As a business owner of a trade business, you know exactly how crucial it is to ensure your pricing strategy is right to maximise profitability.
But how can you ensure your pricing is right for your tradie business?
There are key elements to consider when pricing your trade services. These are direct costs, margin and markup. All three are interdependent on one another so you must know all of them so you are pricing correctly and not eating into your profits.
Tune in as Connor Holliday from Elements Advisory Group takes tradie business owners through the fourth KPI trade business should be tracking to improve business performance – Margin on Labour Vs. Materials.
Let’s look at your margin.
Margin or gross margin refers to the level of profitability you make from selling your services and materials after all the direct costs such as labour, materials and equipment costs have been considered.
Other overhead costs not related to the delivery of service are not included in the calculation.
Why track your margin on labour vs materials?
Simply put, your margin ensures that the business is earning profit from jobs completed. This is important to track so you can price your services correctly and maximise your profitability.
The best way to do this is by separating your overhead costs and direct costs on your profit and loss statement. This will make calculating your gross margin much easier.
You also need to know how much each technician is earning and costing you. This is where the revenue per tech per workday KPI comes in handy. Understanding your tech’s average hourly charge rate, the number of labour hours charged, wet and dry hire hours, as well as the average hourly labour cost is critical.
Once you have identified your target margin, you may now use that to get your markup percentage and set the right price for your services.
Your markup percentage is simply your target gross profit divided by your direct costs. We’ve also discussed margin and markup, and how to use them in your pricing strategy on our blog. You may check that out to learn more on our website.
An important note to remember…
The prices of materials and wages are always changing, and currently rising, so remember to track your margin regularly so you can rest assured that you remain profitable on jobs completed.
If you need help with tracking your margin, as well as the other essential KPIs for tradies, Elements Advisory Group is here to help. Do not hesitate to reach out to the team. Email us at firstname.lastname@example.org or call us at 07 3878 9181.
Join us again in the next video where Connor will discuss the 5th important KPI to improve trade businesses: QBCC NTA and Current Ratio.