How to Determine the Appropriate Profit Margin – Ask Clay Anything

Show Notes

What is the appropriate amount of profit that you should be making with your product or service? During this episode of Ask Clay Anything, Paul Hood (CPA) and Clay Clark break down the proven method for determining the appropriate profit margin to that you should be making on your products and services.

DEFINITION – PROPHET – A seer, soothsayer, fortune teller, clairvoyant, or diviner; A person regarded as an inspired teacher or proclaimer of the will of God. in Christian use) the books of Isaiah, Jeremiah, Ezekiel, Daniel, and the twelve minor prophets.

NOTABLE QUOTABLE – “You must operate your business at a 20% profit margin.” – Paul Hood (Founder of Hood CPA)

Learn more Elephant In The Room Franchising today at www.EITRLounge.com

Business Coach | Ask Clay & Z Anything

Audio Transcription

Two men, 13 multimillion dollar businesses, eight kids, one business coach radio show. It’s the thrive time business coach radio show with Dr Zellner and Clay Clark.

All right, thrive nation. Welcome back to the conversation. It is the thrive time show on your radio and today we’re talking about how to determine the appropriate profit margin and so we’re bringing on a CPA onto today’s show. Paul Hood with Hood Cpas is firm, represents thousands of clients and so as we’re talking about how to determine the appropriate profit margin, we thought it would be appropriate to bring on a profitable, certified public accountant thrive nation. If you’ve been struggling to have success, I promise you that you can do it. I’ve done it and I absolutely know that you can as well. Well, first off, I’ll tell you this. If you’re looking to make an appropriate profit, what you want to do is you want to look for a ceo of a fortune teller, a clairvoyant you want, you want to find, if you’re looking for a profit,

you maybe want to look for Jeremiah or an or or, or an Isaiah or dizzy or an inspired teacher, a proclaimer of the will of God. If you’re looking for a profit, those are the things Paul, you’re looking at. If Paul, if you’re looking for a profit, you’re looking for a fortune teller. Maybe go up to the top of a mountain. Look for a guy in a robe. You know a lot of incense. The incense. I’ll just. Crystal, we really want to find a guy who’s out there by the bok who’s pushing a cart around who’s proclaiming it’s the end of the world. No, no, we’re not talking about that kind of profit. Oh, wow. I read the notes here. We’re talking about how to do it,

how to make an appropriate profit, how to determine the appropriate profit. I’m Paul. I want to get your thoughts on this as we turn to page 71 of your book.

Yeah. Hey, you know what’s funny is I just recorded a commercial for, for 1170 and it said you don’t have to be psychic to determine your future, to know where your future is. You don’t have to have that crystal ball, but what you have to do is you have to be deliberate. You, you define where you want to go. And um, you know, I, I actually, uh, I liked it. I don’t know. I’d. Clyde, you spend much time on facebook. I don’t, you know, I like facebook because of the little memes and the little sayings, so I don’t spend a lot of time on it, but if I’m, you don’t have downtime or whatever and I need last eight hours of my day. That’s it. That’s it. Turn it off after the first day. I’m just kidding. Because you are, you’re a slacker when it comes to facebook. Eight hours. Give me a break. Right? Hey, so it on one of these major says, people don’t decide their futures. They decide their habits, their habits. Decide their future, but you know, what’s exciting clays, you can determine your future. It’s not complicated. And, and, and the reason bring this up is

pricing your products is, is I, I kind of, um, you know, uh, I think we both agree on this. We kind of actually take a two or three steps back and you determine what you want out of life and what kind of lifestyle you want and then you back into will your product and the potential to sell that product or service support that, that desire and that goal. Because if it doesn’t, then you’ve got to go do something else. So the bottom line is you start with the end in mind and you back into how many of these widgets do I need to sell to create the lifestyle that I want. I’m with my family, with my friends, with my faith, you know, fun, all of that kind of stuff. And so you back into it. But then we see, all right, how do we get to that point?

How do we break even? What is our break-even point? What are our fixed costs? And we start controlling those numbers and so you actually can determine your future, your financial future, where are you going to be two years from now, five years from now, 10 years from now, by mathematics, and actually sitting down and what kind of effort are you willing to put into clay? So I want all the listeners to think about this and I want you to go check it out. You can see it and I want you to have. This is an example for you if you go in to businesses that Dr Zellner and I are involved in. So let’s say you go into Dr Robert Zoellner and associates over there next to the Woodland Hills Mall in Tulsa, Oklahoma. Or let’s say you go into the elephant in the room, men’s grooming lounge today. Both of those businesses operate at an appropriate profit margin.

So let’s go with the elephant in the room in order to franchise a business. And we have Jason on today’s show, these superman manager Jason. How you didn’t, by the way, great. So the super manager of elephant in the room, he ordered it to franchise a business. And you went with me to Denver and we sat in a room with an attorney all day creating what is called a franchise disclosure documents. You’re not allowed to franchise in the world today unless you have a franchise disclosure document. In that franchise disclosure document, you must declare the financial status of your business. Now, what anybody wants to buy a business model that doesn’t work. I mean you’re looking at the financials that go hog Jesus’ blood everywhere. This company doesn’t make any money at all. Sign me up. Charlie was with that. No, you want to buy a business model that works.

So the business has to produce a profit of about 20 percent or more after franchise fees. Because when you go out there to buy a business, 90 percent of franchises, about 90 percent of franchises are purchased using a small business loan. So imagine you’re going to go buy a house today. If you buy a house today, there’s a thing called the appraisal. And the house has to be appraised. So let’s say you’re going to buy a house and the house is worth 300,000. You think? So you go to the bank and you say, I want to borrow $300,000 to buy the house. The bank would say, okay, what’s the address? You gave them the address they banks that hasn’t been appraised recently. And you say, uh, no. And they said, well, let’s get it appraised. So the guy comes out to appraise what you’re calling a house, which actually is a shack near a pond and the shack is being appraised for $7, but you say, but it’s worth 300,000.

The Patina, the nostalgia, the accoutrements, the barn. There’s a turtle named Harold by the pond. And I know him. Well you can’t put a price on that. But if I had to, I would say turtle. The turtle by the pond and Harold is worth $300,000. And the banker you meet with the banker, the fingers are all drunk, man. Then you’re going, no, no, seriously, it’s $300,000, right? The bank will say, here’s the deal, we will lend you $7, but you have to put down 20 percent. You’re like, oh, I don’t have that money. But I could show you’re saying I need to put down on a dollar 40 today. We’re out going to do about it. So that’s how, that’s how banks look at. If you want to buy a business and it’s not worth anything. So to have a business that’s worth anything, you have to operate at a 20 percent profit margin.

Now Jason, you run the elephant in the room and you know that we pay more than most men’s. We do pay more than all the men’s grooming places in Tulsa. True. And so I want you to Kinda break down three ideas of things that I do that no other place in Tulsa does for haircuts or through hairstylist. You know that I’m passionate about not sending people home right when we’re slow. Yeah. Why do I not send our people home when we’re slow, they get paid and while they’re on the clock they can be assisting with the day to day, keeping the location running. So they come back everyday to a consistent job as like I used to work for a certain pizza place that I won’t name, but there’d be days where I leave from TCC downtown, 15 minute walk to work, I’d get there and they’d say, oh well we have four servers on, so one of them can do your job, you can go home and we’ll have for service that are already on it because you came down here and we are bad at budgeting and probably worse marketing.

We’ve decided that you should pay the penalty called you get today off. Right. But being loyal to us made stupid. So I see so many business owners in the hair industry. So dumb. I go into, I went into a place this past week or three weeks ago. I go in and get my haircut and there’s like one person working and I asked the front desk guy, hey, hey guys, where’s, where’s your videos? We send everybody home because that we will slope. How would you feel, Paul, if you went to a place of work and you might or might not be sent home? I mean, how would you, how would your accounting practice run if you everyday said, well, we’re going to send you home today. Sturdily were very slow.

Well that’s a business owner that just does not understand that you create wealth by leveraging time and you leveraged time by having a players. Players are not going to put up with that, so it’s, it’s the business owner’s job to drive business in there, to satisfy his players, to keep those a players and to end to edify those a players and reward those a players. And if you want a business with c players than keep doing that.

Our stylist are, a lot of them have worked at other places, previous workforce and so they’re used to being sent home and it’s slow. So they even asked the managers, I go home now you know, you have to make a check this week. You have family to feed, you have to stay here until you have been here at least 36 hours. So you stay here. I mean, what do I do? I don’t know. Sit in the chair and spin round, round round. Right. Have a good time. And the second thing is we pay more than the competition. Jason, why do we pay more money than the competition for our people? Because we’re better. Mm, wow. Hey, that was kind of mean. Now, third, we expect a lot out of the people we hire, right? Why? Well, we want to create, like Paul said, a players. We want to push people to see if they are going to match that level of the employees that we want to see.

And if you have good employees, you have a good business. You just said something profound. He said, we push a players to see kind of a lyrical miracle. We push a players to see if they can handle it. Now, the profit margin that we want to make at the elephant room, I’m just telling you how we want to do it. I want our stylists to be the highest paid stylists in Tulsa. I want the experience to be the best. I want the country club of men’s grooming and in order to do that, I want a 20 percent profit margin coming out of there. So if you buy an elephant in the room, franchise you a can get the money to do it from a bank, but b, you’ll be successful. I don’t want you to buy an elephant in the room franchise and to be slow and to be unprofitable and to not be doing well.

So I, but I have to determine the appropriate profit margin for the goal of franchising. I had to determine that. I know that’s 20 percent polar. Somebody out there says, but I’m not looking to franchise. I’m just looking to run my building company work 80 hours a week all the time. Building homes, never making a profit. Did I just make art? To me, the profit doesn’t matter, but you’re married to somebody who goes to a grocery store where they do charge prices for goods and services. Paul, for anybody out there says, I am not in the hair business. I am not franchising. I’m not an accountant. I just want to know how to determine the appropriate profit margin. What’s a profit margin that you would advise the listeners to at least make in their own small businesses?

Well, like you say, I, I, it’s between 20 and 30 percent. If you can’t bring a 20 to 30 percent of the, of all the dollars that come in, go into your pocket as a profit after all your expenses, you’re, you’re probably wasting your time or you are in a business to where you don’t really care about profit, which I don’t believe that’s a business that’s called a hobby. Clay. Yeah. So you gotta you know, and, and you back into that, and I know I keep saying this and beaten on this, but if you’re not able to turn a 20 to 30 percent profit, then you’ve got to get into a different business or you’ve got to modify your business. Like on one of our earlier shows, clay, you talked about a cake business that, that actually hung picture frames around and explained why that. And what you did was you created a, an environment where you could, you could get more money to the bottom line because you’re providing not only a service but you’re, you’re creating an atmosphere where people to be there. And

so that’s one of the things that we help clients do. Most cpas or accountants are just going to take your historical data and put it on the tax return or financial statements. Our job is to help you create success. Now with this particular cake business, I just want you to understand all the things we did to raise up the value. Okay. They were operating in an office with a low ceiling tiles that had brown stains on it. This is all. These are all the things that I did. I’ll just fire through them real quick. One, I made sure that the decor was awesome. You walked in there and it felt like you’re in. And like in the modern art gallery, that’s one the sights, the sounds. I made a playlist. It was always positive and we’re like love songs, kind of uptempo Luther Vandross, that kind of thing.

It was uptempo, it was positive. I made sure there was a see through observation area where you could see the people making the cake, doing the crumb coating. I made sure that all of the ovens we had facades and veneers put on him. Say Look, very sharp, I made sure the pricing was standardized. None of his handwritten crap on a little chalkboards written with someone with poor pittman ship. It was all officially priced. Nice looking things. We made unlimited free samples of high end gourmet cake. We had gore made coffee, delivered fresh everyday. We made sure that the floors were cleaned everyday. The bathrooms were clean. There’s so many things we did to add to the brand of the business. When you think about branding, Elon Musk, the founder of you ever heard of. I either heard of Tesla. He’s involved with Tesla. I know you’ve heard of pay pal.

Never heard of it. You ever heard of solar city? I don’t know what you’re talking about. You ever heard of a space x? Nope. Okay, fine, but you on musk. Some random guy that you’ve never heard of. He says, brand is just a perception and perception will match reality over time. Sometimes it will be ahead. Other times it will be behind, but brand is simply a collective impression. Some have about a product. Now Elon Musk is famous for trying to deliver something and falling way short, but then on the third attempt, hitting a home run, so I want to talk about branding and as it relates to determine the appropriate profit margin, because if you brand yourself as a high end company, eventually you’re going to drop the ball, you’re gonna, make some mistakes, and it’s up to you to make it right with the customer and to improve the service. So we’re talking about how to determine the appropriate profit margin and branding right here on a look under the hood with Paul Hood Tulsa’s number one CPA. If you’re saying to yourself, I do want to get a copy of Warren Buffett’s only authorized biography and I do want one hour of time with a CPA, I encourage you to book your free consultation today at Hood Cpas

Dot Com. That’s hood CPAS DOT com. Stay to play broadcast from the box in the back, one in the topic today is what we do. You can show thrive nation. Welcome back.

On today’s show, we’re talking about how accurately, how to correctly determine the appropriate profit margin. For your products or services, how to determine the appropriate profit margin. So let’s say out there, let’s say if you’re listening out there, I want you to get out a sheet of paper and I want you to write down which of these brands you want your company to be like. All right, and Jason, I want to pick your brain on this too. So you choose a brand. Okay, here we go. Exclusive. Are you Lamborghini? Are you exclusive like Lamborghini that that’s the highest. The second category. Okay. You gotta choose one of these categories. Are you luxury like a Mercedes? Now Mercedes is a great vehicle. It is a luxurious vehicle, but I would argue that a Lamborghini is exclusive, whereas a Mercedes is luxury. Now the third category going down a little bit here, are you value focused like a Honda, like a Honda is a very nice vehicle to usually get two to 300,000 miles easily out of those things.

A lot of times people sell a Honda with 250,000 miles to somebody who’s going to drive for another 250,000 miles. I mean, those things run forever. All right. Are you inexpensive? Like my 1989 Ford escort, that thing I bought for like $2,000 probably overpaid for it, but that thing, I mean very few things in the vehicle ever worked, but I got me from a to b and that was very inexpensive. So I want to get your take on this. I’m gonna get Paul’s take on this too and start with you Jason, and we get Paul’s take on this. I’m Jason for elephant in the room of which you are the super manager for the brand, the men’s grooming lounge. Which category you think elephant the room fits in? Is it, is it exclusive? Is it luxury? Is it value? Is it inexpensive? I would honestly say it’s exclusive.

Exclusive. You’re saying Lamborghini. Yeah. And I won’t argue with you. I, I think you’re in the stores more than I am. I feel like we’re kind of luxury. Um, and the only, the only difference I would have is that there are places in town I know specifically. I have a friend of mine who gets his hair cut with this guy. It’s 85 bucks per cut and it’s like he only personally has I think, 30 clients and it’s just like you come to him and he’s welcome to my, uh, cutting edge. My name is Isaiah. We bet I cut the and it’s like 100 bucks and it’s, you know, I mean it’s, you gotta tip another John Barnett who, you know from a Oxi fresh fame and Alpha in the room. He’s deaf person that would come to his house. It would put electrodes onto his head to stimulate the hair follicles.

Nice. And they would cut the hair. I cut to the hair. I’d be here. And you know how some for two hours I, I leave here. Will you feel good? The electrodes and work on your scalp? You the, that, the unbelievable growth. I stimulate. I mean, it’s quite a to me that is like the Lamborghini where I just go, I don’t even know what’s going on. What, you know, what’s your name? My name is [inaudible]. I got the I had with that electrodes. Uh, so that would be to me like crazy exclusive Lamborghini. Paul. How did would you say, with hoods, Cpas, how would you were just hood cpas rank? Are you a Lamborghini or a Mercedes or Honda or you afford?

Well, as what I would rank us on as far as service would be luxury because we’re going beyond, um, you know, what the average CPA firm does. We’re, we’re interested in helping our clients reach the American dream by, by reaching their goals versus just, all right, let me get this tax return. Let’s crank it out. You know, we’re not necessarily competing with the h and r blocks, which would. What’s really weird is a lot of times our fees are less than those people as well, but we know that we create marketing, our marketing. A lot of it is centered on how people leave, how they feel when they leave, and so it’s more of a luxury model in going beyond just taking, hey, what’d you do last year? You know, and how, but it’s, it’s looking forward and how can we help them create more wealth, create more income, and frankly pay more taxes because they’re making more money. We want them to pay the least amount possible, but the reality is is we celebrate success and we help people become successful.

So if you’re out there and you say, I don’t know what category I fall in, I’m just going to give you more examples. I as a person am a Honda. That’s me. I’m a Honda. I am your Honda. I am a dive bar man. Bear pig disguised as a Honda. That’s what I am. I’m, I’m all about being the lowest priced, highest value for what I do. That’s, that’s my whole thing. Um, I don’t do well with fine dining. Uh, if you ever asked me to go out to eat, people asked me, they said you want to go out to eat? I don’t know what to do at Mahogany. I honestly get irritated with the entire process. The crummer is something that really irritates me. Ulaan, j, multiple course meals, the nicest thing that I’ll ever go out to eat. The nice where I would like, I go and I go, this wasn’t painful is outback, but I usually will sit at the bar and I determined the quality of the meal based on how fast I can consume it together, so I’m not a high end person, but I have a lot of high end clients who appreciate the finer things in life.

I’m just not that person. So what I would say to you out there as you need to figure out where you want your business model to be and let’s say you want to be exclusive, well, you’ve got to include a lot of things in that. Now Jason said, Hey, elephant, the room’s a Lamborghini. I would say it’s a Mercedes either way, so we’re in the middle. Can you explain all the things that you get an elephant in the room and the experience that you and your mind makes it a Lamborghini, Jason? Yeah. You walk in and you get amazing service. You get a complimentary beverage. If you’re waiting for your haircut to, you know. Let’s say you get there early. You’re never bored. We have espn, nonstop, whatever sporting event you want to watch, we’ve got playstation for you and your kiddos. Do something a little bit different.

So you’ve got, you have playstation, video games. You got espn, you’ve got a beverage while you wait. What else? Keeps giving me kicking me things I need to things. The ambiance is great. Everything is modern. Rustic. It’s very men centric. Uh, it smells fantastic. It’s the smells, the sights and smells. Music. What else? Give me more. Give me more things. Anymore. Things. It has everything. Sensory. Uh, the playlist is phenomenal. I’m more. Thanks. I’m a thing person. Those bathrooms are sick. Bathrooms were say in a good way. Yeah. The cleaned every hour. So you always have. Everything is just nice and neat and clean it. You walk in and it blows your mind. You’re not going to say, what else do I need more? Give me more things. So there’s, there’s more things. It was more things I’ve thought about all these things. What else?

More things with the experience as a whole. I mean, you have a great conversation while you’re getting your haircut. You’re getting your hair cut by a professional. We use top of the line products. That way you leave with something awesome. You leave looking amazing when you leave or you leave feeling amazing every time. This is something that I, I obsess on. We have paraffin hand dip. Our stylists will fire you if you don’t do a great job. Period. True reverence in a uniform. We’re not allowed to talk about bad things. So you can talk about the, the for family occupation, recreation, enjoyment, all in a positive way. You cannot go into the weeds of gossip. Uh, I have yet to go into a competitor. I’m consistently where they don’t exclusively focused on golf, on gossip. I went into one recently, and this is the conversation.

I’m like, Paul, Paul, maybe, maybe you, maybe you could walk me through why this is a good strategy, but I tell the lady, I said, hey, how are you? You know, because they’re cutting your hair. They put little bib on you, you know, how were you, what kind of, what kind of haircut are we getting today? And I’m going, well, I don’t know about you, but I’m going to get two on the sides and I’m going to get a, you know, a cut it kind of show them on a fohawk. And she said, okay, great. And I said, so how’s it going? Because she’s not talking to me. She just looking at me like she’s pissed. So I’m like, how are you doing? She said, I’m doing fine. I’m just going through a divorce. I’m like, okay, okay. Well, uh, sorry to hear that. Um, what are you doing after work today?

You know, what are you doing? What, what kind of things do you do when you’re not working? You know? Well, I don’t know because I’m getting a divorce. Just going to go home and just think about it, you know, I’m going through and I got to work for the paperwork and you wouldn’t believe that guy freaking a hall. I got me pregnant, got me you, you’re going on and on and on and on. You’re like, I want to leave. I feel bad. I almost feel like now I have a relationship where I need to counsel this person and I need to invest in helping her not kill herself after the shift. I mean seriously. I was like, we’re. And it happens almost every time. The gossip and can you talk to me Paul, about like if you brand yourself as high end, why you have to actually hold your team accountable to high end and why that’s maybe a little bit of a struggle as you as you move up to high end. Because I know for me to open the room that was a big a big thing man. When we shift from Honda to high end, there’s a lot of changes we had to make. Talk to me about that. Paul, when you want to move into the high end space, the challenges of doing that.

Well you have to be consistent. Clay and like in that example of the hair stylists, you know, people are in, this may sound bad, but people are selfish by nature. You know when, when if I am sitting there with a client and I’m telling them or a potential client that it’s all about them and it’s about their success, but all I do is sit there and talk about me, whether it’s good or bad, it’s it. That’s not what I’m delivering. It does not match what I say I’m delivering and the key is is you

have to. You can control people’s perception by what you do, say you know, the environment and all of that, so you have to define where you want, how you want to be perceived, but then you have to consistently deliver that perception and large companies invest millions and millions and millions of dollars of how they deliver and how they’re perceived. I was just driving by a McDonald’s. It’s been there forever and they tore it down and clay, no. Yeah, and you know what? They build in its place and other Mcdonald’s and they invested millions of dollars to destroy a building that, that worked just for perception and to build a new one to the newer style, newer. You know how their their persona and how they want to be perceived in the perceptions and so you can just have to be consistent. If you’re going to be the low price person, then you have to deliver low price consistently.

Nothing’s worse than seeing a small business owner who have used themselves as exclusive or high end and they’re offering crappy service, so the reason why your prices need to be higher. If you are an exclusive premium as you should be giving more stuff to people, more things, more value, a better packaging, better decor, but our ambulance better people better smells better over all experience. How do you determine your appropriate profit margin? Add up all the costs that go into making that experience and then throw 20 percent on there. You’ve got to make a 20 percent profit margin. You’ve also need it. You also need to find an accountant who is as proactive about your business as you are. Is it possible? Maybe not, but if you’re looking for the most proactive accountant, that idol, I’d encourage you to go to hood Cpas, dot comments, hood CPAS.com. I’m going to give you a free consultation and a free copy of Warren Buffett’s only authorized biography. The book is called snowball. It’s about Warren Buffet. You can get it today free and a free one hour consultation at Hood Cpas Dot Com. Once again, that’s hood CPAS, Dotcom. Three, two. What.

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