margin. Which is less than you can make on a 70% margin. It doesn’t matter how much GP you got on this deal or that. If your margin is less than it should be – and for today’s AV companies, we would peg that at 57% or higher – you will make less money than you should.
We read recently a justification for maintaining a retail presence. We love retailing! The problem is, there is huge overhead associated with retailing: showroom space, demo inventory, people to wait on customers, back-up inventory in case anybody buys anything. Oh, and this… lower margins than you can achieve as a value-added integrator.
We’re working with a company that does tonnage work with production builders. Lotsa trucks, lotsa installers, lotsa moving around – a lot of per-job overhead. And this… lower margins than you can achieve as a value-added integrator.
We’re not against selling video or doing production homes. If… you can make some margin doing it. And if you can’t, don’t kid yourself that you’ll make it up in volume. Instead, look at ways to deploy the same time and resources to do higher-margin work. It works, every time.
Want to know more about how you might better measure and improve your margins, and make more money in the process? Attend our 30-minute “3rd Thursday” webinar, this Thursday at 11a CST. It’s called Margin Tips & Practices. Register here.
Keep it Vital,
Paul & Steve
Enjoy former coffees at bi4ci.com/blog