Don't Get Wrapped Up in Margins
Spendable profits are measured in dollars and cents. You can’t bank margin — you can bank dollars.
When I worked for Siemens, the focus was all about margin percentage. Evaluations were given, bonuses were paid and careers were made on margin percentage. If a job couldn’t be sold at a targeted margin percentage, then it wasn’t a job Siemens wanted.
One day one of my salespeople brought me a job to consider. It wasn’t a big job — maybe about $20,000 at a 13 percent margin. The dollars to be earned certainly weren’t enough to cover overhead allocations let alone make a profit. The job was well below the targeted margin percentage. Why should we even consider the job?
Well, the job was for a fire detection system at a new shopping center. My salesperson explained that the tenant buildouts alone would be worth a small fortune, and all would be required to connect to our panel.
So, my branch booked the job. Within two weeks, I was getting a call from corporate asking why we had booked such low-margin work.
Too many security companies evaluate their product lines and services by the margin of dollars earned, rather than the dollars that could be made selling the product or service. It’s a common mistake made by large corporations and short-sighted dealers. These companies establish a “target margin” for everything they sell, and walk away from anything that does not meet the margin standard.
The problem with this approach is that it fails to consider the dollars represented by the profit margin. Rich companies understand that you bank dollars, not margin.
In the example I just shared, our sales rep understood that the dollars earned on the project would be significant and, at some point, the overall value of the entire project would meet target margin guidelines. That’s why we booked the project and made more than $1 million in profit on it.
You earn more dollars selling a $1,000 item at a 20 percent margin than you do a $100 item at a 40 percent margin. I don’t care how big your company is — cash is still king. You deposit dollars, not margin. By focusing only on margin, it’s easy to miss profitable dollars.
How can you avoid the trap of evaluating jobs simply by the target margin? I recommend a holistic view of the service or product. Evaluate the product or service from this view:
- What is the amount of dollars earned?
- Are there reasonable add-on opportunities that can help boost the gross sale value?
- Does adding the product or service improve your line and/or enhance what you are already selling?
- Does the product or service help differentiate your company in the marketplace?
- Is this a product or service you can sell? Are you enthusiastic about it?
Too many companies are only selling to a margin standard. This causes them to miss out on banking some serious dollars. Consider more than just margin and watch your earnings soar. /