How Margin, Labor Rate Mistakes Will Put Companies Out of Business

Compromising on equipment margin can create challenges that are unrealistic to overcome, according to leaders of NSCA and Electrosonic.

It’s a tough time to be in the business of making money on audio-video product sales. Customers increasingly beat up dealers when it comes to already-thin margins on equipment. Many in the integration industry look to offset margin profits by simply charging more for service.

That, however, is an over-simplified and ineffective solution, according to panelists on the 5th Annual Integration Business Outlook Presented by CI & NSCA.

Comments by Chuck Wilson, executive director of NSCA, and Jim Bowie, president and CEO of Electrosonic, came during a discussion of typical project hardware margin and typical technician labor rate. Based on a survey of 137 integrators and consultants, 22.3 percent say their typical hardware margin is between 1 and 10 percent. Meanwhile, 26.4 percent get under $50 per hour for labor.

Archived Webcast: 5th Annual Integration Business Outlook Presented by CI & NSCA

The concept of getting less than 10 percent on equipment margins is “crazy talk,” said Wilson during the webcast. “You can’t do that. That’s unsustainable.” 

The only way less-than-10-percent margins is sustainable, he clarified, is if the integration firm is getting “way north of $100 per hour” on labor. “If you’re doing this below $50 and below 10 points, you’re not going to be around [much longer]. There’s just no way.”

This part is simple math, said Bowie. “There is no way to survive if you’re on both sides of this. If you’re earning 1-10 percent on equipment and you’re selling labor at $50 an hour, you’re losing money.”

NSCA Margin Labor

Source: 5th Annual Integration Business Outlook Presented by CI & NSCA survey of 137 integrators and consultants

While there is probably not a lot of overlap between the 22.3 percent with typical hardware margin between 1 and 10 percent and the 26.4 percent getting under $50 per hour for labor, there are a lot of integrators that misunderstand the relationship between equipment revenue and labor revenue, according to Bowie.

A lot of integrators, he suspects, don’t look at the two categories side by side. “Probably a lot of people don’t look at it split up like this. They just look at blended margin at 10 or 14 percent and think, well, I need this project to keep me going and [I’ll] sell the next project at better margin to make up for it.”

The problem with that, Bowie added, is to break even on the next project after a project at that 10 or 14 points, “the next project has got to be 35 or 40 points, and that isn’t going to happen.” 

Wilson, meanwhile, encourages integration firms to analyze the relationship between equipment margin and labor rates, adding that he has a formula that he shares with NSCA members. “I know exactly what happens if you take a point off of margin what you have to add for an hour rate on labor. I’ve done the math over and over and I’ve proven it to our members that by shaving 5 points off of your product, here’s what you have to do with your labor and people are just astounded by that when I show them the numbers.”
Integrators, of course, did not create the product margin conundrum, but that doesn’t mean they should cave to it. At Electrosonic, “we have a water mark,” Bowie said. “We have a margin that if we go below that it takes may signature.”

The industry should take a similar position, Bowie argued. “I think the industry basically has to stand up and say we won’t do this and I think consultants have to help and make sure that they put realistic budgets in for projects.”