How To Maximize Your Profits As A Maker

Sustained profits go to those who figure out how to serve a well-defined customer base with repeatable products over long periods of time. Here are five ideas for gearing up your maker business for long-term success: 1. Make a premium version of your product. Every product you make could be better. If you want to operate a profitable business, take these tips and implement them into your own business. They will help your business perform better, continue to grow, and increase the profits earned. Focus on improving your company’s profitability. Leave the rest to us.

How To Maximize Your Profits As A Maker

How To Maximize Your Profits As A Maker Using

How paying attention to the pennies will lead you to success

Most construction companies only make 2% to 4% net profit after paying job costs and fixed expenses. The little things you don’t think about can add up to an additional 1%, 2% or even 5% more profit at the end of the year. This additional amount can be the difference between struggling and running a successful business.

You don’t make money building things or doing great work. You make money by knowing what it actually costs to run your construction company and what to charge for labor, equipment, materials, subcontractors and overhead. Below, find nine tips for making the most of your company’s profit potential.

1. Get An Accurate Labor Burden Rate

Most construction companies don’t use accurate labor rates when calculating their crew bid rates. Every year, tax, unemployment, social security, and workers’ compensation rates change. Plus, as your employees get older and their situations change, their health insurance rates will also change. Don’t forget to factor in the overtime used versus anticipated in your bids.

Good estimating starts with accurate labor rates—so have your accounting manager figure out exactly what the accurate rate is for every field employee. You’ll find that your labor burden rate can vary by as much as 20% or more for each employee.

2. Calculate Equipment Costs

Calculate the exact cost for every piece of equipment you own factored by the annual utilization to determine the right rate to charge. For each piece of equipment, add the purchase price, interest, depreciation, maintenance, gas and oil, service, tires, repairs, insurance, storage rent, and mobilization costs you really spend across the life of the equipment.

Divide this total cost by the total number of hours you hope to bill, utilize and charge for the equipment over that duration. This is your real cost of ownership per hour, not including overhead and profit. Next, compare this cost with the price of renting it. Get rid of all the equipment that costs you more money to own than you’ll get back from your projects.

3. Maximize Change Order Pricing

Determine what rates you want to charge on each job based on what the allowable or highest fair and competitive rate is in your area that your clients will tolerate. Present your proposed rates to your customer to make sure you are on the same page before you begin any extra work. Are small tools and equipment free, or do you charge for them in your change orders?

To maximize your change order pricing, always include these additional items required to perform extra field work. Some contracts clearly state the allowable change order markup rates, while others don’t.

Why not try 15% or 20% for overhead, and then 15% for your profit markup, instead of the traditional 15% in total? This double markup will increase your bottom line on changes by 1% to 3%.

4. Watch Overhead Costs

You must know what it costs to keep your doors open without any work under construction. This is your break-even minimum you must cover before you make a profit.

Make it a priority to sit down with your accounting manager and get a handle on this annual amount. Then, trim the fat. Look at every overhead check you signed last year.

Where are you wasting money? Consider outsourcing payroll services, craft training, project scheduling, marketing services, safety programs and equipment maintenance. By outsourcing, you’ll free your staff to take care of the important things that make you money.

5. Shop Materials Prices

You’re often busy running your company, and keeping your customers happy and crews occupied—this doesn’t allow you enough time to get enough materials quotes for every job when bidding projects. You get stuck using the same suppliers on most jobs.

When this happens, your materials prices inevitably creep up over time. And when you need more material on jobs, you just call your old friend at the supplier and get more shipped out, without taking the time to get another price from a different supplier.

6. Never Run Out of the Tools & Materials

You Need Another mistake occurs when your crew runs out of material, tools or supplies at the last minute. The foreman heads to the store to buy things they forgot to order in advance. And while the foreman goes to the store, the crew stops working. Require your foremen to prepare a weekly inventory, clearly listing out all the tools, materials and equipment they will need for the next week. And never allow the foreman or superintendent to leave their jobsite to go to the store.

7. Hit Your General Conditions Budget

On almost every job, contractors run over on their general conditions budget. Ask your estimator the last time they checked the actual cost of temporary facilities, fencing, trailers, toilets, water, security or power. They tend to use old numbers on estimates because they’re too busy bidding new work.

Temporary toilet facilities can vary by $100 to $300 per month, depending on how many times per week they are serviced. Look at how many bids you got on those services, such as fencing, power, water, trailers and final cleanup. Too busy to inspect? Give up your next vacation, and you’ll probably cover what you lost on general conditions on your last two jobs.

8. Rank Your Team

Do you know which estimator, project manager, superintendent or foreman makes you the most money? Rank each management team member by work performed, gross dollars and net dollars earned, actual profit versus bid profit, callbacks, punch-list items and customer satisfaction.

Also, rank them by who hits their project labor, material, equipment and general conditions budgets. Focus on how better players make results happen and which low-ranked players don’t do well. Give poor players a chance to improve by providing mentoring and training.

9. Manage Your Money Aggressively

Most contractors run a lot of money through their checking accounts every year. What are you earning on your bank balance? By meeting with your banker, you can design a program to earn interest or invest your bank balance on a daily basis.

There are many ways to invest your cash in short-term investment programs that full-service banks offer. For every $1 million in sales volume, you should be able to generate $20,000 to $40,000 in interest or investment income annually. This will only take about 5 minutes a day to do. That’s not a bad return on your accounting manager’s time.

Profit margin belongs to the most important metrics marking the financial health and sustainability of the business. And that’s why every retailer across the markets is eager to increase profit margin. Let's explore some real-life tools of maximizing the metric.

What is profit margin?

Profit margin is an accounting metric used to evaluate the profit gained by the business in regard to the revenue. To put it simply, profit margin marks the difference between the revenue and costs of products sold. Speaking of margin, it is necessary to make a distinction between the major subcategories:

  • Gross profit margin marks the difference between total revenue and the cost of goods
  • Net profit margin is calculated by taking all expenses (e.g. taxes, royalties etc) away from total revenue
  • Operating profit margin marks the difference between revenue and operational costs (e.g. logistics, warehousing etc)

If the term ‘profit margin’ is used without any specifications, it most likely refers to gross profit margin. In this text, we’re also going to use it in that way.

Profit margin formula

With a relevant and high-quality data on revenue, gross profit, operating profit, and net income, you can calculate each of the outlined above types of profit margin. Here are the formulas:

Gross Profit Margin

(Gross Profit / Revenue) x100%

Operating Profit Margin

(Operating Profit / Revenue) x100%

Net Profit Margin

(Net Income / Revenue) x 100%

Making a difference between various types of margin is crucial in both strategic planning and operational routine. If one of a retailer’s regional offices uses wrong calculations or misinterprets different types of profit margin, the outcomes might threaten sustainability of the entire business.

For example, in high-end clothing retail, the profit margin might be exceptionally high while the net margin is relatively low compared to the other retail sectors. That’s why it’s so important to make a distinction between different types of margin and calculate each properly.

Retailers margins: when low isn’t bad

After calculations are done, the next thing is to evaluate whether the identified profit margins are actually good. But that’s not easy. The point here is that ‘good’ profit margin rates vary not only across the industries but may also be different for various SKU in the same portfolio.

As we’ve mentioned already, high-end apparel is an example of an industry dealing with high-profit margins. Personal-care products, jewelry or specialty foods retailers also belong to this category. These kinds of retailers may sell the products with a profit margin going beyond 50%. In contrast, the discounters and the large group of web-only marketplaces tend to operate with low margins.

However, low margins should never be misinterpreted as an indicator of an unprofitable business. For more than a decade, Amazon’s annual net margin has never exceeded the point of 5%. At the same time, the retail giant is firmly among the top 5 largest companies in the US by revenue. Another company from the same list is Walmart relying on a business model implying low margins, yet high sales volume.

But even Walmart sells some products with a relatively high-profit margin. Depending on the product lifecycle stage, the role or mission of every SKU on the shelf might be different. For example, Best Price Guarantee products or BPGs have high velocity but low margin as their mission implies inspiring specific shopping trips. In contrast, exclusive range products are traditionally ones with the highest margin in the portfolio. Click below to learn more about SKU changing roles and how technology helps to price them at every lifecycle stage.

Craft optimal price for every SKU

Product lifecycleHow it worksooe

Increase retailers profit margins: where to start

Every retailer is eager to maximize profit margins, regardless of whether low or high margin rates dominate across the portfolio. The trick is to maximize the margin and, at the same time, meet customer expectations. There are many ways retailers can increase profit margin. Choosing a particular blend of tools depends on brand positioning, strategic approach, business maturity, and resources available. Let’s look at the most popular means of increasing profit margin:

Maximize
  • Narrow the focus. To a large extent, this point stems from the importance of sustainable market positioning. Before plunging into a new market or sales channel, the business should clearly define its positioning. For example, focusing on exclusive range offerings means that high margins should prevail in the assortment. In this case, narrowing the focus would mean increasing the share of high-margin SKUs.
    To learn more about market positioning for online retailers and get some practical tips, watch the video below.

  • Invest in average order value increase. Basket size or average order value (AOV) is a crucial category while evaluating the effectiveness of a retailer's approach to maximize profit margins. Even if you operate products at low margin rates, you can gain a significant uplift by forcing customers to buy more than one SKU per shopping session. Bundle pricing strategy is one of the best means of increasing the average order value. For example, bundling traffic-generating products with ones of exclusive range at a lower price would help to increase significantly the total margin gained from a purchase.

How To Maximize Your Profits As A Maker As A

  • Look at competitors. For some products, like BPGs or KVIs, the market-based pricing approach works best. For these products, increasing margin makes sense only as long as your prices remain more attractive for customers compared to competitors. And that’s why you need to look at the market and consider the trends while setting prices. For such cases, Competera offers a comprehensive market-driven pricing solution helping retailers to both stay competitive and increase market share.

Stay competitive

Learn moreea Case study
  • Manage promo campaigns in a smart way. Unsustainable discounts and markdowns are fairly considered to be the margin killers. Of course, effective inventory management helps to mitigate many risks but, in some cases (e.g. apparel retail), seasonal markdowns are just an inevitable part of the business. And that’s where retailers need advanced pricing solutions capable of identifying both implicit and explicit cross-elasticities between products in the portfolio which are then used to calculate optimal discounts. The latter means hitting the stock at the maximum possible margin rates.

Showcase: maximizing gross profit margin with advanced software

How To Maximize Your Profits As A Maker File

Advanced pricing software can be helpful while undertaking each of the outlined above approaches to margin increase. Let's take the markdown optimization as a showcase to see how it works in detail.

So, what is the dominating approach to markdown? In most cases, it implies a 'blanket' discount which means that the discount depth is the same for all SKUs on sale. As a result, margins get diluted, the probability of hitting stock is ambiguous, and a retailer's price perception is undermined.

In contrast, managing markdown campaigns with advanced software, like Competera, implies differentiating discounts at SKU-level (based on cross-elasticities) and optimizing discount sequences based on data-driven predictions on reaching the targeted stock level. As a result, the business gains maximum possible margins with the entire markdown cycle under control.

Click below to get some real numbers from the case study or contact us to find what can Competera offer to your business.

Intertop Case Study

case Study Ca Market test