Are you interested in discovering the principal factors that will take your business to the next level? At 4 Level Coach, they have developed The Sweet 16. It encompasses the 16 key things to remember and apply to your business when pricing jobs!
Business is the best game we can ever play. Consider it this way: There are 52 games (weeks) in a year- do you win or lose each game? The only way you can find out is by understanding your numbers. However, did you know that 96% of businesses do not know their daily, weekly, or monthly numbers? People need to learn their financials and numbers and, as a result, generate the profit they need to grow and scale their businesses.
The Sweet 16 can be divided into three simple sections: the 5 things you MUST know about pricing, the 7 common mistakes made in pricing, and the ONLY 4 ways to increase profit.
The 5 Things You MUST Know…
1) The Difference Between Markup and Margin
It is SO important to understand that we Mark up the cost of our jobs/projects. But we need to distinguish Markup from profit margin! Think of Markup as the hope, wish, or want, and profit margin as the reality, fact, or result.
2) How to Read and Understand a P&L
P&L refers to profit and loss, also known as income statements. By mastering this skill, you can understand your overheads, correlate markup versus margin, and start avoiding some of the problems we most commonly see.
3) Your Monthly Cost of Overhead Expenses
You must know your overhead or Operating expenses to price with confidence in your Net Profit. You do this by understanding your breakeven percentage, which comes from OH Expenses divided by Sales or Revenue in a given time period.
4) Your Breakeven %
Your breakeven is your overhead divided by your monthly revenue. Once you see this number, it can help you price appropriately, as you understand that a certain gross profit is needed to cover your overhead expenses and make the right Net Profit.
5) Confusing Markup with Gross Profit Percentages (%)
It's about our percentages(%)! If we confuse our Markup with our gross profit, we don't know our overheads and break even.
The 7 COMMON MISTAKES To Avoid…
1) Pricing With Markup Without Knowing Our Overheads
The only way to understand your overheads is to get into the guts of your business and get a solid grasp on your financials.
2) Miss Allocating Expenses in P&L
Suppose you need to allocate expenses properly regarding the cost of goods and overheads. In that case, you are getting the wrong information from your financials!
3) Not Capturing Project Management Expense in Your Cost of Goods
Your project management is an expense or overhead of the business. But imagine if it was considered as a cost!
4) Confusing Markup with Gross Profit.
Markup is a percentage you multiply by the cost of a job or your Cost of Goods Sold in a P&L. This does not equate to your Gross Profit; your GP is far less of a percentage than your Markup.
5) Labor Burden- Underestimating Your True Cost of Labor
It's important to understand that a labor burden is attached to all labor elements on the job site.
6) No Job Review & Evaluation System to Compare Estimates to Actuals After Jobs are Complete
You need to review and evaluate to improve your perception of the cost of goods. Continuing to bid on projects based on inaccurate numbers, you multiply the problem repeatedly!
7) Pricing Based on False Overhead Expenses
You need to understand your overheads and allocate your numbers properly! Knowing your expenses and revenue will give you your breakeven.
The 4 Ways to INCREASE PROFIT…
If you do one of these, that's fantastic. If you do all 4, there is an exponential increase in profitability.
1) Increase the Price
As logical as it seems, increasing prices will increase profitability. But, if you don't know the rest of your numbers, increasing the price is a shot in the dark.
2) Increase Monthly and Annual Revenue
If you can increase your revenue by completing multiple projects at an increased price, combining these first two ways to increase profit will take you to another level.
3) Decrease Monthly and Annual Overhead Expenses
The spending assessment tool we have designed will walk you through your expenses so you can find out where you can decrease your spending.
4) Decrease the Cost of the Job or Cost of Goods Sold ... "Minus COST +"
How do you decrease your costs? In some cases, you can't do this. But, in other cases, you can!
Everything circles back to knowing your numbers to make better decisions! The price must be for profitability! Don't just price because you think you'll get the job at that market price- Price it right, show up with your shock and wow factor, and set yourselves apart to make money. A solid understanding and application of The Sweet 16 will allow you to transform your business from a profit number!
