Afraid of Low GP on Hardware? ... How About Zero GP on Hardware?
In today’s issue …
- The Myth of Service Only Profitability
- less than 467 words, total reading time 2 1/2 minutes
ZERO GP on gear?! Why would anybody do that??
Of course you wouldn’t. Yet that’s what you get when you sell no gear at all. And that’s what it seems some are advocating as a “better business model” for custom integrators.
We don’t get it. When you sell time, the only Gross Profit you realize is the difference between what you receive for the time you billed, and what the time costs you. The only way to increase your GP is to sell more time (if you have more to sell) and/or increase your hourly bill rate.
When you also sell hardware, the GP on the hardware is on top of the GP for the time. A tech charging $100/hour times 2 hours, to deliver & install a product(s) with $200 total GP, is twice as profitable as the same tech billing time only. (You might consider this next time you tell a client to go buy that TV somewhere else.)
As we often say to integrators, “there’s GP in those boxes going out on the backs of your installers.” The trick is to have them carry as much GP as possible.
The Myth of Declining Margins
The “become a service company” rhetoric is driven by the notion that there will someday be no profit in the boxes, at all. We’ve been hearing about declining margins since 1975, when mail-order outfits were threatening the 40% margins of independent hifi stores. Well, guess what? Today’s successful integrators are still achieving 40% margins, or better, on the hardware they sell. Not all the hardware, of course. Some yield margins greater than 60%! Add a healthy chunk of labor on top of that and now you’re really making money.
We’re not denying there are low-margin products. And some are difficult to avoid selling if you are to be a one-stop provider of home technology solutions (see the TV example cited above). But most of the time – so long as you’re not trying to sell the lowest-priced solution available – there are many higher-performance and more profitable options you could be recommending.
Now, if you are trying to sell the lowest-priced solution, you are definitely challenged. That’s where all the big boys play. You shouldn’t even think about getting in that sandbox. Besides, your customers already think you’re more expensive than those guys. Don’t try to prove them wrong!
Measure, & Improve
Set up your GL accounts to show you the outcome of your BIG numbers: how much Equipment did you sell, vs Install Parts, vs Labor. Set up cost accounts for each. Measure the GM of each. And then, with regular monthly reporting, you’ll begin to see the strategic opportunities you have to make more margin.
You can find a strategic account list, for free, at www.bi4ci.com/resource-library. And to see monthly reporting at its most informative, check out this 3-minute video…