Secrets to Higher Gross Margins in the Painting Industry

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Yeah , but what I am an expert in is gross profit for painting businesses , and that's what we're going to talk about today . So that's good . Yeah , yeah , yeah , and that's what we're going to talk about today . So that's good , yeah , yeah , yeah , let's talk .

We need to get it better .

But problem identification can be hard sometimes . So no shame in having low gross profit , it's just identifying that that is an issue . Now here's some solutions that we'll go through today in this episode ideas for improving your gross profit .

So , first of all , what you want to do and this is going to be kind of in order of priority , of how I look at it If your gross profit is below 40% or maybe even 45% , these are the things I would start to take a look at and the reason why I'm using 40% to 45% .

These are the things I would start to take a look at and the reason why I'm using 40% to 45% . Warren Buffett as an example he looks at when he goes to invest in businesses . He says 40% or higher are the companies that have a competitive advantage .

We also do internal benchmarking , so we know that , on average , the painting businesses that we work with , they're hitting around 44% or so 44% on average . Now , obviously we don't want to be average , so we want to be shooting above that . So , somewhere between you want to be over 40 to 45% , you want to be 50% or better . That would be ideal , right ?

You want to be 50% or better , that would be ideal , right . So if you're below 40% to 45% in gross profit , you need to look at improving it , because that's going to really open up your profitability . It's a huge lever you can pull in your business to really open up your overall profitability , your bottom line profitability .

If you can get gross profit up , all right . So here are the things I'll look at . Number one ensure that you're doing production rate estimating and marking up your projects properly . So this is the number one thing . That is the problem .

When someone especially when someone first comes to us and they have a 40% or lower gross profit and they have a 40% or lower gross profit , that's usually the issue is that they're not doing their estimates properly , using production rates , and they're not marking up appropriately to charge the client for the work that they're doing .

And so , to break this down a little bit further what is production rates . If you're not familiar , production rate is basically how long does it take you to paint a particular surface .

So an example of a production rate would be an hour to paint one side of , or half an hour to paint one side of a door , and then one hour to paint a full door on both sides . That'd be a production rate . Door on both sides , that'd be a production rate . Um , or two hours to paint a , a window , with , you know , a certain type of trim on it .

Or you know a certain amount of time to paint , uh , 10 linear feet of of soffit and fascia , you know . So these production rates are a certain amount of time to paint a particular type of surface , and so you would want to have in your possession a list of production rates .

How long does it paint , how long does it take your team to paint those different types of surfaces , so that when you go out and do an estimate , you're just measuring the surfaces .

You're just measuring the surfaces , you're just measuring the linear feet , the square footage of the walls , and you're adding up those surfaces and then multiplying it by your production rate to get how long is it going to take you to paint those walls , that trim those doors , those windows , etc um , I love the I was .

He said , you know , look around the room here , but that we're sitting in and tell me , you know , what would you charge to paint the walls in this room ? And he got like four different answers that varied anywhere from , you know , 1500 to $4,000 . And the reason is is because , you know , as humans we always have this optimism bias .

We always think like , oh , this isn't going to take that long , I can knock this out , it's going to be a lot easier than it really is .

Having a set production rate takes all the guesswork out of that . You pop open your laser , you know , tape measure or whatever , and within a few minutes you've measured the room and you have a set rate that is not subject to your biases , your optimism , you're eyeballing it wrong and it helps you stay consistent .

You know , even if it's only a few hundred dollars per room , you add that up , job over job over job , and now all of a sudden you're thousands or tens of thousands of dollars in missed out revenue Plus . I think customers respect it right . I mean , if I eyeball the room and say I think it's going to be 1200 bucks , you know , that's one thing .

But if I actually measure it out and show them how I'm coming up with this calculation , I think they're more willing to accept that price , even if it's something that they weren't anticipating . So I love the idea of doing production rates .

Reminds me of a story went to visit this $10 million painting business and part of their sales process is to actually let the customer see that you're measuring , you have tools on a tool belt , you're measuring things to give that impression like , oh , this is a professional that's measuring things and they have some sort of expertise .

They have like a clipboard , they have a tool belt , they're measuring things with a laser pointer and getting precise about that . So I totally agree with you .

It also will just come across as you're a professional and it will probably improve your close rates and your sales process because people will perceive you like , oh , this is a quality contractor that I'm dealing with here , yeah , yeah , so go ahead .

We want to make the customer happy , we want to give them a number that we think they're going to accept , and so you know , we're tempted to undervalue ourselves . A production rate is kind of like , you know , a scaffolding . That prevents us from doing that , because it's not about making a judgment call in the moment .

It's X amount of feet cost X amount of dollars per foot . That's all there is to it , and it helps us to not undervalue ourselves . So I find having a set written rate that I can't deviate from that would help me in my pricing a lot . Yep .

And then what you want to do is do your marking , your markup , your the cost of what it's going to cost you to what you're going to charge the client . And a simple way to do this , or a simple way to think about this , is charge twice what it's going to take you to actually do the job .

So basically , um , if , if it's a you do the math , let's say you had 100 budgeted hours for a project , doing your production rate estimating , and you , on average , are paying your painters , let's say , $25 per hour . You have to add in your burden because you have to pay workers' comp , you have to pay payroll taxes . Use as a ballpark is like 30 .

So if you multiply 25 per hour times 1.3 , that would be 32.50 , so 32.50 , so that would be $3,250 for the labor . And then let's say that you had to buy $1,000 in materials .

That's what it's going to cost you to go to the paint store , buy all the materials and the sundries , and so $3,250 plus $1,000 of materials comes out to $4,250 that it's going to cost you to do the job .

Now you're not going to charge the customer that , you're going to charge the customer twice that and that's going to set you up to get a 50% gross profit . So that $4,250 multiplied by two , you charge the customer $8,500 . Thousand five hundred dollars . So that's um the kind of like the quick , down and dirty way to make sure you're you're charging properly .

Um , now , obviously you can shoot for a different gross profit than 50 . Maybe you want to shoot for 55 or um , maybe 45 . But you got to make sure your your math is right , because a lot of the times I'll go through this exercise with a painting business owner , like how are you getting your prices ?

And we'll kind of go through , walk through it together and it turns out they're not marking up materials , they're just charging the customer exactly what it costs them . They're marking up the labor but they're not marking up the materials . So that's going to skew your gross profit . You got to mark up both things like that .

So just make sure you're you're charging your customers properly , so you're getting at least 45% or higher for your financials . Okay , so that's number one . Doing production , oh go ahead .

Immediately , we put more value on the more expensive one , like nobody wants a half butt paint job with inferior materials and , and you know , bad craftsmanship . Their customers are not afraid of price , they're afraid of value . So if you can offer them value , they will be willing to pay the higher prices . So I know it's hard . Mentally .

We're thinking we've got to be cheap , we've got to get the job , but don't be afraid to charge what you're worth . Customers who want high-quality work are going to expect to pay more for it .

But maybe you can do something to kind of supplement the justification for increasing your prices . Like , maybe you bundle in any paint , exterior paint job with a pressure wash . They get that in a color consultation automatically as part of the bundle .

So if you get a full exterior , you're also going to get a pressure wash and you're going to get a color consultation to help the client choose the colors for their project . That's included in the price . Pressure washing is pretty inexpensive for you to do but it's an actual value add for the customer , for the customer .

And then you know cause , maybe you you also pressure wash the driveway or something like that , like and maybe the roof or whatever the case is . And then the color consultation you know that relieves them of having to pick the colors and figure out . They're not .

You know decorators they don't know what to do , but you include that in and that can be a relatively cheap thing for you to , to to do for yourself , like to get a color consultation , but it could be a big value to your customer . So they don't have to figure out and go to the paint store and all that stuff is taken care of for them .

So think about your offer . What is your offer to your customers ? What are their pain points ? Do they need help with color selection ? Can you handle that for them ? Maybe scheduling is a thing . Maybe you have an open schedule or you're able to get subs on quickly . Maybe you can get things done quickly .

They can sign up today and you'll be out there next week . Think about that . And your offer to be able to increase your price . Think about that and your offer to to be able to increase your price .

And then , as you mentioned , richard , improving the sales process so that you're you're communicating that value in your sales process by having timely communication , being professional in your appearance and in your process , and and build and building that trust in your sales process so that you can command those higher prices because they feel like they're going to be

getting a premium job from you . All right , so that's number two looking at increasing your prices .

I mean , obviously , putting the paint on the wall , that's the commodity that we're selling . But if we can give them a really great experience so that they feel good about themselves the entire time , they will be willing to pay more for that .

Now we're getting into the other side of the equation , which is the cost or what you're paying to get the job done . So number three is ensuring you're paying your subcontractors properly .

If you're using subcontractors and we'll get to employees here in a second if you use employees , so ensure you're using subcontractors , and we'll get to employees here in a second if you use employees , so ensure you're paying your subcontractors properly .

So when we were first onboarding them , I asked , looking at their profit and loss , their subcontractor percentage of revenue was ? I think it was a little over 50% . I was like of revenue was ? I think it was a little over 50% . And I was like so how are you communicating ? Do you use budgeted hours and give that to the ?

How do you determine what to pay the subcontractor ? And this person said they were just giving them 50% and just telling them yeah , I'll just pay you 50% of whatever I charge the client . And so they were just telling the sub , I'm just pay you 50% of whatever I charge the client . And so they were just telling the sub like I'm just giving you 50% .

And then the sub tried to negotiate the percentage higher , like , hey , can I get 55% of the project Because I'm really doing all the work ? And so now it's like negotiating over the percentage that they're going to get of the project . So first

of all , if you're paying yourselves a percentage of the job , don't ever tell them that percentage or have the negotiation around the percentage . Try to use the budgeted hours that you did in the first step . Right , you're doing production rate . That production rate should give you budgeted hours .

And if you're using a tool like PaintScout , when you do your estimate in PaintScout it will actually generate a work order that has the budgeted hours by surface . So we'll have windows is budgeted for 10 hours , the doors are budgeted for five hours , the trim is budgeted for X amount of hours down the line .

So when you're negotiating with subs , you can give them the work order and say , okay , here's all the hours and what's budgeted for everything on this project . If you're saying you're not getting paid enough for this project , tell me , where specifically did I not allocate enough budgeted hours ? Was it the windows ? Was it the trim ? Was it the doors ?

Okay , and if I didn't allocate enough time for the doors , how much time do you need for the doors ? And so it puts it back on them . If they say , oh , I'm not getting paid enough or I want more money for this job , you go back to the budgeted hours and say , okay , where specifically did I not budget enough money ?

Because maybe they're right , maybe you just missed something , but a lot of the times the subs just want more money . They're not necessarily you did get it on target , especially if you're using production rates . They just want more money and so that kind of handles that objection .

So bottom line is try not to pay subs as a percentage of the job , or at least not let them know about it . Focus them on the budgeted hours and also probably just need to generate what you pay them based off the budgeted hours as well , because that's how you generated the price to begin with . And use a work order .

I like PaintScout's work orders that they generate there that have the budgeted hours right there on the work order . I like PaintScout's work orders that they generate there , that have the budget hours right there on the work order . Another tactic you can use with subcontractors is this actually happened today .

We were looking at their profit and loss and their materials were super high . It was over 20% for materials and the subcontractor pay was more or less in line , but the materials were super high . It was over 20% for materials and the subcontractor pay was more or less in line , but the materials were super high .

And what was happening was he was having his subcontractors buy the materials and just go to the paint store and buy it on the account , and so what we determined was that their pay wasn't tied to the materials . They had no reason to watch how much they were paying for materials .

So there was probably a lot of waste going on , which is why his materials were kind of high over 20% in this case of revenue . And so we changed the system and say , okay , instead of just paying the subs their money and then also having to pay for whatever materials they purchased , now I'm going to pay them .

Let's say , 50% of the project goes to the subs , but whatever amount they purchase in materials it comes out of that 50% , so that it doesn't hurt me if they go over on the material budget . It hurts their money , not my money .

So , taking the materials out of the subcontractor pay so that they are now invested in making sure they're efficient with the materials that they're purchasing All right , so that's number three making sure you're paying your subs properly . You're not overpaying them . The next one would be ensuring you're paying your subs properly . You're not overpaying them .

The next one would be ensuring you're paying your employees properly . If you're using employee crews . And it's similar with this first item , which is giving your employees the budgeted hours for each project on the work order , right , should have the amount of time that's allocated for each surface , ideally .

And then you need to give them the expectation like , hey , this is what's budgeted for this project . So I'm expecting you guys to beat this budget or at least meet the budget , and if you're not going to , there needs to be a reason behind that .

And so giving those budgeted hours with the work order and that expectation is super important to keep your employees on budget . And then you can even start to consider a performance pay system .

Cool integration with time trackers and tools like drip jobs or pain scout , and it'll pull in the project amount of budgeted hours , and it will also sync with the time tracker like clock shark or busy , busy or quickbooks time , and you can set a budget , a budgeted hours for the team and then how much they get paid if they beat the budget , how much money

they'll get paid .

And it's basically a real-time performance trade performance pay tracker where they can log into their app , their ProTip app , at any point in time , the employees on the job side , to see where they are on the budget , because , again , it's syncing with the time data and they can see how much they're going to , they're making per hour based off of how how much

they're being the budget on that project . And so it was a real time feedback that they get to see . So they can basically it's a motivation tool so they can see oh , if I work faster , I get it done more quickly and get things knocked out . I can actually make , you know , $40 an hour or $50 an hour , as opposed to my base rate of 25 .

And so that's another tool that you could use to encourage your team to beat budgets If you're , especially if you're using employees in this case , all right . So that's number four . Number five is looking at your paint store discount .

You know , going to your paint store rep and seeing if you can get a lower discount , especially if your volumes increased in recent , you know , months or years and you haven't talked to them in a while .

Talk to them about getting a better discount , cause if you have a decent amount of volume , you know and you haven't talked to them about this in a while that could be something that you could get a lower rate , a better discount for your , for your paint supplies . So that would be something that I would look at as well .

So those are the five things that I would recommend looking at first . Number one take do production rate estimating , if you're not already , and making sure you're marking up your uh , your labor materials properly , at least basically 100 markup . Charge the customer twice what it costs you . That's number one .

Number two look at increasing your prices by maybe bundling services with pressure washing , color consultations , improving that sales process to command higher prices . Number three make sure you're paying your subcontractors properly . Um , base , base it off of budgeted hours and a work order .

Um , potentially , look at taking materials that they purchase out of their , their pay that they're getting , so they'll be more efficient with materials . Number four looking at , uh , how you're paying your employees , again , base it off of the budget hours that you gave them from the production rate estimating you're doing . Hold them accountable , set those expectations .

Consider doing a performance pay using a tool like ProTivcom . And then , number five , ensure you're getting good discounts from your paint store . You mentioned getting good discounts from your paint store .

But yeah , I talked to him one day and I was like you spend a lot of money and a lot of time and your own fuel to go down to Sherwin-Williams . Benjamin Moore , you know , gather all this stuff . You spend a good hour every morning doing this . Why shouldn't you be getting paid for it ? So it's perfectly fine to mark up your materials .

You know , even if the client is paying MSRP for the paint , they're saving money because they don't have to go down to the paint store and get it themselves and you should be compensated for that .

So it's , you know , get those favorable rates to keep your material costs down and then make sure that you are , you know , reselling that paint or marking up that paint to the customer . And so it's where you're getting compensated for your time . You're helping get those gross margins a little bit higher .

wraps it up for our episode on improving gross profit . Love to hear your thoughts on what you've done to improve your gross profit in your painting business . If you go to Facebook type in grow your painting business . Love to hear your thoughts or ideas for future episodes .