Profit margins are a fundamental measure of a business’s financial health, reflecting the percentage of revenue that is greater than the costs of production. For small field service businesses—think electricians, plumbers, landscapers, cleaners, and the like—the difference between success and struggle often lies in effective profit margin management.
This article looks at average net profit margins across various trades, highlighting factors influencing profitability and offering practical tips and strategies to improve margins.
What Is a Net Profit Margin?
Before diving into the specifics of different trades, let's quickly define what a net profit margin is and how to calculate it. Profit margins are a way of measuring profitability using percentages. A net profit margin indicates how much of each dollar of revenue a business retains as profit after covering all costs.
To calculate the net profit margin percentage:
- To get your net profit, subtract your total expenses (including costs of goods sold, operating expenses, taxes, and interest) from your total revenue.
- Divide your net profit by your total revenue.
- Multiple the result by 100 to get the profit margin percentage.
For example, if a plumbing business has a total revenue of $200,000 and total expenses of $180,000, the net profit would be $20,000 and the profit margin would be 10%.
What's the Difference Between Net Profit Margins and Gross Profit Margins?
- Net profit margin reflects overall profitability, because it looks at the percentage of revenue remaining after ALL expenses have been deducted from sales.
- Gross profit margin, which is the percentage of revenue remaining after expenses related to the costs of goods sold (materials and labor costs), only takes into account expenses directly related to the service being rendered.
NOTE: Although both are highly useful measurements for assessing and managing factors impacting profitability, this article is focused on net profit margins.
Overview of Net Profit Margins by Trade
Profit margins can vary significantly across different trades and locations, as each service presents unique operational challenges and different regions have their own dynamics. Based on available data and industry reports, here is an overview of average profit margins in a variety of field service trades in different regions (see Table 1 for breakdown by country):
Plumbing Profit Margins
Plumbing businesses often see average profit margins ranging between 8-20%. The key drivers include high hourly labor costs and material expenses. Efficient job scheduling and resource allocation can improve profitability.
Electrical Contracting Profit Margins
Small electrical businesses can anticipate net profit margins in the range of 6-14%. The margin is largely influenced by the type of work, cost of materials, and region. Adopting job management software can streamline operations and enhance profitability.
Landscaping Profit Margins
Landscaping businesses face unique challenges such as seasonal fluctuations and varying project sizes. Despite these factors, small landscaping companies typically report profit margins between 5% and 12%. Proper project management and upselling additional services can lead to higher margins.
Locksmith Profit Margins
Locksmith services are highly specialized, and their profit margins can vary widely based on the complexity and urgency of the work. On average, small locksmith businesses are achieving profit margins ranging from 8% to 15%, benefiting from the low cost of materials and high markup on labor.
HVAC Contractor Profit Margins
The high demand for HVAC services and the ability to charge premium prices for installations, repairs, and maintenance lead to average net profit margins ranging from 10% to 20%. Efficient management of inventory and labor, along with strategic pricing, are critical for maintaining profitability in this industry.
Cleaning Services Profit Margins
Cleaning businesses generally have lower material costs but higher labor expenses. The average profit margin for small cleaning businesses ranges from 8% to 15%, with residential profit margins typically being lower than commercial. Key factors that influence profitability include efficient scheduling, scale of operations, and maintaining a consistent client base.
Factors Influencing Profit Margins
When you understand the factors that significantly impact profit margins in your businesses, you can start taking steps to managing costs and enhancing profitability. Some common factors include:
Labor Costs
Labor is often the largest expense for small trades businesses. Skilled labor, in particular, demands higher wages, which can reduce profit margins if not managed properly. Your region plays a big role too - if you’re in a high cost of living (HCOL) area or if there is a shortage of skilled, local technicians, your labor costs will be even higher. Efficient labor management through automation and better scheduling can significantly reduce costs and improve margins.
Look Up Local Labor Costs
If you want more information about the average cost of labor in your specific trade, local job postings are a great resource. Barring that, different countries publish different reports that can help you benchmark your business labor costs.
- Australia - use the pay calculator on the Australian Government Fair Work Ombudsman site
- New Zealand - look at average remuneration in the Pay and employment equity review analysis from Employment New Zealand
- United States - use the BLS Data Finder in the U.S. Bureau of Labor Statistics to find information about jobs in specific areas
- Canada - use the Wage Report tool in the Government of Canada Job Bank to look at wages by occupation and region
- United Kingdom - look at the ranges of average annual salaries by job using the National Careers Service Job Profiles tool
Material Costs
Fluctuations in the prices of raw materials and supplies can erode profit margins. Building strong relationships with suppliers and purchasing in bulk whenever possible can mitigate these fluctuations.
Competition and Pricing Strategies
The level of competition in the local market can significantly impact pricing strategies and profit margins. In highly competitive areas, businesses may choose to lower prices to attract customers, which can squeeze profit margins across the industry as a whole. However, while pricing needs to be competitive, costs still must be covered for a business to remain sustainable. Value-added services and other strategies can justify higher pricing.
Operational Efficiency
Streamlined operations are vital for maintaining profitability. Utilizing tech-driven solutions like job management software can enhance workflow efficiencies, reducing time spent on administrative tasks and improving service delivery.
Market Demand
Demand fluctuations, particularly in seasonal trades like landscaping, can impact margins. Diversifying services to cover shifts in demand can stabilize revenue streams throughout the year - for example, a landscaping business may use their equipment to plow snow in the winter.
Tips for Improving Profit Margins
Small businesses can adopt several strategies to enhance their profit margins. Here are some practical tips to improve profitability in your trade business:
Upsell and Cross-sell
Training staff to identify opportunities for upselling and cross-selling during service calls can significantly increase your average job value.
The odds are your technicians don’t want to be salespeople. However, there’s a big difference between asking your techs to push something the client doesn’t really need, and asking them to point out when a different package or service would truly be of benefit to the client - and most technicians are comfortable with the latter. The key is ensuring they believe in, and can clearly communicate, the additional benefit.
Increase Prices
Review and adjust your pricing strategy periodically. Sometimes, even a slight bump in prices can enhance profit margins without deterring customers - don't undervalue your work if you can help it.
Cost Reduction Strategies
Approach suppliers regularly to see if there is room to renegotiate pricing, and take advantage of loyalty programs and bulk purchase discounts whenever it makes sense. Consider strategic memberships to benefit from discounts and stable prices (for example, trade associations often negotiate discounts on behalf of their members for materials, training, tools, and insurance), as well as local alliances (for example, a plumber and an electrician could split advertising costs in offering a bundled service package for kitchen or bathroom renovations).
Financial Tracking
Regularly review financial reports to identify which jobs have the highest margins. When you have a solid understanding of which types of jobs are the most profitable, either focus on building that part of your business, or identify ways to raise the margins on the rest.
Investing in Technology
Adopting technology solutions can improve operational efficiency and reduce costs. For example, using digital tools for scheduling and invoicing can streamline processes and reduce errors, while leveraging customer relationship management (CRM) software can enhance customer interactions and retention. (Job management software like ServiceM8, designed exclusively for small field service businesses, can do all of that!)
Hiring and Training
Well-trained staff are more efficient, and it's a lot cheaper to work with an existing employee than it is to hire new one. Regular training sessions can improve productivity and job satisfaction, leading to less churn, more skilled workers, and higher profits.
The Role of Job Management Software
Job management software, such as ServiceM8, plays a pivotal role in helping field service businesses optimize profit margins by enabling efficient operations. ServiceM8 helps with:
Job Scheduling
Effective job scheduling minimizes downtime and ensures your resources are allocated as efficiently as possible. ServiceM8's smart scheduling assigns jobs to the right staff based on availability, skills, and location, ensuring optimal use of resources and reducing travel time. You can also monitor progress with real-time job status updates and make adjustments as necessary to ensure timely completion.
Invoicing
Automated invoicing reduces administrative time and ensures timely billing, improving cash flow. ServiceM8 allows businesses to automatically generate and send invoices upon job completion, reducing delays and improving time-to-payment metrics.
Pricing
ServiceM8 offers markup billing, which lets you set prices based on cost-plus-margin for materials, services, and labor items within job cards. And when items are purchased for a specific job, it also facilitates the integration of supplier invoices directly into the job record, ensuring that all costs are included as billable items.
Client Management
Retaining your existing customer base is cheaper than winning new clients - and existing happy customers that promote your business to their family and friends are the best advertisements you can have. ServiceM8 facilitates regular client communications and automates reminders for upcoming bookings, follow-ups, and feedback. Your clients stay clients informed and engaged, which leads to more repeat business and positive referrals.
Cost Tracking and Analytics
Cost tracking is essential for maintaining profitability, on both a general business level and a per-job level. ServiceM8 integrates with popular accounting systems and offers features like job costing, customizable cost categories, and robust reporting and analytics tools, all of which help ensure job-related expenses are properly tracked and managed.
Mobile Accessibility
ServiceM8's mobile app lets staff access job information, generate estimates and invoices, track time, take payments, and communicate with customers on the go. If your field staff goes offline, they can still access job details and update information, syncing automatically when back online. When businesses can manage operations effectively from anywhere, especially small field service businesses, your productivity rises, as do your profit margins.
Summary: Achieving Financial Success in Small Trades
Achieving healthy profit margins in a trade business is an ongoing process that requires diligent management, strategic planning, and the right tools. By understanding the factors that influence profit margins and addressing them as part of your ongoing strategy, along with leveraging job management software like ServiceM8, you will be well on your way to optimizing your operations and increasing your profitability.
Explore how ServiceM8 can help you achieve your profit margin goals. Take the tour today.
