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Understanding Blended Margins

Understanding Blended Margins

Business Tips

An important part of running a business is understanding your finances and when to put more or less effort into the areas that need it most. One way to better manage your finances is through blended margins: Looking at your profits and sales channels as one, interconnected system - rather than independently. According to Zachary Traxler from Traxler Tees LLC, it benefits just about anyone who runs a business to have a basic knowledge of how blended margins work. He’s here today to give us a low down on blended margins and answer our top questions about them.

What are blended margins?
 

Blended margins is a way for businesses with multiple divisions or product categories to look at their finances not as separate divisions, but as combined costs and profits across the company — in other words, as ‘blended’. For Zach’s print shop, blended margins also means assessing the trajectory of client relationships to help them see if it’s worth winning over a client with an offer that’s not as profitable, because they can find where to make it up elsewhere.

 

For example, Zach once agreed to take a client on for an order of business cards, even though that wasn’t something they handled in-house. It was beneficial overall because it didn’t require a lot of internal labor — meaning resources could go to other projects — and it was the gateway of letting him charge the regular rate for a large order of t-shirts; once that client eventually started placing t-shirt orders.

Why is it important to understand blended margins?
 

With a lot of industry pressure to offer increasingly cheap products, blended margins allows both you and the client to find the most lucrative, yet cost-effective solutions. “First and foremost, if you are going to blend margins or offer a discount to a client, you want to make sure it’s not a race for the bottom,” Zach says. By analyzing your business costs as a combined ecosystem, you can discover where your tipping point is when offering discounts, and when you might have to renegotiate the pricing you offer. “In terms of charging more or less for the work, we wouldn’t know any of that without analyzing each division of the company and understanding if they’re efficient,” Zach explains.

How can I start analyzing my finances to blend margins?
 

Analyzing and collecting your finances begins with tracking your sales as you go along with an ERP system and an accurate CMS (cash management system) paired with current and reliable book-keeping. This allows you to look at each of your divisions and see where inefficiencies lie. For these inefficient areas, you can start fixing them and know that they might be areas where you avoid discounts or blending. This will also lead you to a decision to take a hit on something like business cards to get a larger client in the door if you're playing the long game and fostering a relationship with the prospective client. 

How can all this help my business?
 

One way Zach has used blended margins to help his business is by looking at order volumes across the board of clients to see where efficiencies and lower costs appear. “If one of our large clients came in and placed one 10,000-piece order,” Zach proposes, “and then we had 10 clients each place orders that were 10,000 plus pieces, we would likely lower the price (only if needed) on the larger 10,000-piece run. It's more efficient to set up and run, instead of the 10 separate 1,000-piece jobs - which we would keep at a higher rate.” Potentially creating more profit - but this can only be determined if a sound and solid ERP and CMS are in place. 
 

Using this information not only lets Zach offer clients better rates to stay competitive, but it also helps him scale his business and drive internal goals by knowing which areas of his business to expand and invest in. Separate 500 to 1,000-piece jobs - which we would keep at a higher rate.” Using this information not only lets Zach offer clients better rates to stay competitive, but it also helps him scale his business and drive internal goals by knowing which areas of his business to expand and invest in. "Take a hit on a few business card orders to win a larger screen printing client - it's a no brainer if the numbers make sense and numbers don't lie"

 

Do you need an accountant to benefit from blended margins?
 

In short: No. “In general, everyone in business should have an understanding of blended margins,” Zach says. “If you don’t have the confidence because you don’t quite understand the numbers behind it, maybe that’s where you can consult a financial specialist,” he suggests. Zach acknowledges that while it won’t always work out or pay off, taking these risks informed by blending your margins can often lead to massive orders that can go into the tens-of-thousands of pieces, and help forge new relationships with long-term clients. “It can be helpful to have an accountant or specialist within arm’s reach,” he notes, “but in terms of understanding and then taking the risks, that’s something you have to do yourself.”