Once we know the contribution margin we then need to calculate our Contribution Margin Ratio. This is what we need to keep our eye on. If the contribution margin ratio is falling short of your expectations then that means your costs are rising. It’s time to analyze your costs to see if they can be reduced without sacrificing quality. If they can’t then you may need to raise your price. Determine what an acceptable contribution margin is for your level of gross profit and stick with it.
JOHN JENNINGS owned Heads or Tales Taxidermy, LLC and now he and his wife run Taxidermy Direct, LLC., a cloud-based business software for the full and part-time taxidermist. Our software is mobile friendly and lets you focus on your passion by helping you to get organized, work smarter, and promote your business. We take a business approach to running a taxidermy studio and strive to help you reach your own financial goals.
To learn more about Taxidermy Direct® or to sign up for a free 30 day trial visit www.taxidermy-direct.com.
Contribution Margin Ratio = (Selling Price – Variable Costs) / Selling Price
.416 = ($600 - $350) / $600
Who hasn’t thought about raising prices and wondered how that would affect your overall revenue? If I raise my prices will I lose all my clients? There are many reasons a taxidermist may consider raising prices. Maybe your costs have changed, or your quality has increased. Or maybe you are just getting too busy and want to limit the number of clients you have. Regardless of the reason, you need to be able to explain your decision to your clients so they understand.
Emotional pricing is the number one reason for small business failure and fear is the biggest emotion in your studio. Before making any fear-based decisions we need to make sure our house is in order. Analyzing our revenue, costs and prices should be an ongoing process, not an annual
Pricing decisions based on fact will be more acceptable and agreeable to your clients.
event. How often do you review your books? Do you know what your overhead rate is? This will fluctuate over time. Do you know what your profit margin is? What is your second largest expense (salary is usually the first)? Do you give discounts? How much have you given away?
There are good discounts and bad discounts. Eliminate all sources of bad discounts before raising prices. Being a taxidermist is kind of like winning the lottery, except there’s no money it. It’s amazing how many ‘friends’ you’ll acquire. Don’t ask paying clients to subsidize the cost of your buddy’s trophy. If they are such a good friend and you still feel obligated to suffer then make them suffer too. Tell them paying clients come first and you will work on their trophy last, so it may take a couple of years or more to complete. The same can be said for price shoppers. Put the decision back in their hands and allow them to take their trophy elsewhere if they so choose. Discounts given directly to clients only stands to benefit them and suppresses taxidermy prices in general. What have you gained?
On the other hand, I think discounts given to businesses can be a good thing for all parties involved. If you offer discounts for wholesale work then both studios benefit. As the wholesaler, you spend less time and money acquiring new clients and have a steadier stream of income due to repeat business. Your business partner benefits by maintaining their turn-around time and keeping their clients happy. Both you and your business partner should be earning a profit.
Once you’ve eliminated all sources of bad discounts you can dig into the actual costs of running your studio. Don’t forget to carve out a decent salary for you and a reasonable profit for your business. A cost-based pricing strategy will account for these factors. Let your clients know when you are raising prices due to increasing costs. They will understand the situation and the reasons behind the increase. They will continue to buy from you.
For example. I used a cost-based method to arrive at a $600 price for a whitetail shoulder mount. I am making a 24% gross profit on that mount. I have $350 of variable costs (mostly materials and labor) and $250 in overhead and profit. My contribution margin is also $250 because this will be used to pay my fixed costs (overhead) and the rest goes into my pocket as profit.
The contribution margin ratio is calculated at .416, or roughly 42%. If it starts to drop below 42% on a regular basis then I have a potential problem and may want to investigate. If my fixed costs (overhead) stay the same I can expect to earn a 24% gross profit.
Cost accounting uses Contribution Margin as a measure of profitability and the Contribution Margin Ratio is a tool you can use to stay on top of your pricing. It’s a simple formula to use once you understand its inputs. Cost accounting separates costs into two buckets, fixed costs or variable costs.
Fixed costs need to be paid whether you have one work order or a hundred. Rent, utilities, equipment, advertising, insurance, or technology can all be classified as fixed costs. They remain relatively fixed regardless of how busy you are. Variable costs, on the other hand, will go up or down based on production volume. They vary according to your workload and include such items as direct materials, direct labor, supplies, and even shipping costs.
Contribution margin only uses variable costs in its calculation. When you subtract your variable costs from your selling price you are left with your contribution margin. In other words, the result directly contributes to paying your fixed costs and making a profit. You can do this on individual jobs, product lines, or customers to see which ones are the most profitable.
Contribution Margin = Selling Price – Variable Costs
Contribution Margin Ratio = (Selling Price – Variable Costs) / Selling Price
The beauty of the contribution margin ratio is that applies across all animals and mounts. If my contribution margin ratio stays at 42% then I’m earning 24% gross profit on everything, regardless if it’s a whitetail, black bear, mallard, or largemouth bass.
Many taxidermists start their business using the cost-based pricing strategy and then move to a value-based strategy as their expertise, quality, or workload increases. Any value-based pricing strategy starts with sound business practices based on regular cost analysis. Taxidermists who offer more value than their competitors can charge a higher price to their clients. When raising prices because of increasing value, let your clients know this. They will appreciate the reasons behind a higher price and will continue to buy from you.
The selling price isn’t just based on cost, or how well you can market your perceived value. There are other factors to take into consideration; including the health of the economy, your client’s income, or what your competitors are doing. It really comes down to what the market will bear and your client’s willingness to pay. Fortunately, there’s a way to measure this too. It’s called the price elasticity of demand.
Price elasticity of demand measures the relationship between supply and demand due to a change in price. The calculation takes into account the original price, the new price, the original quantity sold, and the new quantity sold. The math produces a number between zero and one. Price is considered elastic when the result is closer to one, and inelastic the closer it is to zero. We want to be closer to zero – pricing does not affect demand. I use online calculators to do the heavy lifting for me.
The size of the purchase (relative to your client’s budget) also influences the elasticity of demand. Necessities are less elastic and luxuries are more elastic. Consumers are less concerned about price changes when the goods ‘feel cheap’, in other words, when they feel they are getting good value for their money. On the other hand, consumers are much more price conscious when the item ‘feels expensive’.
If you are still apprehensive about raising prices then don’t raise them all at once. Pick a few mounts that your clients may not notice a price increase on and then measure the effect. Use this information to raise prices on other mounts. You may also want to raise prices incrementally over time. When doing so keep your eyes focused on demand. If demand starts to decrease then you’ve found your switching costs. These are the incremental costs, inconveniences, and risks your clients will incur when finding a new taxidermist they can trust. Everyone has a switching cost. Ideally, you want to be just shy of this mark.
Pricing requires constant care and feeding. You cannot simply ‘set it and forget it’. The key is to find the price that optimizes profits while maintaining a competitive advantage. Finding the ‘sweet spot’ takes skill and practice. Understanding your client’s willingness to pay requires accurate data and may change over time due to factors out of your control. Reduce your fear of price changes by measuring its effect on your bottom line.