How To Fix Bad Margins
Not having very good margins is a huge problem for a lot of trades businesses and for a few good reasons:
- Nobody tells you what’s reasonable in terms of a margin.
- Nobody tells you what’s a fair price (nobody knows really, do they? You don’t know, your old boss didn’t really know; everyone sort of wings it and hopes for the best).
- Your customers just always think you’re too expensive and tell you so.
So there’s pressure from everywhere to be cheaper:
- From your customers, of course; and
- From other trades who are uncertain as you and as afraid as you are of losing jobs for being too expensive.
And there’s uncertainty because you don’t know – there don’t seem to be rules about it, do there?
But you need decent margins.
You need to make enough money on your jobs – on top of the costs of labour and materials and subcontractors if you have them – to cover your overheads and all the things that can go wrong (that’s a long list) AND make a profit
And it’s especially tricky if you’re at that stage in your business journey where you’re shifting from being a primary mover on the tools to mostly other people being the ones on the tools because your labour is effectively free to the business but your tradespeople isn’t.
If you’re doing a job or on a job and you don’t charge enough or allow enough, it doesn’t matter so much because you’re not paying directly for every hour of your work.
But if you’re paying someone else, that’s how sh!*ty margins creep up on you and it gets worse as your overheads start to grow as your business grows – insurances, vehicles, websites, equipment, workshop, (business coach).
As they grow, your magins need to grow to cover them and still give you some profit.
So how to fix them?
If you’ve got this far you know it’s an issue.
The short answer is ‘charge more’ and you’re probably feeling resistance and fear and thinking, ‘My customers won’t stand for it,’ and I don’t blame you.
You might even be thinking, ‘You can’t just charge more, Jon,’ or something like that.
And you might be right or you might not be able to.
You’re probably not right though and you’re probably undercharging.
If money is tight, that’s a clue although there could, of course, be other reasons.
So how do you tell?
You start by understanding your costs properly.
The Tradie Cost Calculator is the tool for that – my clients use it.
You add a fair margin (30% – 40% for trades, 20% – 30% for builders. Gross margin not mark up).
Add it to your average cost of labor.
Boom! – there’s your new charge-out rate.
- Don’t charge less for apprentices – it’s all ‘hours pf labour’.
- Do charge more for supervision or site management or project management
- Do add the same margin to materials
- Do combine hours and materials into unit rates or whatever you like to call them
- Do compare your rates to someone else – another good business like yours not the cheap sh*!t one your customers is comparing you too
- Do quote fixed price, never cost plus
- Do continually refine your prices, check that you made the margins you thought you’d make after the job is complete and then review your price or your rates sheet or your allowances
This is in part about confidence, about setting your price high enough to run a profitable business but not greedy high.
And knowing that it’s a fair price because you understand your costs – labour per hour and the hours it’ll take; materials; and you added a fair margin; and you compared to your peers.
There’s more, of course, but this is supposed to be a short video.
I’ve limited myself to price. We go elsewhere too in our program.
You can do this on your own with the calculator I gave you and the information I just gave you.
Or you can join my program and do it with my help.
I’ll help you compare your rates to real peers and understand your overheads, and I’ll help you be brave.
If you think that might be good, book a Moneymaker Call and we’ll see if that’s the right way forward for you.
There are four ways you can engage with me:
1. Subscribe to these emails and get them once a week in your inbox so you never miss a video from me.
2. Join the Trades Business Toolshed Facebook Group where you can watch these videos, ask me questions or talk to your peers.
3. Attend my next Tradie Profit Webinar.
4. Book yourself a 10-minute chat with me. We’ll talk about whether coaching is right for you now and if it is, we’ll go further into the process before you have to make your mind up.
See you later.