Sustainable profit margin; a must in your floral design business
I'm on a quest to help other floral designers achieve a sustainable profit margin.
Healthy profit margins are critical to running a sustainable small business.
I've met lots of amazing florists on account of my blog Profitable Floral Design. I've learned that floral design is a career which frequently veers towards small business ownership. It challenges us both in creative and analytical ways. Achieving a sustainable profit margin and a consistent pricing strategy seem to be 2 of the most difficult challenges floral designers face today.
It can be a struggle to allocate the time required to analyze your business and find solutions to these financial challenges.
Do you feel this way?
Are you avoiding business analysis because you are afraid of what you’ll discover?
If the answer is yes, it’s time to drop the fear. Shake off the doubt and begin to look at your business from an impartial position.
I’ve discussed this in past blog posts, but it’s worth repeating here. There are a few simple questions to start with when analyzing your business.
What is your pricing strategy?
Do you stick to it?
Are you achieving sustainable profit margins?
Answer these questions honestly and make sure you are basing your answers on accurate financials.
One thing I’ve observed is that too many floral designers are actively choosing to charge their clients below a sustainable profit margin. That means even though as the owner of their business, they get to decide the retail price of designs, they actively choose to charge below the industry standard. Sometimes they charge below cost when labor and overhead are factored into the equation.
Once you’ve looked at your financial reports and answered the questions above you'll be able to decide if you need to adjust your pricing strategy. You need to analyze your retail pricing, costs, and profit margins to understand how much income you can extract from your business.
I want to jump right into an example here.
Let’s say you book a wedding. Yay, right?
Well, let’s save the yay for when you end up making money, ok?
Look at it this way.
Your client has contracted you for the following:
Personals $1,000
Ceremony $2,000
Reception $2,000
This is a $5,000 wedding at retail; Let’s break down the costs at a 3x markup and a 2x markup.
First, let’s examine a 3x markup on your flowers and supplies
$5,000 retail - $1666 cogs (flowers at cost and supplies) = $3334.
Take that $3334 and divide by your total wedding retail of $5000.
That gives you a profit margin of 66.7%. According to industry standards this is a sustainable profit margin.
Now, let’s examine a 2x markup on your flowers and supplies
$5000 retail - $2,500 (flowers at cost and supplies) = $2500.
Take that $2500 and divide by your total wedding retail of $5000.
That gives you a profit margin of 50%. This is lower than our industry standard.
That’s a difference of over $800 on just one wedding.
So, if you were to increase your markup from 2X to 3X and had one wedding per month in the $5000 price range it would total an increase in profit on your wholesale flowers and supplies of over $10,000 annually.
If you aren’t currently calculating your profit margins, but you’d like to increase the profitability of your business, the best thing to do is to start now with new wedding inquiries.
New proposals need to be based on a profit margin goal that is sustainable for your business. So, from here forward you'll take the analysis you've done and apply those formulas to new prospects. Let's say you have been shooting for a 67% profit margin using a 3x markup, but the analysis of your past few weddings reveals an actual profit margin of 50%.
Profit margin goals and floral recipes work hand in hand to acheive results.
How can you ensure your future projects are going to achieve your financial goals?
Here are a few suggestions.
Start to increase your prices with new inquiries.
Create floral recipes for new proposals that ensure your profits.
Confirm wholesale costs before ordering flowers for your projects.
Estimate wholesale costs on the high end for future orders and include some additional cost for a buffer against future price increases.
Stick to your pricing strategy and verify with proven flower math formulas.
Find creative ways to lower costs on overhead and COGS.
Raise your service fees. (we will discuss in more detail below)
You are not limited to choosing just one of these options. You can implement these ideas all at once or phase them into your business based on what fits your needs.
Now, I know you're thinking: what about my labor fee?
Some floral designers call this a design fee and I used to call it a delivery fee to keep it simple for my clients.
It doesn’t matter what you call it. What matters is that you charge it to all your clients because you need to make a profit on your labor.
Labor is not something that should be charged to the client at a break-even cost.
Labor is more valuable than the flowers themselves.
That’s right, I said it. Labor is more valuable than the flowers themselves.
Think about it like this. If you go to a store and buy loose flowers are they less expensive than if they were already arranged in a vase? Yes, that’s because they’ve been handled less.
The more you handle a product the more expensive that product becomes. That's not because the wholesale cost is higher, it's because the labor cost needs to increase for hours spent and the expertise involved in that effort.
Floral design and styling are labor intentive, be sure to evaluate your costs before pricing out new projects!
If you are a professional floral designer, you need to be charging your clients for your expertise. That means no more low-balling the design/labor/delivery fee.
I’m going to explain why.
In keeping with our example above. Let’s say you charged 10% of the total wedding fee ($5000) as your design/ delivery fee. That’s $500.
You need to set up an arch for the ceremony and the reception decor at the same time. So, you hire 2 freelance designers for 5 hours. This includes load-up at your studio, drive time to the venue, and the return trip back to your studio. They get paid $25 per hour each. That’s a cost of $250.
This is money well spent. You can’t do it all on your own. Your team is worth every penny!
You also need to pay someone to pick up the arch and reception décor at the end of the reception. That’s another $50.
Now we’ve got to think about your labor costs. How many hours have you worked on this wedding?
I’m going to break it down for you.
Consultation and booking the client time of 1 hour
1 hour spent emailing and making changes to finalize the proposal
Creating the recipes and ordering the flowers from the wholesaler another hour
1 hour spent picking up the order, processing the flowers, and prepping for production
4 hours of production time; creating the bouquets, boutonnieres, centerpieces
That’s a total of 8 hours of your time, plus you plan to spend 5 hours on the wedding day. So, let’s say you pay yourself $50 an hour. That equals 13 hours at $50 an hour. That’s $650, which is a conservative estimate for a wedding at this price.
Now, here’s the thing.
If you charge a 10% labor fee, that’s $500. However, you’ve got a total of $950 of actual labor costs with everyone’s time dedicated to this project.
In this scenario, you lose big time on the labor for this wedding. You charged $500 and your total cost is $950.
This loss hits hard. This strategy of low-balling labor fees directly impacts how much income you can take home from your business.
I want to be very clear here that this is a choice and that no matter what spin you put on it if you are not charging enough to cover labor costs, it will sabotage your income. You work too hard as a small business owner to lose money on your labor.
The industry standard is a 30% labor fee. On a $5000 wedding that would be $1500.
If you charge a 30% labor fee you can see that $1500 - $950 = $550. You make a profit of $550 on the labor of this wedding. As you can see, it’s important to have a clear understanding of your labor costs. Achieving sustainable profit margin depends on it.
Now for your overall profit margin, you still need to consider your other overhead expenses like rent, gas, insurance, office supplies, utilities, and so on.
If you choose to price your proposals with a 10% labor fee those costs won’t begin to be covered. You’ll erode your profit margins even further because you need to factor in your overhead costs somewhere.
Certainly, you see how the difference between a 10% labor fee and a 30% labor fee can be the differentiating factor between a business that has sustainable profit margins and one that dies a slow death.
Now, it’s time to consider the examples above and use them to actively choose the right pricing strategy for your business.
Sustainable profit margin and financial analysis play an important role in finding your footing as the owner and CEO of your small business. You may find that difficult for a multitude of different reasons. However, it’s something you must spend time on to secure your business for the future.
Your true value can often be overshadowed with internal doubt. That’s why so many floral designers choose to charge less than what is viable for their business. If this is you, there are other ways to look at this dilemma.
Here are some alternatives to change your thought process.
One way to motivate yourself to start charging industry standard pricing is to use your dedication to your employees. If people rely on you for their livelihood, you can relate to what I’m saying now. You may not think that charging a 30% labor fee is reasonable, but you know your employees work hard and deserve to be paid a fair living wage. Use that as fuel to set new goals for the financial health of your business.
Another option is to look at increasing your profit margins as an obligation to your future clients. The best way to ensure you’ll be there for future clients is to turn a profit today. Burn-out is inevitable when you are working extremely hard and aren’t making the profits to show for it. Your promise to provide services for future clients is directly related to your financial decisions today.
Your clients will happily pay a 10% labor fee if you charge that. Why? Simply because they expect you to price your products and services in a way that is profitable and sustainable.
So, it’s your responsibility to know how much you need to charge to cover all your costs and make a profit to guarantee you’ll be there for your clients in the future. That is why having a pricing strategy, creating floral recipes, and verifying your profit margins are so important to a successful business.
Still not convinced your clients will see the value in a higher labor fee?
Let me share 2 keys to charging a higher labor fee. They will help you to demonstrate the value of your labor to your clients.
The first key is expectation management. You need to explain everything that comes along with this custom floral design experience and the pricing that accompanies it. Explain your labor fee as an essential piece of their customer experience. The price is well worth it when you manage their expectations early in the relationship.
The second key is exceptional customer service, but you already knew that, didn’t you?
Imagine your ideal floral design business and work hard to make it happen!
So, take a moment now to imagine your business 5 years from now.
Where are you in your journey? What type of client are you serving? Are you making sustainable profit margins?
Reality check. I know it’s hard to imagine the future of your business right now, but if you don’t, who will?
Next week we are going to dig into a few of the ways you can ensure that your custom floral proposals are on point when it comes to pricing and profit margins.
Until then,
LuAnn