Brian Kaskavalciyan shows how underselling by just $1,000 on a $15,000 job drops your net margin from 52% to 49%. He recommends setting a floor price and adjusting commissions when salespeople go below it, rather than letting them average wins and losses across jobs.
So there has to be a floor price. Like, you cannot— your salesperson cannot sell below this price, and you need to know what that price is. Okay, and so in this case, let's say the floor price is $15,000. So your material and labor cost on that's $5,700, which gives you 38%. Okay, so now you're at 62%. Commission, 10%, so you're at 52%, right? So 52% matches your 52%. You're good. What if your salesperson sells it for 14 Your material labor costs are still the same. It's the same job, they just sold it $1,000 under your floor. So now you're at 41% cost, 59% margin. But look what happens when you put in the commission. So a lot of people still pay the same commission, 10%, on the $14,000. But look at what that does. It takes your gross margin from 52 to 49. So now you're off by 3. By the way, what happens to that 3? Where does that 3 come from? It comes off of your net profit. So your 16% model just on this, on this one job just went down to 13. See that? So now the only way to see this happening, one, is to make sure that jobs are being sold at the right price, but also it's through job costing. You've got to be job costing every job, and you've got to go through and check and make sure that every job is falling within your accepted parameters for material, labor, and commission. Okay, and that the overall gross margin is being met. So now in a case like this, what do you do? What do you do? Well, your cost is still the same, it's $5,700, 41%, but your target's 52%. You should drop the commission so it evens out. So now your commission's at 7%, $980, because it was undersold, so that your 52% is now met. This is one of the ways that you protect your gross margin, and this is critical because this is where a lot of people get in trouble. They don't have a high enough gross margin. For this business. Would you allow your salesperson to average it out and say, okay, on one job, yeah, I went under, but on this job I went over?
No, because that, that's kind of the kiss of death.
Yeah.
You know, you can't let— cannot allow that because they're going to try to rip some homeowners off to make up for other homeowners that they gave jobs away on. Right. So any, any shortage should come out of their commission.
Yep.
From your targeted gross profit.
Yeah. Because you do that enough and they won't undersell jobs anymore. You know, you only need to do this a couple times and show it to them and say, hey, look, you know, this is the gross margin. And this is where, this is where accountability comes in of yourself and of your team. Sales reps got to know, hey, look, you undersell a job, there's a certain amount we need to get. That's why we gave you a floor price. This is it. This is— you can't go any lower than this.
