Friday, February 22, 2008

The Margin. Part III.

Our margin is 35.71%.

So what? How does that help us decide whether to take one more order? Well, it doesn't. We can't make decisions about percents very easily. We need to turn it from a percent into cold hard cash.

Margin is the amount we make per order. If we multiply margin (percent) times the average value of an order (dollars) we'll get a margin in dollars. For the past couple months our average booked order has been worth over $80. 35.71% x $80 is about $30. That means our margin per order is about $30.

Now we have something to sink our teeth into. When we're faced with a choice of whether or not to take one more order, how do we value the decision? How much does it cost to say "No"?

The answer is it costs $30.

That number has some big implications. A couple examples can help us put it in perspective.

Let's say a customer rings us at 8:45 pm. The phones are closed, we don't answer. They decide to shop elsewhere. We lose the order. How much did we lose? $30.

A customer rings us at 3:30 pm on Wednesday. We can't take the add-on. They go shop elsewhere. How much did we lose? $30.


This has been a long trip to get to this number, this measly $30 lesson. I took the time because what I explain next usually is often mind blowing. So hold on to your hats, folks.

First Mind Blowing Lesson
In the bookings example: we could have paid someone $29 to work the extra hour after we're closed, from 8-9pm. If they took at least one order we'd still be ahead. Why? Let me put it this way. If I said, "Give me $29 and in one hour I will give you $30," would you take the offer? All day long!

Second Mind Blowing Lesson
The $30 we lost wasn't income. It was profit. Yeah, you're reading that right. Every order makes us $30 profit.

More on that soon.

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