Business

It Cost How Much?!

Margins: Too much, too little? What’s fair?
charts-and-money

I was recently thinking about margins, related to a project I am working on. It brought back a few memories and, ultimately, this question: How much do you mark something up? How much can you charge…if something costs $100, can you sell it for $150, $250, $1000? What is fair? And is being “fair” a part of business?

I remember walking through a $1M house on the bay on Long Island with another integrator I was partnering with on some projects. (Back then, I did a lot of residential work mixed with commercial.) This was a referral from one of his clients, so he was the lead; I watched and listened. We got to a room where he suggested ceiling loudspeakers: $20 coaxial Quams, eight-inch, nothing special. He was going over his ideas for placement and quantity, with two in this room. When the client asked about cost for each loudspeaker, my colleague said about $750 each! Nobody flinched; we moved on to the next room.

That should have been a red flag for me, him being so willing to rob a client, or at least I think….I sold that same loudspeaker at the time for $75 installed…what I thought was fair. Too little?

At that time in my life, when I looked at a situation, I would think, “What would I do?” (interesting that I had this column title in my head without knowing it, 30 years ago!), and then make a judgment based on that. In other words, if you did not do it my way, you must be wrong! Having confidence is one thing, but you have to respect others and their means and methods. Different from you does not mean wrong.

Here is another example. While working as an AV consultant for a firm that also did security, I often did some security work. One day, the rep for GE was visiting, explaining why we should specify his products. While talking privately after his presentation, as I did with all manufacturers, I asked him to send me his dealer price sheet. (I could write a whole article just about this issue!) He looked at me like I had not two, but three heads, and said, “No.” I asked again and he said “Hell no.” And when I asked how I could specify a product that I do not know the cost of, and then suggested that I would just use another manufacturer, he went to my boss and complained!

Having been an integrator first for many years, when I do a cost workup for a project, I use dealer prices. Back then (and even now), many consultants don’t bother with cost pricing, and use list price for their estimate of cost for a project. It’s quicker, but I found that method to be highly inaccurate!

You see, I would look at each section of my cost workup (audio, video, control, infrastructure, etc.) and for each item add a markup of 20%, 35%, 50%, for example. This way, I could have different markups for different sections, even different markups in the same section, and an overall markup for the entire project. This takes more time, but is more accurate. I like more accurate.

Can I brag for a minute? Using this method on a $1M-plus courthouse project, and with five bidders, after discarding the high bidder and bottom dweller, the mid-level bid was within $35,000 of my “Estimate of Probable Cost.” That was pretty good work, if I say so myself.

I never did get the cost of the security equipment, but not long after, I had an issue with my home garage door and security system. I needed a new sensor at the top of the door (two large metal contacts). I called Ackerman (my security contractor) and was told it would be $75 for the part, plus $75 for the installation and connection to my system.

On a whim, I called the alarm distributor we worked with, asking for a personal favor: Can I buy the part? He said sure, and met me for lunch at Shoney’s; he charged me $8.00 for the part! My first thought was that I am in the wrong business; I should sell everything and become an alarm contractor! What the #&%! are we doing? We fight to the death over a couple of points and this neighborhood industry typically gets 850% markup without question? Hmm.

Ackerman installed my part for $75. Wow!

On the opposite side of the spectrum, when I was the regional engineer for XeroxAV, I can remember some education work coming in: bid work. They wanted us to provide our dealer cost for every item and then mark it up 8%…wow, but a different wow!

We are all over the place here: 8% to 850% markup. What is fair to charge a customer: Is it 30%, 50%, 100%, whatever you can get away with? Here is what I think: For current AV clients, when I work with an integrator and price projects out, we start at 50% on equipment and 100% on labor cost, adjusting accordingly to the particular client and project. We are able to do this because the proposals I write do not have line-itemized equipment listings or prices. I have a section I call “Equipment Highlights,” and never list pricing. We sell systems, not equipment.

I believe that you do not charge whatever you can because you can; you charge what is fair. At some point, charging…no, I mean gouging your customers…can and will come back and haunt you. And that’s not for me. I do not let others gouge me and, in turn, do not gouge others (my definition of fair).

If you would like a working Cost Work-Up Excel spreadsheet, or a sample proposal of mine (or both), feel free to email me.

If you have any great examples of margins and markups, or stories to share, please send them to me at dkleeger@testa.com.

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