Business advice tip #7:
So Why Should You Care About Your Gross Margin?
Not knowing your Gross Margin is the kiss of death in the battle of profits and losses. It puts you on the back foot in every negotiation you have with a client, no matter what business you are in.
If you don’t know the cost of your goods or expenses, then you have no sound footing with which to effectively upsell to a client, or negotiate either a pricing plan or a discount for an upfront payment plan. It’s always wonderful to tell your clients that if they pay you in advance you’ll give them an XX% discount, but if that discount detonates your profits then why offer it at all? For professionals, this is true of retainers that fall short of all the work you performed. For tradesmen, it hits home the hardest when a job goes beyond your original deadline.
Your Gross Margin is the difference between sales and costs (excluding overheads). Gross margin can be defined as the amount of contribution to your business, after paying for fixed and variable unit costs, required to cover overhead and providing a buffer for unknown items. It expresses the relationship between gross profits and sales revenue. It can be expressed in two simple formulas:
Gross Margin = Net sales - the cost of sales
OR
As the ratio of gross profit to sales revenue, usually in the form of a percentage:
Gross Margin Percentage = (Revenue - Cost of Sales) / by Revenue.
Moreover, whether you offer a product or a service, knowing your Gross Margin will help you identify your highest profit margin products or services from your lowest profit margin products or services. If it is strategically advantageous to offer an upsale item to a client in order to get the job, wouldn’t you want to know which one will cost you the least and give you the most profit?
This is ultimately why understanding your Gross Margin is so important.
Written by Coach Josh Slavitt, pictured here with his son Liam
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great article. i know for a long time i didn’t know that number. or my “lifetime client value.” needless to say, until i figured that out (with your help) i was able to identify my most profitable clients.