4 tips for determining profit margins on services

When it comes to determining profit margins, goods-based businesses seem to have it so much easier. Since the product being sold is a tangible item, it has easily quantifiable costs and value.

When you’re dealing in services, however, it becomes more difficult to determine profit margin, since most of the determining factors are intangible and qualitative. That doesn’t mean it can’t be done. In fact, determining the profit margins for your service is essential to a strong business and healthy financial management. Read on for four tips to help you determine your profit margins.

Material and time costs

Determining costs starts with looking at how much you spend on resources for the service. This will include any tangible resources, like cleaning supplies or cosmetics, but it will also include the time it takes for the service to be completed. This is where good time tracking software really shines. You need to know how long a service takes and how efficient your employees are in order to understand the true costs of performing the service.

Direct and indirect costs

In addition to the costs of materials and time, you will also have indirect costs. These are the costs of doing business, like office space, vehicle insurance, and money spent on training employees, to name a few. The entirety of each of these costs won’t be deducted from the profit margin of a single service, but they do need to be incorporated in some way. For instance, if the employee needs to use the company car for three days to complete the service, three days worth of costs to own, maintain, and insure the car should be included in the costs of the service. 

Employee experience cost

Your employees do not have equal skill sets, equal knowledge base, or equal pay. Likely your managers have a stronger company history which leads to better service knowledge than your entry-level staff. They also get paid more. This means that the two hours of work done by your new hire to complete a task isn’t quite equal to the 45 minutes it takes your seasoned manager. They not only have different pay rates, but they also have different responsibilities – if the manager has to take 45 minutes to complete the task there are other important things not being done in that time.

Marketing and administrative costs

Like the costs of doing business, marketing, and administrative costs also need to be factored in. If you have receptionists who schedule all of the service appointments, their pay needs to be considered as part of the cost of the service as well. If you are offering a new service and you launched a specific marketing campaign to advertise it, the costs of that are also part of the profit margin equation.

Conclusion

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