Maximizing Profitability: Markup vs. Gross Profit

Maximizing Profitability: Markup vs. Gross Profit

Are you maximizing your profit for each placement? Do you know the exact costs every time you place an employee? Or how a change in the cost of benefits or a liability can impact your profitability? It all comes down to how you determine your bill rate.

In the past, the historical way staffing companies’ sales staff established bill rates for their customers was based on a set markup percentage. If the customer is willing to pay $12.00 per hour and you established a 1.40 MU, you would bill your customer $16.80. It was quick, easy, and top line focused.  

Over the years, this method became extremely inadequate due to rising costs of federal and state unemployment rates, as well as rising workers compensation expenses and new employee benefits. But more importantly, this method does not ensure you are billing at a profitable rate.

Establishing bill rates solely using a flat percentage doesn’t take into consideration all the necessary cost of services, as well as all the employer liabilities.

Here are some things to consider:

  • Mark-up is the amount added to the cost of services to cover selling, general and administrative expenses, and profit
  • Cost of Services is all the costs directly incurred in delivering the service. The primary types of costs are the wages of the temporary employee, along with the associated employer payroll taxes (FICA, FUTA, SUTA), employee benefits, workers’ compensation cost, and possible interest expense  

When determining the bill rate, you need to determine the total cost of the talent. I’ve seen many businesses go out of business by competing on price without understanding the cost of the service.  

Unfortunately, when just considering a flat mark-up percentage, something as simple as a workers compensation code can affect your margins tremendously.  

Mark-up is different than gross margin. Gross margin is more inclusive, taking the revenue less the cost of services.

Let’s look at the benefits of calculating bill rates utilizing the gross margin method:

  • It ensures you are considering all the expenses directly associated with your placement(s)  
  • There is a direct ratio of hours worked and profit
  • Once the gross margin calculation is completed, you are able to pay commission on your true profit [On a mark-up based commission program, you could be paying out commission that is actually eating into your entire profits]   
  • It also allows you as an owner and/or sales manager to continually be reviewing/monitoring your team’s weekly profit — if a line item expense changes, which will directly affect your gross margin, you can immediately see it and react  
  • It directs top-line focused staff to more of a bottom line focus  

Part of TRICOM’s Business Performance Tools available to our clients is the Breakeven Tool. This tool is client-specific and will calculate markups and more. This breakeven tool is customized to the client’s employer tax rate, workers compensation, employer benefits and cost of funds (if applicable).

This tool will calculate the break-even bill rate for a pay rate based on the previously stated employer liabilities. It then allows an owner, sales manager or sales team to establish the necessary bill rate to achieve the company’s set gross profit.   

Not only is this tool important for pricing new customers, but it is also critical for historical forecasting as well as re-pricing due to workers compensation premium increases and/or unemployment rate increases.

Juan Diaz, President and CEO of ProStaff Solutions, realized the benefits of this tool first-hand for his staffing business. When Juan first reached out to TRICOM, he was experiencing some difficulties. “Definitely the company was in pretty bad shape in terms of profitability. Overall we weren’t experiencing much success,” explains Juan.

Julie Ann Bittner, TRICOM President and CEO, and Rick Gehrke, TRICOM’s Director of Cash Management and COO, worked with Juan customer-by customer, to re-evaluate their customer portfolio. “In the beginning, we were just giving out markups and not even considering all the costs associated with each placement,” explains Juan.

“We’ve experienced 15 to 20 percent growth every year since we started with TRICOM,” shares Juan. “Of course, it’s because of their recommendations on the way we should pick clients, how we should markup better with the tools provided to us in the beginning. That helped to change our mindset on how to do business, how to approach clients, how to train our sales team as well. So educating us more. That’s one way they’ve helped our success.”

The Breakeven Tool is a simple, easy to use tool, and you have the ability to work with any of the senior management team at TRICOM to customize it to fit your specific needs.  

If you’re not currently utilizing The Breakeven Tool, call us today to get your personal customized report.