Tim Stobierski from Harvard Business School mentions that there are two basic ways to improve profit margins: increasing revenue (by selling more) and decreasing costs. Reducing COGS (“Cost of Goods Sold”) is a popular way to help improve profit margins, but will it be helpful in a plumbing business, and how can you use it?
You can lower your plumbing business’ COGS by negotiating with material and equipment suppliers for better prices or terms. Try to minimize waste as much as possible, which also involves improving your inventory management. Streamlining labor costs can also help improve your profit margins.
Increasing sales is always good, but it can take time to do effectively. My first recommendation to any plumbing business owner is always to see how they can reduce their COGS. Let’s examine the most effective ways to do that.
Target Gross Profit Margin for a Plumbing Business
Owners of a plumbing business should aim for a gross profit margin of 60% to 62%. This should bring them to a net profit between 10% and 20%, which is generally considered healthy. Of course, this could differ somewhat depending on your region and local competition.
Even new/small/startup businesses should aim for those margins or higher. While many may believe it is important to lower prices to earn business, this is generally horrible concept to adopt in our experience. It’s better to focus on earning customers that will pay market rate for your service from the beginning as opposed to price shoppers — and consider that as an owner-operated operation, you’ll be delivering better and more personal service than larger operations.
Negotiate with Suppliers
Apart from getting more customers and increasing sales, one of the most logical ways to increase profits is cutting down expenses, and a simple way to do that is by cutting the prices of equipment and stock.
Unfortunately, we aren’t the ones who set those prices, and our suppliers are increasing their prices for precisely the same reason we want them lowered: they want to increase their profits.
However, many suppliers are open to negotiating prices or terms, especially as our order numbers increase. You may want to consider the following:
- Buy in bulk. Larger orders often come with discounts, so consider purchasing frequently used items like fittings and pipes in bulk if your cash flow allows.
- Consolidate your orders when possible. Some suppliers offer better terms if you order a range of products in one go rather than splitting orders across different vendors.
- Leverage multiple quotes. Get quotes from several suppliers for the same products. This can be an effective tactic to negotiate a better price. Some suppliers have a policy to beat any written quote.
- Negotiate payment terms. You could try to negotiate lower interest rates or perhaps request extended payment terms. The latter may sound counter-intuitive, but it can improve your cash flow, which allows you to reinvest in other aspects of your business.
Minimize Waste
Waste is one of those hidden costs that can quietly eat away at your profits. In a plumbing business, waste often occurs due to over-ordering materials, improper use of supplies, or defective products. By reducing waste, you will cut down on your costs while improving your operational efficiency considerably.
To minimize waste, consider the following:
- Focus on accurate job estimates. Check that you calculate the material requirements for each job accurately to avoid over-purchasing, and train your team to do the same. Taking too much stock on a job often leads to unnecessary waste.
- Use technology to your advantage. Invest in software that tracks material usage and project requirements to prevent over-ordering and help monitor wastage. I’ve found that products like Sortly and ServiceTitan can save you a significant amount over time!
- Use materials efficiently, and train your staff on best practices to do the same. Ensure that damaged or unused materials are correctly stored and reused when possible.
- Recycle and salvage. Some plumbing materials, such as copper pipes or certain fixtures, can be salvaged for future projects, while it’s easy (and good for the environment) to recycle others. Take the time to establish a process to store and reuse salvageable items.
Improve Inventory Management
Inventory mismanagement is one of the most frequent culprits behind inflated COGS. An unoptimized inventory system causes overstocking, understocking, or increased carrying costs, all of which eat away at your profit margins.
Efficient inventory management practices help keep costs down, which improves your cash flow, while ensuring you have what you need for every job.
Here are a few practical steps to improve your inventory management:
- Implement an Inventory Management System (IMS). These software tools can help you track the materials you have on hand, what you might need soon, and how fast your inventory moves. They prevent overstocking, which often leads to theft or loss of materials. The examples mentioned earlier will help with this.
- Schedule regular physical inventory audits to ensure what’s on the books matches what you actually have. I know business owners and staff dread those monthly stock-take sessions, but they can catch discrepancies early on and allow you to adjust your orders as necessary.
- Use a Just-in-Time (JIT) ordering approach. Depending on your supplier relationships and lead times, consider using a JIT approach to your inventory management. You can minimize holding costs by ordering the materials you need for specific projects as you need them.
- Regularly review which of the items you stock are fast movers or slow movers. If you find that some items don’t sell as quickly, you can order less of that item and more of the ones that consistently sell out. In other words, prioritize the high-demand materials and avoid excessive stocking of slow-moving inventory.
Streamline Labor Costs
Even though labor isn’t something you purchase stock of, it is also a crucial part of your business that can increase your costs significantly. It doesn’t fall under the typical definition of COGS, but service-based businesses like plumbing can benefit considerably by streamlining labor costs.
See how these tips can help you:
- Optimize job assignments by assigning the right jobs to the right technicians. Every team member has a unique skill set; match them to the jobs where they can work most efficiently to reduce the time they spend on-site.
- Reduce idle time. When your technicians aren’t actively working for whatever reason, your business incurs costs without delivering value. Check that all materials are ready before the team arrives, and schedule orders to minimize downtime between jobs.
- Invest in employee training. Even though training is often seen as an expense, well-trained employees can diagnose problems quickly, use materials efficiently, and complete jobs on time, which reduces labor time and the likelihood of costly mistakes or rework.
Keep your eyes on your team and identify when they have nothing to do. Apart from scheduled breaks (which are necessary), try to find ways to minimize those events as much as possible.
Conclusion
Plumbing businesses can benefit considerably from minimizing the cost of goods sold to improve their profitability. Negotiating with suppliers, minimizing waste, and improving inventory management are all ways to significantly lower COGS and enjoy healthier profit margins.