* In this issue: Product or Labor Business?
* Less than 555 words, a three minute read.
The debate on the CI business has long been: is it a product business, or a labor business? True, the products are your physical solution. And most companies price products (except for TV’s!) at or near list prices. But as we will illustrate, Labor pricing is the key to making money in CI.
At list prices (again, except for TV’s), most companies make a 33% to 50% aggregate margin on the boxes alone. Let’s call it 40% for our discussion.
But most of the costs of running a CI business are in the design, installing and servicing of those products.
In fact, most companies spend 40% to 60% of Product Revenue in compensation costs for their people. Let’s call it 50%. And there are other major operating costs: rent, utilities, vehicles, office supplies, computers, subscriptions & memberships… These typically consume another 20+% of product revenue.
OK, that comes to costs equaling 70+% of Product Revenues. If we only had product margins to help (40%, right?), we would have an unsustainable not-for-profit scenario of -30%!
No surprise, then, that the real opportunity for profit rests on the backs of our labor force, and our ability to extract value for their services.
So… How much Labor Revenue is needed to make a decent profit in a CI company?
Successful owner/operators we’ve worked with typically target 50+% of the product revenue. Keep in mind – in our example Labor Revenue is 100% profit because we included the direct labor expense in our total compensation costs earlier.
At 50% of Product Revenue, Labor covers the 30% cost shortfall while also yielding a bottom line profit equal to over 13% of total revenues.
Here’s the math showing our cost assumptions, with Labor at 50% of Product revenues:
Product Revenue $1,000,000
Labor Revenue $ 500,000 (33% Labor Mix)
TOTAL Revenue $1,500,000
Cost of Goods $ 600,000 (60% of product revenue)
Product Margin $ 400,000
Labor Margin $ 500,000 (costs included below in Labor Cost)
Total Margin $ 900,000
LABOR COSTS $ 500,000 (Direct labor would be $200K-$250K)
Major Other $ 200,000
TOTAL Costs $ 700,000
Net Operating Profit is a healthy $200,000, or 13.33% of $1.5 million. And if you can drop Costs – COGS, Labor, & Major Other – by a total of $100K, you’ve got operating profit equal to a full 20% of revenues!
The math is simple, and achievable. Half the companies using our dashboards (www.bi4ci.com) achieved net profits of 13% or higher in 2018; a fifth of them surpassed 20%.
Our view: companies making less than this are discounting their labor without knowing it. If our company above priced Labor at only 30% of Product Revenues – $300K Labor for $1.3M total revenues – they would be discounting Labor 40% while zeroing out operating profit!
When you start looking at your business as a Labor Business that sells Products, rather than a Product Business that adds Labor, you will see that additional gross profit goes out on the backs of your employees. Only then will you realize the full potential of the CI Business model.
In our experience 9 out 10 CI companies do not understand this simple aspect of the CI business. Your skills and knowledge are worth a lot in the marketplace. Don’t sell yourself short.