Ep. 18: Inflation Isn't Killing Your Margin. Your Work Mix Is.

[00:00:08] Speaker A: You are listening to the Total profit podcast. I'm T2 and I'm here with Tommy P. Who keeps telling business owners a lot of things that they don't seem to want to hear. [00:00:18] Speaker B: Truly, it's not the economy. [00:00:21] Speaker A: Right. [00:00:22] Speaker B: Some of these problems existed before today. [00:00:26] Speaker A: Well, and that's exactly what we're talking about today. All right? Every headline is screaming inflation, supply chain, labor costs rates. But here's a very uncomfortable truth that we're gonna dive into, and that is that inflation isn't killing your margin. Your work mix is. [00:00:46] Speaker B: Right. [00:00:46] Speaker A: It's your work mix. So this episode is sponsored by performance margin software. Because guessing your way through rising costs and all of these different elements is not a strategy. We're not going to guess our way through that. So material costs have fluctuated for three straight years, up and down, all over the place. It became national news when lumber was so expensive and so on. Labor costs are up. Interest rates have been very volatile the last several years, and so everyone really feels squeezed. You think that's a fair statement? [00:01:23] Speaker B: I think it's a very fair statement. And if you don't know what your true costs are, as we talk through this, it's causing an anxiety, I'm sure, [00:01:35] Speaker A: a lot of anxiety. Here's my question that I want to dive into today, though. So if everyone is dealing with the same market, everyone's dealing with the same market, why are some companies still running 20% gross margin, while others are still stuck at 7, 8, 9% or maybe even losing? [00:01:53] Speaker B: I think the short answer is they know what their margin is, so they're comfortable with these changes and they. They can adjust their. Their runways and somebody that is guessing isn't. Doesn't have that comfort level. So though the instinct is to panic or it just grinds on them of what am I doing wrong? And we can help those people take a look at this and build that same path that the 20 percenters are following and give you that comfort. [00:02:24] Speaker A: Well, let's talk about the work mix a little bit, and let's dive into that. So define what that is. We've got service versus install or service versus whatever actual work you do, small jobs versus large jobs, custom versus a standardized type of installation or whatever you do. There's high complexity types of jobs versus things that are very repeatable. [00:02:50] Speaker B: Right. [00:02:51] Speaker A: Okay. So most owners kind of lump all of this together and they say, we're busy. But like you said before, busy is not a business model. No, busy is not a business model. So when we separate those work types within the performance margin software, something always happens. One category is carrying the company and another category is quietly bleeding the company. And when we provide that kind of clarity, it's so eye opening for our clients. What usually shows up when we break this down, thinking about those work type mixes? [00:03:32] Speaker B: Well, it's an education piece that you can't use the same margin for everything. You have different levels of performance in your work groups and you need to plan them accordingly. But at the end of the day, I'll make the analogy of a custom car show on television. These cars come out and they're 20 times the original value, but that's because they cost that much. So if you have a custom job, you have to have the mindset that people are using you because of your craftsmanship and that's worth something. You've earned that. So don't kind of set that to the side and lump everything as this is my number. You need to be flexible. [00:04:19] Speaker A: You need to be flexible. We find that a lot of those custom projects sometimes underperform. Business owners will do them as a one off for various reasons. And maybe there's a strategic reason reason. Maybe you want to bring on a high profile client, maybe you want to do a specific type of work and experiment with it a little bit. And so your margins might be lower there, but if that's something that you're doing on the regular, that's not good. [00:04:45] Speaker B: It's risky. [00:04:46] Speaker A: It's very risky. What about small jobs margin versus larger job margin? [00:04:54] Speaker B: Yeah, and those are bid according to your margin, but also according what the market will bear. The founder of Performance Margin software uses the analogy in his journey. One year he was bidding everything with the same margin or salespeople were, and he would get a ton of little jobs that had very decent margins, but not getting the big jobs that actually had the margins with the cash. He's like, what the heck's going on? Peel it back. And realize this is where the tier system comes in. By whatever increment of dollars these jobs fall into, they differ, have different levels of profit to squeeze out of them. [00:05:40] Speaker A: Oftentimes business owners will bid the larger jobs at a smaller margin, but because of the volume of it, they end up making more, more money off of the job overall. So yeah, there's different margin levels for the size of job. And we help define that. We help define that. [00:06:03] Speaker B: And you mentioned the service industry services is a call for your expertise. People have a problem, they're using you as the subject matter expert and there's a value to that. So don't degrade your value when you have these different profit centers or different work types in your business. [00:06:23] Speaker A: Don't degrade your value. Know what you're worth, right? Know what you're worth. So here's a few phrases that this is what guessing sounds like. Guessing sounds like we think that commercial jobs are profitable. We believe that our remodel division is really strong. We've always done it this way. That's a classic one, right? [00:06:47] Speaker B: Yes. [00:06:47] Speaker A: Knowing sounds like Division A runs 24% gross. Division B runs 17% gross. That's what knowing sounds like. Custom work has a 37% variable rate. Service calls produce three times the cash velocity. Those are statements that tell me you know your business. You're not guessing. You're not making generalized statements. This is what knowing feels like. So this week we've got a little homework assignment for people who are listening. Separate your top three revenue categories and calculate your gross margin individually. This is something that we can help you with if it's not something that you want to spend time on. But honestly, if you can't do that in under five minutes, you don't have the right visibility for your business. And so it's not a situation where inflation has snuck into your business. Your work mix did, and you don't have it defined or broken out correctly. So simplify to multiply. [00:07:52] Speaker B: Exactly. I love it. It's truly what we've been preaching in all of our past podcasts. However you lay it out, stop guessing. Start knowing. Just reach out to us. TotalProfitManagement.com Schedule A free consultation and let us help you. It's that simple. And remember, take her cool. [00:08:17] Speaker A: It's all going to be fine.