For those of you who read our most recent article, we focused on profit killers. Now we’re having a bit more fun and taking a look at profit drivers.
Specifically, what are your profit drivers and how can you improve them? This article will discuss the metrics that drive profits, and how to specifically maximize those profits.
Your Profit Drivers
There are four main variables that work to create a profit, and within those variables, there’s a lot of play. As a staffing business, you are looking at:
1) Price of services (contractor, temp-to-perm, etc.)
2) Variable costs (this means costs that vary in direct proportion to revenue typically represented by cost of sales)
3) Fixed costs (or overhead)
4) Sales volume.
Sounds relatively simple, right? But let’s take price of services. This will vary widely if you are a boutique firm or one with more general placements.
Fixed costs can also go up or down, especially for companies that are looking to grow and expand locations. Those firms would need to decide whether they would do best with a centralized or decentralized model. In fact all of these variables can be managed to your advantage. Let’s dig a little deeper.
How to Strengthen These Drivers
With many of your clients using a vendor management system or a rate card, your price of services may not leave you much room to negotiate. But there are steps you can take. The first one is deciding whether you want the business – perhaps a lower price is worth it because it’s a prestige customer, or can guarantee a certain level of business.
One thing you have to do is make sure your prices are competitive while keeping your business healthy. You can find out what your competitors are doing, or similar companies within similar business models and geography, by joining a benchmarking service. Both Staffing Industry Analysts and the American Staffing Association have these services – you provide data and you get information tailored to your situation.
You also need to figure out your own benchmarks, whether you join a survey group or not. At Madison, we can help with that. Our Performance Analytics measurements will give you up-to-the-minute trends on sales gross profit, gross margin, markup percentages and headcounts. Simultaneously, you can get data through our Online Solutions (MOS), which provides you with comprehensive sales reports and gross profit by customer – results which may surprise you, but will definitely enlighten you.
Much of your energy will be focused on getting customers and qualified candidates. This is only natural. But what about the customers you do have? It’s crucially important to have great customer relationships. This can influence every profit driver you have.
For example, did you know a whopping 68 percent of clients drop suppliers because of perceived indifference? It’s the biggest reason clients leave, and the good news is, it’s fixable.
In developing a relationship-driven strategy, a staffing company must:
- Focus on the right customers to serve. Who are the most profitable customers?
- Figure out the best opportunities.
- Develop unique marketing and sales strategies for different types of decision makers.
- Understand the customer’s expectations, and become an advocate for its customers.
- Put the capabilities in place to deliver at all levels of the organization.
With regard to other costs, again, automation can help you. For example, Madison’s Applicant Tracking System (ATS) will free up your front-line people to concentrate on sales and service. And a CRM tool (built in as well in our case) will allow you to manage longer sales cycles that come with a more “consultative” role. This gives managers the visibility to support sales reps all through the process.
As you can see, behind the relatively simple profit dynamic, there is a lot of room for strategy and vision, and great ways to increase profits while increasing service. Let Madison Resources help you manage and exploit these profit drivers.
Billing Rate Explained
Your bill rate is a major key to profits. You can figure out your bill rate in three easy steps:
1) Figure out the pay rate (how much you’ll need to pay an employee).
2) Apply the markup you think you can reasonably get.
3) The total is the billing rate.
For example, if you’re paying an IT worker $50 per hour and decide you can get a markup of 80 percent, your hourly billing rate would be $90.
However, you need to understand who you are competing against. You do not want to leave money on the table. Do not quote mark ups try to always quote bill rates. In IT for instance , your competition is not necessarily another staffing firm it could be a systems integrator or consulting firms. They typically mark up their people by 150 – 200%.