Why Margins Matter in Business

The Wrap Biz

By Matt Richart

When we first opened our wrap business in 2004 our main focus was to stay in business and keep it running without closing our doors. That was our biggest fear and concern. Making a profit and creating a good life for us was paramount but we just didn’t want to go under. After some time of proving our worth and creating a viable business, you start to peel back some of the layers of your business that have worked along with what hasn’t worked. I think a fair amount of us have gone through pricing changes, realignments, culture changes, and process evaluations, and continue to do so. I know we have and will continue to do so. I preface these items because I was lucky to be taught how important margins are to your company and most importantly your growth. Without fuel for your company, you cannot grow. Sometimes growing also doesn’t mean you add ten more team members and 4 new printers. You can grow your company by creating more cash flow, creating safety nets for slow times, and can also invest in education for your team, acquiring the best talent available, and allowing you to be around for a long time. These actions can’t be achieved without good, consistent margins.

Being in the graphic industry, most of what we sell, and produce is all custom-made. Some products are purchased, marked up, and sold back to our clients. Being in the wrap industry we are designing these wraps, creating a brand, producing the graphics, detailing the vehicle, installing the vehicle wrap, doing quality control, and then invoicing for payment. A fair number of steps take place during this process which requires not only a good amount of labor but also administration time. The mark-up in our industry can be particularly good and lucrative. Especially if you have your margins correct. Margins to most people are common sense but it is not common sense until it becomes common practice. When we first started our business in 2004, I would run into a landscaping business that was doing four million dollars a year in revenue. Then I would have lunch with an HVAC company that was doing over seven million dollars in revenue. When we finished lunch, he told me that he was operating with 7% margins and that business was not great. That really opened my eyes to what companies were really making money. I went back to the landscaping company that I was friends with and asked him what his margins were. At that time, they were operating at almost 5% margins and were barely hanging on. I could not imagine doing four million dollars worth of wraps, deadlines, stress, and busting our tails just to have a five percent margin. This information was both discouraging and encouraging at the same time.

This is when I really started to go back and reverse engineer our sales process, pricing list, touch time, administration time, and how long it really took to complete a wrap from beginning to end.

At our company we really try to stay in the 60% - 70% margins on most jobs that we complete. For example, if we were quoting a partial wrap for a client and we had $400 in material along with $300 in labor we would charge $3,000 for this partial wrap. The total overhead for this job would be $700 total. We then subtract $700 from the sales price of $3,000 which will give us $2,300. Then take $2,300 and divide by what you sold this partial wrap for which was $3,000. That will give you a 76% margin on this one example. Keep in mind that you will not always hit these types of margins depending on the scope of work that you are performing. I tell my sales staff all the time that we cannot always get those types of margins. If we purchase an item that we don’t produce and resale back to our client those items usually have 40% margin or so. Just don’t beat yourself up when you can’t always generate those types of margins. All these numbers can become boring to some but for me, it gets me excited. Especially during the quoting phase of the sales process. By diving deep into your quoting process, you can really calculate how much overhead you have into each product which allows you to know what streams of revenue bring the most margins for your company. At Digital EFX Wraps we usually never give out discounts or run a special sales campaign until about two years ago. I noticed that January and February were our company’s slowest months. So, to combat that we offered a 15% discount on all wraps during those months. While it did pump up sales for those two months that discount was applied to all our products including signage, design, and installation services. What I learned very quickly was some of our products did not have enough margin in them to justify giving a 15% discount. As the next year came to an end, I set up our new sales campaign and offered our discount to only box trucks and trailers. The reason for this was due to our high margins on these items. Our labor was significantly lower on these wraps because our team could wrap three to four trailers per day depending on size and complexity. I noticed that these vehicles were in the 75% - 80% profit margins for our company. We ended up doing just as many sales in January/February as we had done in the previous year with less labor. Our company was just as profitable with 25% less labor than the year prior.

Another easy example to use in your head or on paper is a simple 4 x8 banner that you might produce for one of your clients. If a 4x8 banner costs our company 50 cents per square foot to produce that would cost our company $16 to print, trim, and grommet. We would then sell that to our customer for $192 at $6 per square foot. If we do the math that I mentioned earlier you would subtract $16 from $192 giving you $176.00 left over. Then take $176.00 and divide by the sale amount of $192 which gives you a 91% margin on this one job.

I don’t know about you but I would take these margins every single day of the week. This is why some companies focus only on banners and these types of products. Also, the more work you provide and the revenue you produce will allow you to adjust your margins so that you can become even more affordable which should bring in more business. I could discount this banner by $90 and would still be around 84% margin for this exact job. This would be an item that I would be willing to do a sales campaign on or even donate to a great local charity.

I highly recommend that you go back to a few of your last vehicle wraps, signage, or any other graphic product that you have sold over the past month. Look at what was charged to your client, what it took to produce that product, and what was your final margin on that job. This will give you a clearer picture of what you and your company are producing. As I teach in my business class for Inside the Wrap Shop you need good margins in order to add fuel to your rocket. Not only as business owners do we need to be profitable, but we need cash flow in order to grow and protect ourselves during slow times. I learned a long time ago that being a 2 million dollar wrap company doesn’t mean anything unless you have the correct margins that will give you true net profits at the end of each year. This is what is important. This is what will allow you to grow. This will also allow you to hire better talent to add to your team which will take you to another level. Work on your margins and you will see your bank account change dramatically!!!

Matt Richart Matt@digitalefxwraps.com Co-Owner/CFO, Digital EFX Wraps LLC. Instructor, Inside The Wrap Shop