This is the second part of a two-part blog. The first part is "There is No Industry Standard Markup In The Floral Industry." Be sure to check out the markup calculator at the bottom accessible to our subscribers!
They thought they were profitable.
A while back, I was consulting with a sweet elderly florist and helped look through her finances for her shop. They did a decent amount of revenue. They seemed to be doing pretty well for a small town shop - at least until we finally got through all of the costs to have a wire service and fees to run her shop. At the end of the day, she and her dependent husband (who was diagnosed with Alzheimers) were bringing home somewhere less than 20k per year. If you own a shop, you know the hours she put into the shop. She was paying employees and was definitely keeping the wire service afloat, but was struggling to keep up herself. It's a story that breaks your heart..and makes you want to take another gander at your numbers.
As a florist and small business owner, it's up to YOU to take a hard look at your finances to ensure you are being wise in your pricing. This article is one of many ways you can look at your company to ensure you're running a profitable business.
If there is no set industry markup, how you should determine your markup?
We established in the last article that a single industry standard doesn't exist. So, how should you determine your markup? 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 I'd like to suggest for you to reanalyze your methods.
Begin With The End In Mind
Just as you wouldn't buy flowers before you know the style of the event, you shouldn't create a markup without knowing what you need your profit to be. Begin with the end in mind.
Determine your profit goal
How much do you want to make this year in cleared profit? 50k? 200k? 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 $1,000,000, 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 that you're feeding 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 go into this so you definitely want to chat with your tax professional. In the US, your cleared profit would then be subject to your personal taxes as well (SECA and income) so keep that in mind. For the purpose of this step-by-step process, let's say that 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 someone so let's dream. :)
Goal: $100,000 (apologies to our illustrious readers of other currencies)
2. Estimate Demand
Once you have your desired profit, you need to consider your demand for the recent year and ask yourself if you can make that happen. If you did 100 weddings last year, plan on doing that again this year (unless you can predict more accurately). If you're just now starting, plan on something much smaller than you'd like and be surprised if it changes. Luckily, in the wedding and event industry, you get a little more heads up about what your finances are going to be like in 6 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: $1,000
3. Calculate Overhead
Your overhead are things that, most of the time, are over your head. That could include your shop (the roof is over your head), your accounting (because it's over your head), your marketing costs, your website, or your Curate subscription (wink, wink). Basically, anything that doesn't have to do with the event and services you don't do yourself. 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.
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, 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:
A. COGS Analysis
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 labor costs used to produce the goods. So, don't add advertising or accounting costs in here. Let's say you spent $500 for goods and $200 for labor. Your revenue ($2,000) minus your cost of goods sold ($700) equals $1,300 (your gross margin). Your costs ($700) divided by your revenue ($2,000) equals out to 35% COGS.
So, whenever you quote from this point forward, you need to ensure that your goods + your labor are equal to 35% of what the final quoted price is. To recap the COGS method:
$500 (goods) + $200 (labor) = $700.
$700 (actual cost) divided by .35 (your percentage) = $2,000.
It worked! The final breakdown looks like this: $700 COGS, $300 event overhead, $1,000 profit.
(If you're a Curate user, this would be a markup of 2.85 on hardgoods and florals and your labor would need to be at 40%.)
B. Trial and Error
Another method of calculating your markups is using what you already use or would like to use. Let's say that you currently use 3x hardgoods and florals plus a 20% labor rate.
3x (markup) * $500 (hardgoods and florals) = $1,500 (pre-labor quoted price)
$1,500 * 20% (labor rate) = $300 (labor fee)
$1,500 + $300 = $1,800 (total quoted price)
So, let's see if this method worked!
$1,800 - $500 (goods) - 200 (actual labor 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 labor 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 detect or maybe you overestimated your the 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 that you're still profiting what you should.
- There is no industry standard. You DON'T have to make things complicated just because. Some florists really feel more comfortable having a 3x florals, 2.5x hargoods, plus a 20% labor charge. Some florists literally just markup the flowers by 5x and then have everything built in. Your rentals can work with a similar concept.
- Make sure that you aren't losing money with your markup. Are you building in hardgood / sundry costs into the floral markup? Great. But be observant if you're using a huge amount of disposable product because you aren't calculating for that.
- Know your market. Make sure you aren't just throwing out numbers you want. The end price should be comparable with what your market should buy. It's not a bad thing to work mainly with budget brides if that's your market. Just recognize it and work from there. Step #5 will work with testing and tweaking.
- Don't give in to the emotional aspect by pricing lower or higher. One side of you will say, "I really do deserve to earn this type of money." and the other side will say, "There's no way I could have afforded to pay that price for flowers when I got married!" There are a LOT of places that emotion helps a florist run a business. However, when you're sitting down to look at your books, tell your emotions to take a hike.
- Do you have any large purchases to make? Any other investments you need to put into your business? Be sure to weigh those in to your overhead.
- Be sure to analyze your tax situation. $30,000 may be your goal profit for this next year but if you're in an LLC in America, that $30,000 becomes quite a bit less after taxes.
This markup calculator will help you easily determine where your markup should be.