Why It Pays to Break Away From ‘Standard’ Markups
Since starting our local studio in St. Louis, Missouri five and a half years ago and launching Stemcounter.com almost four years ago, I’ve had the opportunity to work with more than a thousand florists on their invoicing settings, proposals, and profit margins. I’ve seen scores of Excel sheets formatted in every way, shape, and form.
Out of all the florists I’ve met with, there are precisely two categories two which they belong. The first says, “I know how to price floral arrangements.” The second: “I desperately need help when it comes to pricing.”
Here’s where it gets interesting. Of those in the first category, I’ve had at least 25 conversations with people who assert florists need to price to “industry standard.” Of those conversations, how many named the same “industry standard”? Maybe two.
At our shop, we began to question things and really take a dive into how different companies priced their markups. In the end, we decided to do more than just accept what others said we should do. We decided to find out what we wanted to earn and adjust our level of service based on the markup we needed to make the profit we wanted.
But Isn’t it Good to Price the Same as Others?
“Sort of.” While there seem to be 87 different markups, at Stemcounter.com we see that there are similar profit margins within certain geographical areas within the same tier of the market. This makes a lot of sense. We work a lot with event proposals, so we’ll use that as an example.
Florist #1 is in a rural town in Nova Scotia with a population largely of lower to middle class families. There’s no floral market or wholesaler nearby, so everything has to be shipped. You’d be hard pressed to find a flower shop with customers who will be able to pay more than the price after a 2.5x markup, with labour calculated hourly on their wedding proposals.
Florist #2 is in downtown Toronto with a storefront and three employees. Space is expensive and you have to pay quite handsomely to get great team members. Based on anecdotal pricing from some of our Toronto florist friends, you can also get cheaper flowers than florists who need them shipped in.
Let’s say there was a single industry standard and florist #2 had to make it on 2.5x markup without an extra fee for labour. It could theoretically work — if the florist is willing to sleep in the shop and embrace a hunger strike. But if they wanted to support a family or take a vacation every so often, they shouldn’t depend on “the industry standard.”
This example speaks loud enough without even considering whether the florist is retail or event-based, a brick and mortar or home-based floral business, or a myriad of other market differences that florists have.
Toronto florists shouldn’t look to Nova Scotia to determine their pricing. But they most certainly could look at other florists in the same market. This is where a geographical industry standard comes into play. Consumers have a certain expectation of what to pay and florists within the area have the ability to get flowers at similar prices. While your markup likely won’t be exactly what someone else does, talking with floral friends in your community will definitely give you a better view of the market.
If There is No Set Industry Markup, How Should You Determine Yours?
So, how do you know what to charge? Most florists who start a business from scratch simply copy the markups they already know. Many a great business has started this way so there isn’t any shame in it. This is even how we started our company. But it’s neither the only way nor the answer that reaps maximum profitability.
Let’s consider another method:
Begin With The End In Mind
Just as you wouldn’t buy flowers for an event before you know the style, you shouldn’t create a markup without knowing what you need your profit to be. Work backwards.
1. Determine your Profit Goal
How much do you want to make this year in cleared profit? $50,000? $200,000? Let’s get really honest here. It doesn’t matter what your revenue is.
There are some in the industry who think it’s more glamorous to be Business Owner A, who grosses $1million than to be Business Owner B, who grosses $200,000. However, if both business owners net $100,000 in profit, Business Owner B is doing 1/5 of the work to make the same profit. Don’t get fooled by wire reports or tax returns saying that you did hundreds of thousands in business. What matters is what you’re taking home to feed your family. Determine what profit you need for it to be worth staying in the industry.
There are dozens of considerations, such as taxes and shop investments that could factor into this goal, so you definitely want to chat with your tax professional. For our shop in the U.S., our cleared profit would then be subject to personal taxes as well (SECA and income), so keep that in mind when looking at your situation. For the purpose of this step-by-step process, let’s say you’re the sole owner of a wedding and event floral shop who wants to net $100,000. This may be a dream income for some, so let’s dream!
2. Estimate Demand
Once you have your desired profit, you need to consider your demand for the last year. If you did 100 weddings last year, plan on doing that again this year. If you’re just now starting, plan for a smaller number than you’d like and be pleasantly surprised if it changes. Luckily, in the wedding and event industry, you get a decent heads up about what your finances will look like in six months. If you’re a retail shop, you may want to work based off of your cost of goods sold from the previous year.
Demand: 100 weddings. Profit needed per event to hit your goal: $1,000
3. Calculate Overhead
Aptly named, overhead costs include things literally over your head (like rent for your shop) and those metaphorically over your head, such as your accounting, your marketing costs, your website, or your Stemcounter.com subscription (wink wink). For this example, let’s say that you had $30,000 of overhead. Your overhead divided by 100 events would be $300 per event.
Overhead: $30,000. Overhead per event: $300.
(Lost on the math? Stemcounter is giving away a free markup calculator to do the work for you. Find it at http://info.stemcounter.com/markup-on-flowers.)
4. Calculate Markup
If you did 100 weddings last year, you need to plan on an average $1,000 in profit on each wedding this year to hit your goal. Simple enough. If your average wedding is $2,000, you can spend $1,000 for each wedding. To break that down more, that’s $700 for your COGS (cost of goods sold) and $300 for your overhead per event.
There are a couple different ways you could calculate your markup:
Do a COGS analysis. As a recap, your Cost of Goods Sold includes the cost of the materials used in creating the arrangements along with the direct labour costs used to produce the goods. Don’t add advertising or accounting costs in here. Let’s say you spent $500 for goods and $200 for labour. Your revenue ($2,000) minus your COGS ($700) equals $1,300 (your gross margin). Your costs ($700) divided by your revenue ($2,000) equals 35% COGS.
So, whenever you quote from this point forward, you need to ensure that your goods + your labour are equal to 35% of the final quoted price. To recap the COGS method:
$500 (goods) + $200 (labour) = $700
$700 (actual cost) divided by .35 (your percentage) = $2,000
It worked! The final breakdown looks like this:
$300 event overhead
(If you’re a Stemcounter user, this would be a markup of 2.85 on hardgoods and florals and your labour would need to be at 40%.)
Trial and Error
Another method would be to plug in various figures quoted as the “industry standard” to see which ones work. Let’s try a 3x markup for hardgoods and florals plus a 20% labour charge.
3x (markup) times $500 (hardgoods and florals) = $1,500 (pre-labour quoted price)
$1,500 times 20% (labour rate) = $300 (labour fee)
$1,500 + $300 = $1,800 (total quoted price)
How’d it do?
$1,800 – $500 (goods) – 200 (actual labour cost) = $1,100 (gross margin)
$1,100 – $300 event overhead = $800
It looks like we ended up $200 short of our $1,000 profit. So, how do we fix it? We can either bump up our markup to 3.4x or we can bump up our labour to 33%.
5. Make Adjustments
Once you finally have everything together, you’ll probably realize that you don’t have everything together. There are going to be overhead expenses that you didn’t anticipate or maybe you overestimated your number of customers. This is when you’ll start to play offense (raise your markups) or defense (find better priced goods). It’s good to come back to this once a year to make sure you’re still profiting what you should.
It’s so easy to compromise on the profit you need because you’re scared of the price you’ll have to charge. In the end, if you can’t get away from raising your markup, you need to adjust your level of service to justify that type of markup. Instead of selling flowers for an event, sell an experience for that event.
Now, all this does NOT mean you have to make things complicated. Some florists really feel more comfortable having a 3x markup for florals, 2.5x for hard goods, plus a 20% labour charge. Other florists literally just markup the flowers by 5x and then have everything built in. Your rental charges can work with a similar concept. Remember, the most important thing is that your business is profitable.
Don’t let emotions sway your pricing. One side of you might say, “I really do deserve to earn this type of money.” More likely though, the other side of you will say, “There’s no way I could have afforded to pay that price for flowers when I got married!” There are lots of instances where emotions can help a florist. However, when you’re sitting down to look at your books, tell them to take a hike. Ultimately, it’s when you’re willing to do this and break away from “standard” markups that you can finally move away from minimal profit margins and truly grow your business.