As published in the Summer 2022 issue of Master Plumber Magazine.
Ever wondered how your profit compares with other businesses in your industry? I get to see the books of lots of plumbers – after years of seeing the numbers I now have a clear picture of what a good set of books looks like – and the KPIs you can use to see if a business is operating in what we call the profit sweet spot.
In the white-hot market, we’ve had for building and trades in Queensland over the last few years, plenty of businesses have seen a significant increase in top line revenue – but how many businesses can say that profit has followed the same path? Given how much demand has been in the market it’s a real shame more operators haven’t been able to benefit.
Sure, you can say that materials, labour, and operating expenses have increased, but the real failing here is the inability of businesses to A) properly track their margins and B) use this feedback to adjust pricing, ensuring they maintain the profit sweet spot.
In fact, when it comes to your take home profit, which after all should be what we’re all chasing, I see time and again operators who are able to turn a significantly higher profit from much lower revenue than other businesses – all by following a strict approach to defending margins – you’ll see this in the numbers following in this article.
This varies depending on the nature of work a business takes on. For the purpose of this article, I’m focusing on domestic maintenance plumbing.
For these businesses, it’s critical that Gross Profit (GP) is in a range between 40% to 45%, ideally as close to 50% OR BETTER if you can get it! That is, for every dollar of revenue you generate, you’ll be left with between 40 to 45 cents of gross profit after accounting for materials, labour, and any other Cost of Goods (COGS) items used in producing the revenue for a specific job.
I have to stress, I’m referring to an average GP%, meaning that, on larger items like hot water systems you’ll have to wear thinner margins but then make it up on smaller items like consumables, aiming for 200% to 500% mark-ups in some cases on these lower priced items.
From the figures below you can see how defending margins can result in the same GP dollar amount from a much smaller top line sales number.
In FY 22 Plumber B generated almost exactly the same GP (approx. $300K) from only $780K in revenue compared with Plumber A’s $1.3 million in revenue… I bet you can guess who’s got more time on their hand for the family and fishing…
Remember, increased revenues without healthy margins just means you’re busier, not wealthier!
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Whilst it’s been around for a number of years, fixed pricing is being taken up by more and more operators as a solution for driving higher margins.
And when you look at the numbers, the benefit to the business owner is undeniable. Not only does it build efficiencies into the sales process, resulting in increased revenue and shorter quote-to-cash times, fixed pricing systematically locks in your margins, taking out the guesswork.
Based on four plumbers using fixed pricing that were consulted for this article, hourly rates ranged from $203 inc GST to $610 in GST, with the average across the four being $422.75 – a compelling argument for a fixed price approach.
An early adopter of fixed pricing and a client of ours, Joseph Egan, shared with me that it’s not as simple as just updating your price book, there is a range of operational changes that need to be made to realise the benefits.
A good example of this is carrying stock on hand so that when you’re on a call out for a common repair, you can offer on-the-spot additional services, saving the customer time and energy of a future call out.
We carry a range of popular product lines in our vans, rather than just replace one set of faulty flexi-hoses we can replace the remaining four sets for a client who wants to take advantage of having a plumber on hand,” says Egan. “We don’t need to make multiple visits or go back to the office to put a quote together, the customer makes a decision on the spot, knows exactly what the job will cost before the work commences and because the price is fixed, they aren’t watching the clock to get the work finished in a quick time frame.
Benchmarking Operating Expenses and Net Profit
The next item to stay on top of is operating expenses, because every dollar you spend on “keeping the lights on” will eat into your gross profit and leave you with a lacklustre take home profit.
The KPI we use to benchmark operating expenses is overhead percentage i.e. Overhead : Revenue as a percentage. The sweet spot we’re looking for here is less than 10% if you’re operating out of home and under 15% for those with a separate commercial shed.
Continuing the example from above, this time adding in our overhead figures to determine actual take-home profit, Plumber A has some serious work to do to reign in overheads – not a great place to be after all that effort!
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So, in summary, if you’re a domestic maintenance plumber you should be aiming for 40%-45% GP and keeping your Operating Expenses less than 10% of Revenue. The impact on your take-home profit of hitting the profit sweet spot is VERY REAL! In the examples given above, a disciplined approach to gross margin and containing overheads saw Plumber B buck the trend, in the face of rising costs, actually increasing their profit.
