Margin, COGS, Markup & Profit Confusion - Short 123
HVAC School - For Techs, By Techs
Bryan Orr
4.9 • 1K Ratings
🗓️ 20 July 2021
⏱️ 12 minutes
🧾️ Download transcript
Summary
In today's short podcast, Bryan clears up the differences between markup and profit margins in HVAC businesses.
The number one mistake that people make in business is confusing markup and gross margin. For example, you can double the price of a $50-part and sell it for $100. That would be a 100% markup. However, your gross margin is NOT 100%; your gross margin is only 50%; you only made a 50% profit on the total sale.
In the same case you have above, you have a 50% cost of goods sold (COGS). COGS is the direct cost of the expenses you paid to sell your service or product. The opposite of COGS is overhead. Overhead includes anything that doesn't directly bring money to your business (rent, utility bills, etc.). Let's say that your overhead costs total $30. You only end up with $20 of net profit.
Typically, 10-20% net profit is a good (if slightly idealistic) goal. Net profit can contribute to business growth if you put it into your business. For example, you can use that money for advertising, buying vans, and buying better tools.
If you want to determine a 10-20% goal, DO NOT USE MARKUP. Instead, you need to divide by your COGS expenses. In the case of the $50-scenario, let's say that our cost of goods sold is 60%, so that seems like a 40% markup. You would divide 50 by 0.6, and you would get $83.33. If you multiplied by markup (140% or 1.4), you would have gotten $70. You wouldn't come close to your gross margin number using the markup method.
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Transcript
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| 0:00.0 | Bupadududu-doo this is the HVac school podcast I'm Brian this is a short episode |
| 0:07.6 | this short episode is gonna be one that a lot of you roll your eyes at because you're like man |
| 0:11.3 | I work for the man he keeps me down and I don't care |
| 0:15.1 | about any of this stuff maybe none of you said that but that's the voice in my |
| 0:19.1 | head sometimes the way I felt when I worked for others, but this understanding of some of these monetary terms |
| 0:26.0 | and how they easily get confused I think is going to help you, whether you're a business owner, |
| 0:30.8 | a manager, or just somebody who wants to better understand |
| 0:33.7 | pricing and profitability and what that all means. It's not going to be long so it won't be like some |
| 0:38.1 | really boring mathy podcast. So just hang in there, hang in there. I think you're going to be happy that you heard this. |
| 0:44.4 | Or maybe you already know it and you're rolling your eyes at me. That's also fine. That's also fine. |
| 0:48.4 | But here we go. First we got to thank our great sponsors. |
| 0:51.5 | carrier and carrier.com refrigeration technologies at |
| 0:54.9 | refrigeratetech.com they make many many great products. John Pasterello |
| 0:59.6 | originally started the company when he invented Big Blue, which is hands down my favorite |
| 1:04.7 | bubble type leak detector. It's so much more than just soap bubbles. It is a leak reactant that's designed |
| 1:10.4 | to show even tiny, tiny bubbles without creating any corrosion and |
| 1:15.0 | without reacting to electronic leak detectors. |
| 1:18.0 | It's great stuff. It comes in the spray bottle. |
| 1:21.0 | If you haven't tried it yet try out Big Blue from |
| 1:23.8 | refrigeration technologies and also check out their leak detection guide |
| 1:27.4 | that's on the refrigeration technology's website just browse around a little bit |
| 1:31.1 | at refrig detect.com they have really great training and education materials there as well. |
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