Many smart home professionals are guilty of using the terms markup and margin interchangeably. But should they?
The easy answer is no. Markup and margin are distinct values and impact your bottom line differently. To better understand the costs and profits for your business, you need to keep the figures straight and separate.
The simplest explanation of a markup is that it is the difference between the cost of a material or service and the sales price a contractor charges for the material or service. The figure is always based on the cost of the job. For example, if you want to mark up the cost of material and labour by 1.50, then you would multiply the costs by 1.50 to reach the sales price. For example: $6,500 x 1.50 = $9,750.
Because the markup you use determines your sales price, it's an incredibly important figure. Without a proper understanding of a markup, smart home tech pros won't be able to give well-educated estimates and may be bidding on projects while missing an opportunity to increase their profits.
A margin, or more accurately a gross margin, is a contractor's gross profit on a job and is a percentage of the sales price. While a markup is always based on job costs, a margin is always based on sales. A 50 percent markup, like the example calculation above, will not equal a 50 percent margin. The additional price above the job costs is only one-third of the sales price, therefore it's a 33.3 percent margin.
This misunderstanding leads many contractors to use gross margin incorrectly, which will give them the wrong calculations. This can lead to inaccurate estimates and lost profits. Whatever percentage of gross margin you want, you should subtract that number from one. Then, divide the estimated job costs by that figure.
For example, if you are seeking a margin of 35 percent, you would subtract .35 from one, getting .65. Then, divide the estimated job costs by .65 to find the amount needed to reach a sale price with the correct gross margin: $6,500 / .65 = $10,000.
Both markup and margin can be used to determine the price a contractor will charge for a job. If smart home professionals want to use a margin to price jobs, they must determine the goal they want to hit.
Above, the contractor wanted a margin of 35 percent, then used the reciprocal of that margin to determine the sales price. Contractors can also use a markup to make a profit on a job, but without the proper calculations, they may not hit their margin goal.
The CEDIA Tech + Business Summits are one-day events showcasing upcoming technology and future trends in the smart home industry. Each event features product displays from top manufacturers highlighting their latest and most exciting products, as well as free seminars covering business and technology topics. Our Tech + Business Summits are a great opportunity to network with your industry peers and to build and nurture important business relationships.
Register Now