Take a breather from the frantic pace of a production shop and recalculate what it costs you to produce an order today compared to a year or two ago. Let’s say an order with an invoice price of $1,000 costs you $700 to produce now when it only cost you $650 12 months ago. (When I say, “Costs you X dollars to produce,” I mean the cost of raw materials that go into the order, consumed items [e.g. energy to operate your machines, shop supplies, such as cleaners, oils, etc.], production labor, packaging, and delivery.)
This means a year ago, your gross margin was 35 percent ($1,000 minus $650 divided by $1,000). Today, your gross margin on that same order has deteriorated to 30 percent. If you only raise your price by the amount the cost of goods sold went up ($50), your gross margin would have still shrunk to 33 percent ($1,050 minus $700 divided by $1,050).
Periodically, cast your attention to the cost of goods sold for a typical job. As a general rule of thumb, when you do raise prices, double the difference in how much the cost of goods sold increased. Doubling your costs equates to a 50 percent gross margin, also known as a “keystone markup.” In the example above, if you raised your selling price for that order from $1,000 to $1,100 (a 10 percent increase), your gross margin would grow to 36.4 percent. There is a good chance you will have no problem charging and collecting $1,100 for that order, either from a new prospect or a good customer that has been delighted doing business with your company in the past.
-Vince DiCecco, Your Personal Business Trainer
