What gross profit margin should i aim for

It all depends on the market, competition, and demand. Financial information firm Sageworks published a study in of the professional service industries with the highest margins. It found that legal services and bookkeeping were among the top-performing sectors. Other industries, like design, also had a good profit margin. But, how do we go about improving our gross profit margin and increasing revenue? Here are some tips and steps you can take to reach higher profit margins.

To increase your gross profit margins , increase your pricing. Therefore, James decides to put his pricing up. This is an example of reverse engineering our figures to work out gross profits — we decide how much extra income we need in dollars, and adjust the metrics accordingly. But if only it was that simple. While increasing project pricing is an obvious solution, there are many variables and factors at play that determine the price to a client.

Otherwise, they risk pricing themselves out and losing market share to the competition. Instead, professional services firms should get creative and find new niches and ways to sell products to increase gross margins. To do this, marketing teams should conduct industry research and product analysis to see where opportunities lie.

For example, a creative agency has a team of copywriters who work on general writing projects. Therefore, the creative agency decides to focus on SEO writing and uses case studies of recent successes to sell these services. As they have clear, recent examples of successful projects, the team is able to command a higher margin. This is an example of how a diversified product offering, and reimagining your sales message are effective ways of increasing your profit margins.

In project management , one way of deciding whether or not a project should go ahead is by using the Profitability Index PI metric.

This figure is a ratio that allows services firms to determine the potential future profit of a project. If the PI is greater than 1, the project will be profitable. And a project will break even if its PI is equal to 0. So how do we work out PI for a potential project? We take the present value of future cash flows and divide it by the cost of taking on the project.

Cash flow is the money that comes in and goes out of any business. So project A will be profitable and should go ahead, as the PI is greater than 1. So, with a PI of less than 1, project B will not be profitable and should not go ahead.

By assessing PI, services firms can prioritize projects with a high ratio, and reject those with a lower rate. This will directly impact the gross profit margin. By not accurately tracking time spent on a project, businesses are effectively devaluing their services and charging less for their time.

These time allocations are what Jane thought it would take her to complete the project. They, like many companies, optimistically guess. So Jane starts working on the project. And the time spent on each task was more than planned:. As you can see, Jane actually took 3. And so, the net income on this project will be a negative amount, which means a loss.

For a small business , this minor miscalculation could have serious consequences. So by using project management software to track billable time, an agency can keep a database of actual hours spent on a project. Then they can analyze this data to determine, with greater precision, how long future projects would take. This then allows them to more accurately charge the client, and preserve a higher gross profit margin. Or, see where productivity can be improved.

Having precise data of time spent on a project also allows us to see where there are inefficient and time-consuming tasks that could be automated. This allows a firm to further optimize its internal processes to ensure employees spend more time on billable activities and less on administrative tasks. This is known as employee utilization, a statistic that shows the percentage of time an employee spends on revenue-earning tasks.

Both gross and net profit margins are important KPIs for professional services organizations. Gross profit margins tend to vary by industry, due to industry-specific costs and the level of competition. Gross Profit Margin Formula Calculating gross profit margin is pretty straightforward. Gross Profit Margin Explained Gross profit margin is a good metric for measuring shows how effective a company is at converting goods, materials and direct labor into profit, because it includes only the variable and fixed costs associated with producing or acquiring products and services.

Should It Be High or Low? It can highlight areas with opportunity for improvement—for example, if one product or service has higher gross profit margins than others, that could point to an opportunity to reduce COGS or shift the sales strategy for other product lines. It can be used to help set pricing at a competitive level while ensuring products are still profitable. Without proper context, it may present an inaccurate view of profitability. For example, a company may need to pay more for raw materials temporarily if several suppliers in a certain region close after a flood, or it may discount heavily in order to capture market share.

It is less valuable for comparing companies across different industries. Average gross profit margin varies by industry sector, largely because of differences in COGS. Gross Profit vs. Gross Profit Margin Gross profit margin differs from gross profit in that it measures the efficiency with which a company generates revenue as a percentage. Financial Management. What is Revenue? What Is Total Sales Revenue? What Is Operating Margin? Expense vs. Sales Chat How is your business adapting to change?

The two factors that determine gross profit margin are revenue and cost of goods sold COGS. COGS is what it directly costs the company to make a product. Labor costs are part of COGS, for example. COGS also includes variable costs that change as production ramps up or down. Raw materials and packaging are examples of variable costs. Gross profit margin signals whether your sales and production processes are running efficiently. You could then analyze and improve the production process to lower your costs.

A higher gross profit margin means a lower ratio of COGS to total revenue, which, in turn, means a higher potential for profit. You can look at the gross margin of specific products to see which ones bring in the most profit. This is useful for choosing where to concentrate your marketing efforts. Calculate your gross profit margin by first subtracting the cost of goods sold from your total revenue.

The time frame for your revenue and COGS numbers depends on your sales cycle. You can choose to do daily, weekly, monthly, or whatever makes the most sense for your company. One distinction that can be confusing is that between gross profit margin and markup. Industry averages can give you an idea of a general gross margin to aim for. Gross profit margin is a critical metric and certainly worth checking periodically. But it fails to account for significant operating costs.