Very few integrators get into the custom installation business because they love accounting. But recognizing some key accounting principles is vital for the success of your business and your overall sales efficiency. One of the most misunderstood accounting doctrines is the difference between Markup and Gross Margin. Knowing the difference can change your bottom line massively. Fortunately, D-Tools software can help you avoid this common bookkeeping error in your proposals and boost your company profits substantially.
Here are the quick definitions:
Equipment Markup -- the percentage difference between the actual cost of he equipment and the selling price.
Gross Margin – the percentage (or ratio) of revenue retained as profit.
Of these accounting principles, Equipment Markup is the easiest to calculate. After you connect to a supplier and gain access to your dealer-level pricing in D-Tools, let's say you buy an architectural loudspeaker for $100 and sell it for $200, that is a 100% Equipment Markup. Similarly, if your dealer cost for a shoppable product like a video doorbell is $100, you might have a 20% markup to $120.
Gross Margin is a bit more complicated and is a vital statistic when determining your company’s overall bottom-line profits. Gross Margin is calculated by dividing the difference between the selling price and the price you paid. In our example of that loudspeaker you bought for $100 and sold for $200, the Gross Margin is 50% ($100 divided by $200). That is half of the 100% Equipment Markup figure! In the video doorbell example, the Gross Margin is 16.7% ($20 divided by $100).
Equipment Markup is always going to be a larger number when compared to Gross Margin. The problem for many integrators is that they confuse the two principles, then get a big surprise from their accountant at the end of year when their profits are not as high as they thought they were.
Knowing the difference between the two figures can make an immediate impact on your bottom line by slightly increasing the percentage of your Equipment Markup to hit a higher target Gross Margin percentage.
D-Tools can help with your sales efficiency. In the software, you can set your target Equipment Markup percentage for each individual product. The software will then automatically set the customer price based on that percentage. If you set that markup percentage higher based on a Gross Margin target, it will boost your bottom line.
Here is a quick reference chart to help you determine what percentage of Equipment Markup you should be aiming for to hit your Gross Margin.
- 15% Equipment Markup = 13.0% Gross Margin
- 20% Equipment Markup = 16.7% Gross Margin
- 25% Equipment Markup = 20% Gross Margin
- 30% Equipment Markup = 23% Gross Margin
- 33.3% Equipment Markup = 25% Gross Margin
- 40% Equipment Markup = 28.6% Gross Margin
- 43% Equipment Markup = 30% Gross Margin
- 50% Equipment Markup = 33% Gross Margin
- 75% Equipment Markup = 42.9% Gross Margin
- 100% Equipment Markup = 50% Gross Margin
In 2023, integrators on average derived 77% of their revenue from equipment, according to the upcoming 2023 D-Tools Mid Year Market Health Report. According to the 2023 U.S. Integrated Home Market Analysis study from CEDIA, the median revenue for a custom installation company last year was $892,500. That means about $687,000 of that income was derived from equipment sales. So, you can see how making a slight adjustment in your Equipment Markup percentage for each product will help you hit a higher Gross Equipment Margin and can make a big difference in the size of your wallet at the end of the year.
