Are You Charging Enough?

Marking up Procurement Items

Pixabay on pexels

In the design industry it is common to procure items for clients. The price you charge is usually calculated as a marked up percentage of the cost of the item.

The simple version math (ignoring freight & taxes) may look like this for one item:

Cost of Item = $100

Markup = 10%

Price Charged = $110

So how do you know if that 10% markup is enough?

Manage Your Costs

We like to manage procurement activity by separating those sales from design fees and then managing the cost of goods sold. Cost of goods sold is a category of business expenses that includes all the costs directly involved in delivering a service — in this case delivering procured items.

Suppose in the example above you were procuring 10 items at the same cost for ease. They would show up on your financial statements like this:

Income: Procurement Items = $1,100

Cost: Cost of Goods = $1,000

Gross Income = $100

The gross income is the money left over to pay for the work of procuring the items. That work may include communicating or coordinating the selection, approval, purchasing, logistics, storage or installation of the items.

You have $100 to pay for all of that time.

So how do you know if that 10% markup is enough?

Manage Your Profit

If you are doing the work as the business owner then the $100 is profit. Just get comfortable with the average hourly rate:

  • 2 hours to procure all 10 items will translate to $50/hour.
  • 5 hours to procure all 10 items will translate to $20/hour.

If you pay staff $20/hour to do the work then you need to be comfortable with the remaining profit:

  • 2 hours to procure all 10 items will cost $40 and therefore translate to $60 of profit.
  • 5 hours to procure all 10 items will cost $100 and therefore translate to $0 of profit.

In this final example you can see there is no money remaining to pay for rent or systems therefore the business is losing money.

So how do you know if that 10% markup is enough?

Follow These Steps

Step 1, Manage Costs:

Translate the gross income into an hourly rate. Increase the percentage until you are happy with that rate.

Step 2, Manage Profit:

Subtract out the hourly rate of staff that would be doing the work. Increase the percentage until you are happy with the profit.

Step 3, Manage Price:

Keep increasing your markup periodically until someone says it is too high.

If you need further guidance on how to manage procurement costs then feel free to schedule a complimentary advisory session.

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honeyguide | helping makers and designers carve out time to get back to their creative work