All businesses have one thing in common: revenue makes the owner happy. The problem is that revenue goals are meaningless if variable costs are rising without you noticing. Here are three ways tracking your gross margin can lead to higher profits.
1. Revenue Goals Are Meaningless Without Tracking Your Gross Margin
If your costs are rising but your prices aren’t, you’re eating 100% of the added costs. That means everyone else in your supply chain is making more by raising their prices to you, while you’re working harder for less.
When you track your revenue against a specified margin, you’ll notice cost increases sooner and can adjust your prices sooner. Consider this: just a 2% margin differential equals $40,000 more profit in your pocket at $1,000,000 in revenue.
2. Averaging Your Gross Margin Is Key
Some items and services have market pricing caps that limit how competitive you can be on price alone. But you can still increase your average margin by adding services with better margins into the mix.
For instance, say you own a car repair garage and your overall goal is to maintain a 40% gross margin. Brake replacements in your market sell for $199, leaving you with an anemic 29% margin on that job. If you offer additional services with 45% to 50% margins, like fluid refills or tire rotation, you can pull your average margin back up to 40%. But you have to track these numbers weekly or monthly to know how and when to react as things change.
That said, don’t be too quick to discount items where you’re already making 50% margins or more just because the margin looks good. You’re going to need those higher margins to help average out pricing errors, broken items, and other mistakes that are sure to come up every year in business.
3. Know When to Increase Your Prices and Be Able to React Quickly
A gas station is a perfect example of this mentality. We’ve all seen the prices on the sign change, seemingly by the hour. That’s because when their costs go up, so does their retail price. Price increases should never be arbitrary or reactive out of frustration. If the margin goal is 40%, the gap between cost and retail pricing stays at 40%, full stop. Not paying attention to your margins on a regular basis will, without a doubt, cost you thousands of dollars every year in profits.
Frequently Asked Questions
How often should I be tracking gross margin? Weekly or monthly, depending on how quickly your costs shift. Businesses with volatile input costs (like fuel, materials, or commodities) benefit from more frequent tracking so price adjustments can keep pace.
What’s a healthy gross margin target? It varies significantly by industry, so the more useful benchmark is your own historical margin and what it takes to cover overhead and profit goals. The target matters less than consistently tracking against whatever target you set.
How do I raise prices without losing customers? Tie increases to actual cost changes and communicate them clearly rather than raising prices arbitrarily. Customers are generally more accepting of increases that are consistent, explainable, and not a surprise.
Should every service or product hit the same margin target? Not necessarily. Some items may run lower margins to stay competitive, as long as others run higher margins to balance the average. The goal is your overall blended margin, not an identical margin on every line item.
