Margin Of Error - AvNetwork.com

Margin Of Error

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Ever walk into a large department store and wonder why the same items are consistently located near the entrances and exits?

For retail stores it's all about gross profit margins, sales per square foot and inventory turnover. Uniquely perceived high priced items that take up very little space and cost a small fraction of their sales price to produce will always get the premier locations.

The same holds true in our industry. For us, one of the highest profit items had been the video projector. A projector fits in a car trunk, could often run many tens of thousands of dollars with margins exceeding 40 percent, was cantankerous to install, and inherently unreliable requiring multiple service calls back in the '80s and '90s. I remember one horse racing track that became part of the daily routine for our video technicians.

So what did we do as an industry? Along with our clients, we demanded a better product. I guess it was a case of being careful of what you wish for as you might get it. Now we have very capable and reliable projectors that are sold next to the paper towels at office supply superstores. Great for keeping the factory assembly lines busy but not so good for our bottom line margins.

The most closely guarded secret of the industry is not technological in nature, but plain old profitability percentages. With all the failures and consolidations both within and without of our industry for the last five years, it's been very hard to get a handle on the state of the state. So what's your percentage?

The first number you'll likely hear is the gross margin on specific bids. Trade show bragging rights start at 30 percent and diminish to simple acknowledgement of contract award rights at around 10 percent. One starts to look downright foolish winning bids at under 10 percent, as this is a well known recipe for financial catastrophe.

Yet that is exactly where owners and electrical contractors want you to bid. After all, drywallers only get 10 percent, don't they? You listen to any owner and you'll get a speech along those lines. Arguments like day hiring from the local hall and local material requisition may make a dent with this type of argument.

If the bid is awarded through an electrical contractor to you, it's a pretty sure bet you're price is getting stepped on to the tune of at least 7 percent for "administrating" your efforts-and that is almost exclusively net margin for the electrical contractor. It's also a pretty good bet that your bid has been faxed to your local competitors in order to grind down your price. God bless the NSCA for pushing to get our systems out of Division 16!

My personal rule of thumb is to shoot for a minimum 35 percent gross profit margin in larger deals. This level generally ensures you'll at least remain in business for the duration of the warranty period while providing a long term quality relationship between owner and contractor that doesn't require nickel and dime change orders.

Long term margins well above 35 percent invariably end up in a disastrous divorce once the owner become more sophisticated about your work. Conversely, there are a string of failures out there for companies bidding under 20 percent gross margin. Typically these firms gained a large market share quickly and used the up front payments from the current job to pay off the last one. Great concept as long as their sales rises geometrically.

Remember that gross margin is never the same as net margin, which includes unbilled and uncontracted time, project overages, late payments and other unanticipated inefficiencies. That 20-point bid can rapidly diminish if your staff is not kept continuously busy and you're not negotiating better pricing deals with your vendors right from the start.

It's unlikely you'll be able to grind your vendors much for very long. Ever wonder why so much production is being moved abroad so quickly? Once the first manufacturer in a given industry makes the move, the others really didn't have any option but to follow in order to remain competitive.

Yet I would be remiss if I didn't offer some remedies to the situation. Rather than pack you off to a $1,000-seminar, I will offer the following 11 time-proven, self-explanatory techniques:
1. Avoid guessing at the price the market will bear.
2. Qualify for additional vendor discounts.
3. Most effectively defend your prices.
4. Set your product offerings apart from the competition.
5. Eliminate the confusion between "mark-up" and "margin."
6. Reduce returned merchandise, mistakes and errors.
7. Determine whether a price objection is real or merely an excuse.
8. Upgrade sales to higher margin premium products.
9. Create gross margin reports and know when to run them.
10. Respond creatively when customers ask for a discount.
11. Design gross margin incentive plans that get results.

John Mayberry (emmaco@emmaco.com) is vice president of engineering for Emmaco Prentiss, a consulting firm located in San Marino, CA.

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Too Clever By Half

So what do you do when you underbid a major long-term project? Even with the best of intent and procedures, it still happens. I've found there's 600-year-old expression, "Too clever by half," which often sums up the situation quite nicely.