Improving Your Profitability: Gross Margin
Making more profit is about more than just “sell more”, as you well know. In this section – an excerpt from our free 10 Ways to Improve Your Profitability whitepaper – we discuss how improving your gross margin can improve profitability.
Think Gross Margin When we think about ways to increase profits, we usually think about lowering operating expenses or increasing sales. In fact, for many staffing firms the fastest path to higher profits is higher gross margins – and many staffing firms leave gross margin on the table by paying temporary employees above market and/or charging customers below market rates.
For Example.. Consider, for example, a staffing firm earning 4% net operating profits. They can increase net operating profits by 25% (to 5%) by raising gross margins by merely 100 basis points (1%).
Focus on the Bill Rate and the Pay Rate
When we think about increasing gross margins, we often focus on either charging more to the customer (bill rate) or not overcharging our workers (pay rate). Incremental gross margin gains require both. Your incentive structure, workflows, and management controls should work together to maximize gross margins.
Incentivize Your Team
Traditionally in staffing, salespeople and recruiters are not focused on maximizing gross margins because they only receive a tiny fraction of the incremental gains as commissions. However, these incremental gains can dramatically increase operating profits. So it is in your interest as a firm owner to express the importance of negotiating an optimal bill rate and pay rate.
Some ideas on how to accomplish this are bonus incentives, and “gamification” - aka integrating game mechanics into sales to motivate participation, engagement, and loyalty.