The Industry Math Problem

In my last article, I wrote about the moment I realized I had been running a blind business blind. The pricing formula I had used for years was broken, and once I understood the math underneath it, I had to systematically take apart everything I had built.

This article is about that math. Specifically, the model most of us in this industry use to price our products, and why most of us, myself included for over two decades, never sat down and figured out what it was actually doing to our P&L.

If you're a dealer in window coverings or any home services trade, this article is going to make you uncomfortable. It made me uncomfortable when I figured it out. The math has always been right there. Most of us just never bothered to do it.

Where Our Prices Come From

In our industry, our price lists come from our suppliers.

The supplier publishes a manufacturer's suggested retail price, the MSRP, and gives each dealer a cost factor. That cost factor is what the dealer actually pays, expressed as a percentage of the MSRP. If the cost factor is 0.4, the dealer pays $40 of material for every $100 of MSRP.

That's the entire pricing system for most dealers in this country. The supplier sets the retail price. The supplier sets the cost. The dealer sells somewhere in between.

I've thought about this a lot. We aren't selling refrigerators or dishwashers off a showroom floor. We're doing design consultations. We're measuring. We're installing. We're offering long term warranties. There is a tremendous amount of value being delivered beyond the product itself, and none of that is reflected in an MSRP set somewhere upstream.

The MSRP is built around the product. Our businesses are built around the product plus everything we add to it. Those two numbers were never going to line up the way most of us assumed they did. And most of us, myself included, ran on that mismatch for years without ever stopping to see it.

How the Math Actually Works

Let me walk through it the way I had to walk through it when I finally sat down with my P&L.

Say a product has an MSRP of $100. Your cost factor with the supplier is 0.4. That means your material cost is $40.

Remember what Jim Lett said. Material cost should not exceed 30 percent of your P&L, and ideally it should be under 20.

Here's what actually happens.

Scenario one. Dealer sells at full MSRP.

Revenue is $100. Material cost is $40. Material is 40 percent of revenue. Already over Jim's 30 percent ceiling. Twice the ideal.

And that's the best case. Selling at full MSRP is the most disciplined version of how this model can work. Most dealers don't even do that.

Scenario two. Dealer gives a 20 percent discount.

Revenue is now $80. Material cost is still $40. Material is now 50 percent of revenue. That's 2.5 times the 20 percent target.

Two and a half times. On the same product. Just because the dealer gave a discount that the customer probably would have bought without.

Scenario three. The box store program.

This is where it gets really painful, and it was my situation for a long time.

In my box store program, my cost factor was 0.3. So on a $100 MSRP product, my material cost was $30. That sounds better than the 0.4 cost factor in my regular business, but the discounts wiped it out.

The customer got an automatic 10 to 20 percent off as part of the promotion. Then, to stay competitive, I typically gave another 10 to 20 percent on top of that. So the customer was paying somewhere between $60 and $80, with $30 of material in the job.

At the low end, that's $30 of material in a $60 sale. Material is 50 percent of revenue.

At the high end, it's $30 in an $80 sale. Material is 37.5 percent.

Either way, way over the line.

Here's what that looks like side by side.

And keep in mind, all three of those scenarios assume a clean job with no extras. They don't include shipping. They don't include install.

What Free Shipping and Free Install Actually Cost

Most dealers in our industry offer free shipping and free installation. I did. Almost everyone does. It's treated like the price of doing business.

But free isn't free. Those costs don't disappear just because you don't show them on the invoice. They come out of the same revenue you already shrank by discounting. Shipping has to be paid to somebody. Installers have to be paid by somebody. When you don't charge for those things, you absorb them. Job by job. Quietly. Out of the same gross profit that was already too thin to begin with.

So now your $80 sale, with $40 of material, is also covering shipping and install on its way to whatever was supposed to be left for overhead and profit. There usually isn't much left. And on a lot of jobs, there's nothing.

This is how dealers work harder every year and make less. The math was never going to add up.

The math only adds up when something upstream changes. The pricing fix is real, but the deeper fix is the supply chain itself.

Why we limit who carries the line →

Where I Actually Stood

When I had this realization, I sat down with my own numbers. I had two parts of my business at that time. My regular retail business and my box store program.

In my regular business, my cost factors ranged from 0.25 to 0.42, depending on the product line. I typically gave a 20 percent discount.

That meant on every single job I sold, I was outside Jim's recommended range. Every job. Not some. Not most. All of them.

In my box store business, my cost factor was 0.3, but the automatic and stay-competitive discounts pushed me to 30 to 40 percent off in most cases. Material as a percentage of revenue was even worse than my regular business.

And in both businesses, we were absorbing free shipping and free installation on top of all of it.

I added it all up, and the picture was clear. I was severely underpricing every job in the company. And the most painful part, the part that really stopped me, was this. Even underpriced like that, we were still usually more expensive than most of our competitors.

That meant the rest of the industry was even worse off than I was.

Telling My Team

The hardest meeting I've ever held in my company was the one where I sat down with my managers and walked them through what I had just figured out.

I showed them the math. I showed them where we stood. I showed them what every job was actually doing to our P&L.

I told them that we had been walking down the wrong path. That the way we had built the business, the way I had taught them to price, the way the whole industry priced, was broken. I told them I was sorry for not knowing this earlier and for letting us run for years on a model that couldn't work.

Then I told them we were going to fix it. Every part of it. And it was going to be hard.

Owning that in front of the people who had been executing your plan for years is not something I'd recommend doing on an empty stomach. But it had to happen. You can't ask a team to rebuild on a new foundation if you won't tell them why the old one was wrong.

The Bottom Line

The model most of us run on does three things to a dealer's P&L, all at once.

It lets a third party set our retail price.

It encourages discounting from a number that was already too low to begin with.

It buries the cost of services like design, shipping, and installation inside a price that doesn't account for any of them.

The result is that most independent dealers are running on math that doesn't work, and most of them, myself included for years, never sat down and proved it to themselves.

The first step out is to look at your own numbers and stop pretending. Figure out what your material is as a percentage of every job. Figure out what you're absorbing in free services. Figure out where you actually stand.

I promise you it will be uncomfortable. It will probably make you angry. That's the right reaction. The math was hidden from you for a long time, and so was mine.