Gross Margin vs Gross Markup

Gross Margin vs Gross Markup

Here at BidClips, we have frequent conversations with our clients about gross markup and gross margin, especially as they relate to pricing. Through these discussions, we noticed that gross margin and gross markup are commonly thought of as interchangeable, which can have disastrous impacts on pricing and bottom lines.

The way this usually plays out is a client sets a target gross margin of say 50% and then calculates their prices using the formula for gross markup. When they calculate their gross margin, they expect to see 50%, but they don’t, their result is 33%—an unpleasant surprise.

Our client mistakenly believed that gross margin and gross markup are equivalent, but they are not, they are related. And because of the way they are related, gross margin will always be less than gross markup. The client’s services will always be underpriced, and they will always fall below their target margin.

We want to eliminate the confusion surrounding margin and markup by exploring how the numbers are related and how each has its own uses. Before we do that, we need to define margin, markup, and a few other useful accounting terms used when discussing margin and markup.

Important Terms

Revenue (def.) how much you sell a product or service for. It is also known as top-line because it is the first line item on a Profit and Loss Statement. Pro Tip: What you sold.

Here is how revenue might look in your industry:

Home Flat Glass Window Washing Plumbing
3 x Insulated Glass Unit Part: $600 Exterior Window Package: $1,000 Toilet Fill Valve: $100
Insulated Glass Unit Installation Labor: $400 Extra Clean Screens Add-on: $500 Fill Valve Installation: $200
Total: $1,000 Total: $1,500 Total: $300

Cost of Goods Sold (COGS) (def.) your cost to produce a good or provide a service that is ready for sale. What costs you include in COGS will vary based on your industry, but you should cover all costs that can directly be attributed to generating revenue. Pro Tip: Cost of what you sold.

Here is how Cost of Good Sold (COGS) might look in your industry:

Home Flat Glass Window Washing Plumbing
3 x Insulated Glass Unit Parts: $180 Cleaning Supplies: $100 Toilet Fill Valve: $20
Insulated Glass Unit Installation Labor: $90 Cleaning Labor: $100 Fill Valve Installation: $50
Total: $270 Total: $200 Total: $70

Gross Profit (def.) the difference between Revenue and Cost of Goods Sold. It is calculated by subtracting the Cost of Good Sold from Revenue. Pro Tip: Remaining revenue after paying COGS.

Gross Profit= Revenue – Cost of Goods Sold

Home Flat Glass Window Washing Plumbing
Revenue: $1,000 Revenue: $1,500 Revenue: $300
COGS: ($270) COGS: ($200) COGS: ($70)
Gross Profit: $730 Gross Profit: $1,300 Gross Profit: $230

Gross Margin (def.) the portion of revenue that remains after paying expenses to produce your goods or services expressed as a percentage of total revenue. Gross margin must always be less than 100%. Pro Tip: % of remaining revenue compared to revenue

Gross Margin =

Gross Profit
Revenue
X 100

Gross Markup (def.) the amount over cost you sell your goods or services for expressed as a percent. Gross markup must always be greater than -100%. Pro Tip: % over cost you sold your goods or services for

Gross Markup =

Gross Profit
COGS
X 100

Gross Margin and Markup Are Related

There are a couple of rules we should know about the relationship between Gross Margin and Gross Markup. The first rule is so important we should remember it twice.

  1. Every Gross Margin corresponds to precisely one Gross Markup
  2. Every Gross Markup corresponds to precisely one Gross Margin
  3. Gross Markup will always be higher than Gross Margin
  4. Gross markup and gross margin can be converted from one to the other using the following formulas:
Gross Margin to Gross Markup Gross Markup to Gross Margin
Gross Margin
(1-Gross Margin)
Gross Markup
(1+ Gross Markup)
Gross Markup Gross Margin
25% 20%
33.3% 25%
43% 30%
50% 33.3%
67% 40%
75% 43%
100% 50%
200% 67%
300% 75%

Using Gross Margin

Gross margin is an important number to watch for your business’s overall health because it gives a clue about how efficient and effective you are at preparing your products or services for sale. It will also inform you what portion of your revenue is retained as capital to pay for general expenses or pay down liabilities and associated interest expenses.

You should have a general idea of the average gross margin for your industry and compare it to the margins in your business to see if you are below or above the industry average.

Margins are Below Industry Average

If your margins are below your industry average, then you know your prices are too low, your costs are too high, or some element of both.

Avoiding pricing mistakes that result in prices that are too low (or too high) for your market is extremely important. To do so, you should periodically review your pricing strategy to ensure you are maximizing profits while maintaining a competitive advantage.

Sales processes can also function to drive down gross margin even if your top line is priced well. Sales reps will often take any opportunity to close a sale, and discount diving is a real challenge we have witnessed from our own reps. If you are going to offer discounts to help close sales, you need to set your reps’ expectations about when and how they can be used. Establishing gross profit minimums and rewarding sales reps who achieve profit goals along with sales goals are two great methods.

If you decide you are in line with the competition after reviewing your pricing, you should examine your costs. Call around to alternative vendors and see what they offer. You may discover you need to renegotiate your current contracts or source materials from different suppliers. If you operate a business where labor is a significant component of production, you should examine if you are being as efficient as you can with your workforce.

Margins are Above Industry Average

What if you have looked at your gross margin and realized it’s higher than your industry’s average? That’s a good thing! Right? Well, maybe not. Remember, many factors go into pricing aside from calculations and metrics. What the market can bear, or what your customers are willing to pay, will ultimately determine your final price.

Your price, coupled with your value proposition, will determine how much of the market is available for you to capture. By pricing higher than the average, you could price yourself out of growth opportunities, and your approach should be reviewed in your positioning and pricing strategy.

Using Gross Markup

Gross markup by nature does not lend itself to a straightforward analysis of what happened in your business compared to gross margin. However, it is a more natural way to envision what needs to happen to be profitable.

For instance, if you know your COGS on each sale is $100, and you have $2,500 each month in operating expenses, and you expect 50 sales, then you know you need $2,500 / 50 = $50 in gross profit on each sale to break even. That is a 50% markup, which is more comfortable for most people to envision and calculate than to recognize it as a 33% margin.

The uses for gross margin and markup discussed above lends to the idea that gross margin is an accounting function, and gross markup is a pricing function. We believe this is a narrow view because they can be equally powerful in pricing and accounting. Knowing gross margin and gross markup are different in form and use, but recognizing their relationship will empower you to use them in new and exciting ways.

The Power of the Follow Up

The Power of the Follow Up

Building Relationships Through Empathy

One of the core concepts we teach our salespeople at Service Station is demonstrating empathy toward the customer at every point of contact they make with that customer. In the home and auto service industries, customers are not often contacting us because they have some awesome projects they are super excited about getting done.

More often, a problem occurred with their home or car, both of which are significant, if not the most significant investments your customers will make in their lives, and they are experiencing powerful feelings of loss, frustration, and fear. They begin to ask themselves questions such as “What happens next?” “How long is the process to get this fixed?” “It works well enough; do I need to spend all this money to fix this now?”

Even in instances where a customer is making an upgrade or update to their home, the significant investments of time and money they put into the project cause Buyer’s Remorse to be a deep feeling you must address. Questions enter their minds, such as, “Will this update increase my home value?” “Can I make my money back in a resale?” “Will I like the results of the completed project?”

It is overcoming the internal dialogue your customers are having with themselves, or rather, empathizing with it, that will win you jobs.

 

Follow-ups are about the customer

The best time to position ourselves as empathetic listeners is at the onset of our relationships with our customers. Unfortunately, we are unable to do so at times. Perhaps we didn’t listen properly. Maybe the customer didn’t wholly express themselves. Perhaps we weren’t in the proper frame of mind to respond as we would like.

Following up provides us with the opportunity to refocus, relisten, and respond.

A well worded follow-up will say to customers, “We heard you, and we understand you are facing some difficulties. We are here for you and want to help.” This subtle message transforms the buying experience for the customer from being about you getting work out of them to you working to achieve their goals.

This subtlety is important because customers know that when you follow-up, you are looking to close a sale, which is inherently about you. You must combat their wariness toward being sold by approaching all follow-ups, and interactions in general, with the mindset that the sale is 100% about the customer.

 

Introducing empathy in your emails

You can achieve this in your follow-ups by demonstrating that you have been thoughtful toward the customer first and that your primary objective is not merely to close a job. Homes and vehicles are very personal items, and customers should receive similarly personal experiences.

Take the following example of two follow-ups attempting to achieve the same goal of closing a sale.

Example 1:
Hello, Mrs. Smith. I am calling to see if you received the bids we sent you. We would love to get started on this project, do you think you are ready?

Example 2:
Hello, Mrs. Smith. It was great to speak with you the other day. I was reviewing the bids we sent you, and I think the frameless clear channel with brass fixtures would look great in your bathroom. I know there are important decisions to make on this project, so I wanted to gather your thoughts and help you make a great choice.

The simple changes in the second example help to reshape your customers’ perspective about you. First, it establishes a personal experience because you demonstrated enough care to review the customer’s bids and put your own thoughts into their choices.

Second, it reinforces to the customer that you understand they have some decisions to make, which may not be easy ones.

Third, you demonstrate that you are interested in a collaborative discussion by leaving the call to action open-ended. This also has the secondary benefit that customers will have more difficulty merely responding that they are not interested at the time.

Ultimately, following up will position you in your customers’ minds as the shop who legitimately heard their needs and is coming back around to make sure they are taken care of. Even if you don’t close the sale, a customer will remember your efforts for the next time they have a need, and your follow-up will set you up to forge a long-lasting relationship that will result in future sales or referral business.

Power 1: Following up provides another point of contact to address customers’ questions and concerns with empathy.

Power 2: Following up strengthens your relationships with customers by being at the forefront of their minds and demonstrating persistence in helping them achieve their goals.

Selling to Deciders with a Value Proposition

In sales psychology, there is a thought experiment where a salesperson is talking to a couple, and he asks them a question about their preference for a feature for the car they are interested in buying. He closely observes the couple’s interaction, and carefully notes which person is given the ultimate say in response to his question. He knows that person is the person he is selling to because that person is likely the most crucial decision-making persona in the buying process – the Decider.

The Decider has the final say in the purchase decision-making process and is ultimately the person a salesperson is selling to. The Buyer persona (the one stroking the check) has sway throughout the process. Still, any objections they have over price will ultimately be overruled by the Decider if they feel their needs are met by the value presented in excess of the price. A great salesperson will overcome the objections of the Decider by learning about their needs and selling to the benefits which best fulfill those needs.

We must remember that the goal of every sale is to present enough value to a customer to overcome any objections that arise over price. Through this complex back and forth of delivering value vs. price, we will encounter and need to overcome objections from various personas throughout the decision-making process.

 

Dealing with the Decider persona

In some instances, the same person is every persona, and you only need to sell to that person. But because we are in the home and auto service industries, and we are dealing with homes and cars, which typically represent significant family level investments, there are generally multiple parties involved, with various needs, and strong opinions. You may have one person who is every persona, two people who split all the personas evenly, or even multiple people acting as each persona at different times!

In fact, we track the reasons customers don’t immediately book when we present them with a bid, and 23% (n = 36,258) of the time, their response is, “I have to speak with my partner or another third party.” That means for nearly one out of every four jobs you are unable to close, you failed to do so because you were not selling directly to the Decider.

This happens for several reasons, and we see it every day, even in our own lives. One partner wants something around the house taken care of, so they ask the other partner to present them with solutions. A tenant needs an issue addressed, and they call a provider without realizing the landlord needs to be involved. Your estimator sits down with a couple to present a bid, and they make the wrong assumption about the needs of the Decider or are unable to recognize who the Decider is.

 

Offer your value proposition

Unfortunately, not selling directly to the Decider is a dangerous, and often losing position to be in. If you spoke with the Decider but didn’t recognize their needs and or didn’t correctly translate benefit to those needs, you aren’t going to close the sale. If you haven’t spoken with the Decider, and your message is being presented through another party, even if that other party is close to the situation, you likely won’t close the sale.

The only person who can completely understand and present your price to value proposition is you. How often have we asked our partner to get an estimate on a job, and they say, “The person I talked to said it would be $987.67 to get it done.”? There is no value or competitive differentiation expressed in that statement, and that is the danger of relying on someone else to present your message.

This is where following up comes in. By giving yourself more opportunities to speak directly to the Decider and reiterate your value offering, you are going to see better sales results.

Power 3: Following up gives you another opportunity to get in front of the Decider.

Power 4: Following up allows you to present or restate, your value offering.

Streamline Sales Processes and Generate Results

The most compelling reasons for following up with customers are the simple reasons that follow-ups are effective at generating results. They give you a good idea on which leads are strong leads and should be worked, and which are most likely lost and should just be monitored.
This categorization of leads will increase the productivity of your workforce by giving everyone a unified direction on which customers are valuable in pursuing. This streamlined focus will save your business time, effort, and money in the long run.

Follow-ups are also very effective at closing jobs. Across the BidClips customer base, when our customers use automated follow-ups, they experience a 12% (n = 2,729) average increase in overall sales, with some experiencing as high as a 23% increase. When we layer on following up via phone call or direct message, the increase in sales rises even further to between 20% and 30% (n = 56,982).

While those numbers are significant, the hidden power of closing an already bid lead is that an already bid lead is much more valuable than a new lead. The saying “a bird in the hand is worth two in the bush” is extremely appropriate when applied to follow-ups.

By the time you get to the follow-up, you have already put in 80% or more of the time and money needed to close the sale. The cost of the lead from PPC or other lead generation, and the overhead cost of bidding the project, are sunk costs you could recoup by closing.

Power 5: Following up helps your team prioritize leads so their efforts are focused on closing high-value customers and not wasted on pursuing lost opportunities.

Power 6: Following up results in better closing results, which translates into more sales and less wasted resources.

Follow-ups are powerful. There are many more direct and indirect benefits your business will receive by doing follow-ups other than the ones listed here. If you aren’t doing them, you need to be.

BidClips 2019 Year End Review

BidClips 2019 Year End Review

2019 – The Year of Transition “In Like a Lamb out Like a Lion”

If you ask me to best describe 2019 here at BidClips, I would use the phrase “in like a lamb out like a lion”. The gales of change that frequently accompany the transition of seasons from winter to spring are the perfect metaphor for our latter half of the year – especially during the last quarter when we undertook a series of changes in rapid succession.

While it was an exciting time at BidClips and Service Station, we certainly encountered our fair share of challenges that required great team efforts to overcome. I know I speak for everyone on the team when I say I am thrilled to be beyond the last three months of 2019 and feel better positioned to grow into 2020 and beyond.

Overall, as I reflect on 2019 and look forward to 2020, I can’t help but feel proud of the remarkable efforts our team put in to accomplish our goals throughout the year. I am immensely thankful for all the fantastic people who have worked tirelessly to help this business come together. As someone very close to me likes to remind me, “success is not a straight line”, and 2019 – The Year of Transition, which came in like a lamb and left like a lion, will pay dividends into 2020 – The Year of Growth and beyond.

Now, let’s take a brief look back at 2019.

 

January through July – Beta and Feedback

We entered 2019 having just commenced a pilot program with Neighborly to prove the concept of our product within their Glass Doctor franchise. Working closely with Glass Doctor franchisees and the corporate office has enabled us to build the best sales solution for the service industry.

We learned a lot about our product through our focus sessions and feedback groups, which continue to influence product decisions today. That said, because of the previously mentioned changes in the latter half of 2019, we fell off the wagon in terms of collecting feedback and hearing our customers, for which I am sorry.

Our phrase for 2020 is “Back to Business” and feedback will again be a firm area of focus for our team. We have a saying around the office that we are a company that takes feedback on our feedback. We love it. We are pretty good at it. We need to get MUCH better and get back to practicing the art of listening well.

To that end, we are looking for more feedback users in several categories. In the early redesign of the feedback groups, we are thinking we will divide everyone into three separate user types. The Beta Users will test the early versions of new features. The Focus Users will participate in – you guessed it! – focus groups to provide feedback on our current product. And the User Experience and Interface Users will be the guinea pigs on who we test mockups for future development. If you are interested in joining any of these groups, please e-mail us at success@bidclips.com with the subject “Join Feedback” and we will reach out to see which group you best fit into.

 

August to September

August was the harbinger for the craziness that would ensue at the end of the year. Most of our board members attended the Glass Doctor conference where they met up with our BidChachos, presented the findings of our pilot, and discussed how BidClips would change the way glass shops operate. They even brought a calculator we built to demonstrate the inherent missed opportunity in the way glass shops are run today.

Immediately following Glass Doctor Conference our team members walked into the vendor hall at Neighborly Reunion for our first official trade show. We met great people in various corners of the service industry and were able to generate conversations and buzz around our platform. We are thankful for all the fantastic people we met and cannot wait to be back in 2020!

September 1st represented our first official day of Early Access for providers in attendance at Glass Doctor Conference. It was really our first official day of availability to the public, but we were not broadcasting to the public, so we called it Early Access. We spent most of the month giving demos, selling platforms, and refining our onboarding process.

 

October through December

October is when everything really picked up. We encountered a few snags in our onboarding process and had to go back to the drawing board to better teach and coach on the product.

On the Service Station side of the house, we moved our entire sales team to the new platform and brought over all Service Station clients while simultaneously closing down the old system. We also began the initial process of changing our Service Station pricing which commenced November 16th.

The previously discussed pricing move included doing away with collecting 12% – 20% of completed sales through Service Station and toward a multi-level pricing system. In case you missed the details of our new pricing structure you can find it below. It should be made VERY clear that this is NOT pricing for the BidClips platform, but rather for our inbound call service known as Service Station.

Per call $2.49
Per message $0.50
Per service request $1.99
Of bid total 1.99%
Of job total 7.99%

Throughout the holiday season in late November and December, our team worked hard to adjust to the pricing changes we made in early November and complete our final platform release for the year. It was an enormous release, officially three times larger than any of our prior releases!

We officially pushed the behemoth out the door on December 28th, and I thank our testers and coding team for doing a tremendous job finding and running to ground issues to make our final release of 2019 our smoothest to date.

One of the key features of the release was the completed API integration with Mainstreet Computers™ Glass Avenue™ product. It is an integration we have long looked forward to as it gives our front-end sales product a strong operational partner in the glass industry. If you want to learn more about how Mainstreet and BidClips work together, please sign up for a platform tour.

For the final note of 2019, I would like to give some statistics to show what we have been able to run through the platform in a relatively short amount of time.

9,583 Service Requests
$3,919,242 worth of Bids sent
$1,081,656 worth of Jobs closed
$160,269 payments through Authorize.net

Glad you stuck with me for the recap of 2019. Now let’s take a look at 2020.

 

2020 – The Year of Growth and Integrations “Getting Back to Business”

We have many exciting initiatives coming in 2020 for both the BidClips platform and Service Station sales team.

One of the main goals for both companies is to move into the Plumbing and Lawn Care industries, while we expand our current offering of Flat Glass, Auto Glass, Window Washing, Mobile Storage, Auto Detailing, and Carpet Cleaning.

 

Service Station Initiatives

One of the primary areas of focus for Service Station is our new follow-up service which we began trialing in a few shops at the end of 2019. The initial results of the service are very positive! Our process is designed to maximize the follow-up offering for your unsold estimates.

We also need to get “Back to Business” and operate at the highest level as an overall sales team. We recognize that the transition at the end of the year took a lot of our management team’s time and effort, and we were unable to manage the team in a way we consider appropriate for the level of service we customarily offer.

We are heavily investing our time and resources into analytics and processes to make ourselves more efficient and more accountable so we can get back to doing what we do best – providing the premier first impression for customers and closing jobs. We will also be taking on 1 to 2 clients a month beginning in the second half of January, so if our contact center service is something you are interested in, please reach out to sales@bidclips.com

 

BidClips Initiatives

On the platform side, we are targeting a few large initiatives this year in conjunction with our normal release cadence. We spent too long getting our last release of 2019 out the door, and we want to get back to a three- or four-week release cycle. We already have our latest version complete from a features perspective and are just wrapping up some bug fixes.

The main areas of focus in development for 2020 will be our pricing engine, including the ability to automatically generate bids and bid packages based on customer-supplied information.We will also be giving great thought into how we can better add automation throughout the platform as well as create flexibility around how we define a customer.

At the beginning of 2019, we worked on some exciting pieces of the system centered around calendars and schedules that we want to get into your hands sooner rather than later. One piece of feedback we have heard loud and clear from our users is that they would like native provider iOS and Android applications, and we are taking a hard look at doing these.. And, as always, we will be listening to feedback from all platform constituents.

 

BidClips Integrations

I couldn’t reasonably call 2020 the year of integrations without including a section about integrations. In 2019 we completed integrations with Twilio and Mainstreet but would have loved to complete more. In 2020 we are going to make this a core initiative of our platform development.

We recognize it’s not optimal to operate in today’s technology environment without having a marketplace or being part of the marketplace of another software. We are absolutely going to tie off integration with Quickbooks as well as integrations with Google Calendar and Zapier. We would love to do one with Slack as well, either directly or through Zapier.

With our Twilio integration, it is a straightforward leap to porting in other phone systems, and we are looking at how to achieve this for RingCentral and Clarity. We will continue to update our subscribers on our integration initiatives, and we would love feedback on integrations you want to see come to fruition.

Thank you for taking the time to read through this post. Every one of our customers and subscribers is incredibly important to us and we strive to be transparent about who we are as a company and where we are headed together.

We are expecting an incredible journey in 2020 and we thank you for being a part of it. Come visit us again. We will be here getting “Back to Business”.

Sincerely,
Austin Casey, CEO BidClips and Service Station