By Rich Lindblom, YSN
Last month I wrote a piece about why you need to take every deal regardless of the price, in which I shared my thoughts on profit margins.
After the piece appeared I got more feedback than usual, some positive, some not so positive. After chatting with the dealers who disagreed with me, I realized it basically came down to profit margins. So, today I thought I would talk about margins and explain my thought process a little deeper.
The first thing we need to cover is the difference between markup and margin, because in talking to dealers over the years, I’ve found that there’s some confusion about that.
Markup means to add a certain percentage amount to your cost on a product. For example: If you have a product for which your cost is $500 and you want to mark it up 20 percent, the selling price would be $600 ($500 x 1.2 = $600). But markup is notyour profit margin.
Profit margin is an entirely different story, and it is something that people often find harder to compute. Profit margin is the amount of profit expressed as a percentage of the total selling price. So, in the example above, the profit margin is not 20 percent as some might believe; instead, it would only be 16.67 percent ($100/$600 = 16.67 percent).
But the real question here is, what exactly should be factored into calculating your true profit margin?
Several years back I was sitting in a room with a bunch of exclusive Maytag/Whirlpool dealers when this very topic came up. And let me tell you that it ended up being a heated discussion. Some dealers believed that the onlything that should be factored into your profit margins was the cost of the product and the price you sold it for. As for me, I was on the other side of the argument. I have always believed that everything should be factored into your profit margin in order to get a true picture of your actual profit on the sale.
So, what other items would I factor into my profit margins?
- Volume rebates
- Merchandising allowances
- Co-op advertising
- Extended warranties
- Installation charges
Why do I believe that these items should be factored in when calculating your profit margin?
Let’s start with the first three items on the list: Volume rebate, merchandising allowances and spiffs. All three have one thing in common — from an accounting standpoint, they lower your actual cost of goods sold. So, if they lower your true cost of the merchandise, why wouldn’t those be factored into your profit margin?
Now let’s look at the next three items on the list; they also have something in common. If you didn’t sell that product, you never would have earned that money. Co-op reduces your advertising expenses, and extended warranties and installation charges are items that add to the bottom line of the invoice. So, I would ask you, why shouldn’t those items be factored into your profit margin as well?
Now before you go saying I’m crazy, ask yourself one simple question: How do you think your big box and regional competitors are able to sell products near, at, or sometimes even below your cost? It’s not because they are getting a better price than you; taken together, BrandSource members are bigger than any of them. The answer is that they net everything out of the price — which is exactly what I did and argued that others should do as well. Hence the heated discussion with my fellow Maytag dealers.
If you still think I’m wrong, I suggest we do some calculations using an extreme example that a regular reader of my columns sent me and see how the profit margins actually stack up.
Let’s say your base cost on a dishwasher is $500 and your competitor down the street is selling that same dishwasher at that same price. Should you take the deal? If you read my previous story, you already know the answer. But for those of you who didn’t, let’s run some exemplar numbers and see what your realprofit margin is, even when you sell a product at cost. I will use some generic percentages for volume rebates, merchandising funds, spiffs and co-op. Yours could be a little higher or lower, but you get the idea.
|Line Item||Your Cost||Selling Price|
|2.5% Volume Rebate||(-$12.50)|
|1.5% Merch Allowance or Spiff||(-$7.50)|
|2.5% Co-Op Advertising||(-$12.50)|
|5-Year Extended Warranty||$75||$150|
Looking at the above example, even if you sold that $500 dishwasher at your supposed cost, you still stand to make as much as $197.50 in gross profit, which is a 24.7 percent profit margin. That isn’t half bad money for what some dealers would call a zero-profit deal. Just as important, you turned a product and hopefully won a customer for life.
But you also made $197.50 in cash profits. And when it’s all said and done, margins don’t pay the bills, dollars do!
It’s always gratifying when someone reaches out to me after reading one of my articles because it struck a particular chord with them. So if you have a question or comment (good or bad) about something I wrote about, please contact me at email@example.com. I’d love to hear from you.