Understanding Markups


This section explores the concepts of mark-ups; what they are, how to gauge where to set mark-ups and how to monitor your market’s response to them.

Setting mark-ups correctly will ensure you’re getting the maximum return on your frames, maintain happy customers and not lose undue sales because the market doesn't agree with your price. Achieving this balance between profit and price perception can be the most challenging part of running a successful business.

Many picture framers’ are familiar with marking up their materials by a factor (Gross mark-up) to arrive at a selling price. A big problem with this method is that it does not accurately separate variable cost (materials) and running costs (overheads). If your mark-up is to be accurate you need to know both, as a mark-up based only on materials is quite meaningless.


It’s important to understand that mark-up is often expressed in two ways.

Gross mark-up is achieved by taking the cost of goods (materials) and applying a percentage mark-up.

£10.00

 Materials

x 3.6

 Gross mark-up (260%)

£36.00

 Selling price

Net mark-up looks at the cost of goods as well as the cost of bringing the product to the consumer. These include overheads such as rent, wages, and electricity and are known as Overheads.

£10.00

 Cost of goods

£20.00

 Overheads

£30.00

 True cost (Materials plus overheads)

x 1.2

 Net mark-up (20%)

£36.00

 Selling price

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Whilst these both give the same selling price there is a fundamental difference as to how the profit is recorded. With gross mark-up, when the cost of goods is deducted from the sale price, the £26.00 difference gives a false impression that a healthy profit is being made. However, the net mark-up which is applied to both cost of goods and the overheads of running the business shows that the true profit is £6.00. This is the real indicator of profit and allows the business to make an accurate judgment of where to set their margins.

This article will talk about mark-ups as a net amount, because this is where the true profitability of a business comes from, after all variable (framing materials) and fixed costs (business overheads) have been covered.


  What should my mark-up be?

When it comes to setting your mark-ups, unfortunately there is no magic number. Consumers will pay a price based on perceived value.

Manufacturers and retailers set their prices based on the unique benefits and desirability of their product. They compare it against other products on the market and make a decision on what they feel the consumer will be prepared to pay.

The final price is determined by the scarcity of the product and/or service offset against demand, as well as the affluence of the market it is being sold into. If there are more people selling than there are buying then this will drive the price down, inversely, if there is more demand and less availability this will drive the price up.

What is a benefit?

Benefits offer advantage and solutions to people's lives.


Examples:

"This is a mobile phone". The benefit is that I can leave the confines of my home or business and not miss a call.


"This mahogany frame with timber inlay will match your regency furniture". The benefit is that the frame will maintain a desired unity wihin the room.

Now you may be thinking… well, picture frames aren’t scarce at all. Here's the thing; you’re not selling picture frames!  You’re selling an experience; the picture frame is just a means of providing that experience for the customer. You’re preserving a memory, decorating a home or bringing someone’s creation to life, these attachments or desires are what brings customers to your door and create a perception of value for the service you offer.

People buy benefits. The key is; understanding the benefits your product/service brings to them. The greater the benefit a product/service brings to a consumer the more desire they have for it. This is known as perceived value. The more desire a person has for a benefit the greater their perception of value for money will be.

Don't believe me... Think of the amount of times you over pay for something because it puts you above the bunch, if it was too cheap you wouldn't value it because everyone else had one. Consumers will pay more if they believe they are having something uniquely tailored to them.

In truth profit is earned; we shouldn’t just expect to make profit. By understanding the needs of the customer and presenting the benefits of our picture frames we increase desirability, and thereby a perception of value from which we can profit. It’s called selling the benefits.

It's often the case that framers can be very good at creating beautiful items, but be very poor at appreciating the value this brings to their customers, to the detriment of profitability.

It's important to be aware of the meaning picture frames bring to the lives of our individual customers and focus on these desires when interacting and designing frames with them. When you understand their needs, it becomes easier to sell the benefits that fulfil their desires, creating a perception of value and thereby earning a profit.


  Should I charge the same as my competitor?

I get asked this a lot, perhaps because there's a lack of confidence about pricing but also because people are unsure as to what they are selling.

Consider this;

You're creating a unique product, sure it is a picture frame, but it’s not the same frame or customer experience the framer down the road will produce. As a manufacturer of custom made luxury goods you have a massive advantage when setting your pricing because customers cannot buy the exact same product anywhere else.

Your customers are not comparing prices as they would if buying an identical washing machine from two different retailers. There are a host of benefits you can offer your customers to differentiate your service and products from your competitors, and therefore allow you to sell at a higher valued price point.

By selling those benefits, customers are smart enough to see the greater value and the reason to pay the correct price. If they're unable to see the value, most likely they weren’t your customer anyway.

So think about the value you bring and what distinguishes your business from your competitor and build on those differences.

To get you started I’ve mentioned a few to consider in the next section.


  How do I create a greater sense of value for my frames?

There are many things you can do to help create a greater perception of value within your customers towards your business and the frames you design and create. I've listed a few important ones below


 Store presentation

Store presentation immediately forms a price perception in the customers mind. From shop signage and external window displays through to entrances, lighting and internal displays; these are just some of the stimuli that create a price perception in the customers mind.

A clean well-presented store with good lighting and nice displays creates desire and builds confidence that a professional service will be offered. Give careful consideration to the type of market you want to attract to your store and create an atmosphere in which those people will enjoy and be comfortable in.

Your design area needs to be large enough to support work and clear of unneccessary clutter. Your moulding wall should be clean, ordered, well lit with fresh, with large corner samples that ooz desire for your customers to want to touch and explore. Mat board samples should also be clean, well ordered and of a good size.

This is where the magic happens for the customer, what happens here will determin the customers perception of service and quality and with that, value for money.


 Be interested in the customer

Without doubt, customers buy service and advice; they appreciate that a sales person has taken the time to help them. In general people place greater value on time than money and the fact that you have spent time, or saved them time creates value.

This does not mean that you have to spend hours with someone, just that the time given was quality and focussed on their needs. Did the customer feel they were offered the correct advice and that their needs were properly attended to? Catering to customer’s most precious resource, their time, can be more persuasive than even the most drastic of price reductions.

It’s also worth considering that customers do not always walk away because the price is too high, they often walk away because the service is poor. There have been a number of times I have walked away from buying a product because the service left me feeling undervalued.


 Be interested in the customer's art

Quite often customers want validation that the item is worth getting framed; they see you as somewhat of an expert and therefore quite often seek your affirmation. If you don’t think it is anything special or don’t appear to appreciate it, what incentive does this give them to go with the best framing choice? “I’m not sure it’s really worth framing...” Have we all heard that before?

Think for a moment about an artist who has just put their heart and soul into an artwork. You are the first person tho see their creation and they're feeling vulnerable and open to criticism. Now imagine that no positive comment was made upon the work, how do they now feel about getting it framed? Validation and enthusiasm is now draining from their being.

Customers do not always refuse a quote because they feel your price is high in general, it can be that they feel the price is greater than the value they place on the object to be framed. There is a distinct difference between these two outlooks; try to gauge the customer’s sense of value so you can either build a greater perception of worth towards the object or design a frame that will satisfy their preconceived budget.


 It's all about design

Ok, here’s the thing… Design is everything!

As framers it is very easy to get caught up in standards or conservation, neatness of mitres and lack of overcuts in mat boards. Whilst it's important to offer this level of professionalism, in most cases this is not the primary concern of the customer.

It’s reasonable to assume that the majority of people seek the service of a picture framer to come up with something that truly complements their artwork and/or home and is uniquely beautiful.

Foremost in most customer’s mind is; what will it look like? The customer sees the frame as an overall package and rarely looks at the detail. Designing a frame that truly complements the artwork and fits perfectlty within its intended environment is what truly creates a perception of value.

Frames never stand alone in a room, and having good knowledge of colour, art history, and architecture and furniture design will help you in creating the best solutions for your customers.

Gaining expertise in matters of design will allow you to guide your customer into a frame that will be captivating and a talking point. People love to surround themselves with beautiful items they can admire or show off. Being able to competently explain the design process and create stunning design ideas will excite and inspire the customer to make the correct purchase.


 Quality matters

We all love a quality product, from the immediate aesthetic look to the feel and weight; these are just some of the sensory stimuli that give the impression of quality. Therefore using better quality and more unique materials often costs only a little more yet creates a strong perception of a quality product.

Avoid using materials that are used in cheap production frames as these have already set a price perception in the customer’s mind which will be difficult to sway, and as a bespoke framer, you will never be able to compete against.


 Convenience

We all want our lives to be easier, and of course customers want the obvious conveniences when serching for a store, such as location, availability of parking and consistent opening times to name a few. However, I believe there are far greater conveniences that customers seek.

People walk into a framing shop because they have a problem. They have something they need to display and lack the skills or time to manage it. This has brought them to your door, and making the design process easy and fun gives customers the incentive to come to you with a problem they know your expertise will solve.

Putting obstacles in their way by making it look as if they have brought an insurmountable problem makes them feel like the bearer of bad tidings, when in fact their experience should be enjoyable.

A good selection of samples and knowledgeable design consultants assists customers to make the best choice for their needs, this helps to draw and retain customers. People don’t want the hassle of travelling between various shops looking for the right choice, it’s time consuming and expensive. If they know the business can cater for their needs there is a strong incentive to shop with them time and time again.

More than ever people are time poor and therefore place a great value on their time. If the sales person can quickly get to the crux of their needs and come up with the correct design they have a massive competitive edge that customers will pay for. Having standard questions and processes for the front counter creates consistency and speeds up the design process dramatically.


 Offer consistent pricing

It’s makes good business sense to offer transparent and consistent pricing. Often new customers are worried about what a frame will cost. They’re concerned that they will take up your time and then not feel able to walk away if the price is more than they’re willing to pay.

This emotion can dissuade consumers from approaching framers in the first place. You can reduce this apprehension by having examples of different frame types with their prices clearly displayed; this gives customers price comparisons and helps in normalising your prices. When consumers regularly see the advertised price of a product they become less concerned about the price and focus on the products benefits and points of difference.

Every business should have point of sale software these days, customers expect the price to come from a computer, not doing so creates suspicion of the price. Good software will give the true cost of bringing the frame to market (labour and materials) so you can be confident of your prices.

How the price is delivered has a massive bearing on the customer’s price perception. If your head and eyes are downcast and the price is mumbled in apology, the customer will feel that you believe the price is unjust or at least unconsidered. It is important that you believe in the price you are quoting and being sure of your costs and knowing that your mark-ups are reasonable gives you certainty and confidence when delivering the price.

If the customer does not go ahead with the quote, don't get angry. Smile and make them feel that this is ok. Maybe explain that they are having something custom made to their requirements. Tell them that you will save the quote so they can go away and think about it. If you have done your job well and also made them feel comfortable about taking time to think about it, most likely they will come back.


The importance of consistent pricing


Over the years I've heard framers say "I look at the car they drive or the clothes they wear and decide on the price then". Honestly... this sends a shiver down my spine. Firstly; it's a bad indicator, because it's often the wealthy who will not spend the money, or have less sentimental attachment to what's being framed. Secondly; at the very least it gives their business a bad name, but importantly, it also gives an impression that the framing industry as a whole should be treated with suspicion when it comes to trusting the price. Think how you would react if a price quoted to you was seemingly plucked out of the air.

Look at other retail and service industries, the prices are considered, consistent and transparent, to build confidence in consumers that's the way it should be.


  Is it wrong to be making a profit?

Small businesses often feel embarrassed about making a profit, they build relationships with their customers and don't want to appear as if they are ripping them off. Let me assure you... You're not! Businesses need to make a profit, their very survival depends upon it.

Let's look at why it is important to make a profit


 So you can live

Unless you have a trust fund or other supported means of income your business will give you money to live. Most small businesses do not make large profits, so you should never feel guilty about this.


 Allows you to offer quality service

You're probably tired of hearing me say how important customer service is in framing, but it's true! Being profitable allows you time to offer good service, if you margins are too tight and you're busy trying to get frames finished to get in more money, your customer service will suffer. When customer service suffers so does the price and the profits.


 Lets you be there for your customers in the future

People love it when they find a good framer, they take pocession of them and others will hear them quote; "My framer..." and so on. It's extremely stressful finding a new framer and wondering about what kind of job will they do, how much will they charge etc... Being there for the future of your customers is a big reasurrance, having to go elsewhere because you have closed down is of no benefit to them at all.


 Builds equity in your business

Equity gives you cash reserves to endure the quite periods of the year, it also allows you invest in the future of your business, through either self funded capital investment or being able to secure loans for future development.


 Fix things when they go wrong

Things go wrong in business... As much as you may try to avoid it, it's a fact. The product does not meet the customers needs or there are product faults to name a couple. Fixing these things cheerfully and quickly makes for extremely happy customers, smart businesses build this risk into their mark-ups so they can quickly address these customer concerns when they occur.


 Reward your risk

Going into business has considerable risk. There are many things to get right; product lines, price points, customer service, business image, marketing, cash flow and much more. Bringing all these skills together can be challenging and many businesses fail because they got one or more of these things wrong.

Leaving secure employment and investing both finacially and emotionally into a business is fraught with risk. It's therefore reasonable to be rewarded for the risk taken, and surely the reward should be greater than a normal wage earner taking little risk, otherwise why take on the risk at all. Invest your money somewhere safer and get a job.


  How do I apply my mark-up?

I'm often asked, how do I work out my mark-up? This is not an easy question to answer because it's different for every business, and is dependent on many factors including those mentioned above. I often answer with, "Why not start by asking how much money do you want to make based on your intended turnover".

Lets take a look at Scenario 1 from the real life case study on the Labour page.

Mary was drawing out £1,000 per month (12,000 per annum) to cover her living expenses, included as part of her labour charge. She wants to earn more than the basic wage though, and also needs to ensure she covers the eventualities mentioned in the profit section above. Mary concludeds that she wants to make at least another £18,000 ontop of her basic living wage, giving a total annual income of £30,000.

Mary has worked out the average cost per frame (labour and materials) and the number of frames she makes per year she'll make.

Average cost per frame

£45 X

  (labour and materials)

Frames per year

1000   

Total cost for year

£45,000   

Net mark-up on cost

40%   

Net profit returned

£18,000   

By applying a 40% (net) mark-up Mary has estimated that she will return the £18,000 she wanted to reward all her hard work. She may vary the mark-up over her range of manufactured frames, but by monitoring her sales she can ensure her overall return (net profit) will be in the vicinity of 40%.


  Will the customer pay the price?

It's all very well for Mary to assume she is worth the extra £18,000 per year, but is it something that her customers agree with?

If someone has taken the time to walk through your door with artwork under their arm there is a good chance that they will get it framed. If sales consultants have done their job correctly the probabilty of the customer paying the quoted price is likely.

However, it is unreasonable to expect that everyone who walks through your door will go ahead with the quote and you must be willing to take some rejection.

Reacting to every price rejection with discounts is a sure way to create inconsistency in pricing, affect profitabilty and leave you feeling uncertain of the correct price to charge.

It's best to guage your overall customer reaction to price by monitoring your conversion rate from quotes to orders. This is done by keeping track of how many firm quotes you give and what proportion of these were converted into orders.

If everyone is happy to go ahead with the job (100% conversion rate) you can assume that there is room to lift your margins.

There is a bit of a rule of thumb for getting your mark-up right: If one in five customers doesn't hesitate at the price, then you may be too cheap. No one complaining about the price is a fair indicator that you have room to increase your prices.

Have a look through last months quotes. Perhaps one in five customers should have told you that you are too expensive and not gone ahead with the job. At most, you may expect 80% of your quotes to be converted to orders.

If you are falling below 70% conversion rate there may be an issue with the price, or even the level of service that the customer is receiving. Remember, it's not always about the price.

Customer reaction to price is the best tool we have for determining mark-ups, and monitoring this over your whole customer base is the best way to create consistency and fairness in pricing.

Good software should allow you to easily monitor your conversion rate from quotes to orders. This will assist you to make accurate decisions about your pricing based on solid, undisputable information.