Table of Contents
Purpose 🧠
Pricing can be a complicated topic to discuss! If you’re coming over from a different business management system other than Aspire, it can be a lot to consider. Thankfully, Aspire is here to help explain!
In this series of pricing articles, you’ll:
Discover terms used in pricing: such as cost, price, revenue, gross profit, and gross margin.
Understand the pricing philosophy of Aspire and the concept of mark ups.
Learn the hierarchy of pricing based on the branch, division, or service type.
Understanding Pricing 💰
To make sure we’re all on the same page, let’s discuss a couple of concepts that apply to pricing no matter what industry you are in: cost, price, revenue, gross profit, and gross margin.
IF you are already familiar with these terms, you can skip to the next article, Understanding Pricing in Aspire.
What is Cost?
Cost, or more specifically, direct cost, is the dollar amount your company is spending to buy something to complete a job you are bidding for. This could be the wage you pay your employees, materials bought to complete the job, or rental equipment you need to use. It’s usually considered a part of your cost of goods sold (COGS).
Take, for instance, the hourly labor cost for a crew member:
Cost | $18/hr |
In this case, it will cost you $18 an hour for any job you bring the crew member on. This is your cost per unit for your labor. Next, let’s discuss price. 👇
What is Price?
Price is the dollar amount your company sells that same item to your customer to complete a job you are bidding for.
Take, for instance, the hourly labor price for a crew member:
Cost | $18/hr |
Price | $29/hr |
Your customer will pay $29/hr for labor you provide to them. This is your labor price per hour.
What is Revenue?
Revenue is the total amount of money brought in by your company's operations before subtracting your costs. A simple equation for revenue is:
The total price of the item or service you’ve sold = Revenue
In this example, we’ll show the revenue of a 5 hour job:
Cost | $18/hr x 5 = $90 |
Price | $29/hr x 5 = $145 |
Revenue (of a 5 Hour Job) | $145.00 |
Our revenue on this 5 hour job is $145.00, but it doesn’t account for the cost just yet. This is where gross profit comes in!
What is Gross Profit?
Gross Profit is the total amount of money brought in by your company’s operations after subtracting your costs. The equation for Gross Profit is:
Revenue – Cost of Goods Sold (COGS) = Gross Profit
or said another way
Total Price – Total Cost = Gross Profit
Continuing with our example, we’ll see that the gross profit for this bidded labor item is $55.
Total Price – Total Cost = Gross Profit
($29.00 x 5 hrs) – (18 x 5 hrs) = Gross Profit
$145.00 – $90.00 = Gross Profit
$145.00 – $90.00 = $55
Cost | $18 x 5 hrs = $90 |
Price | $29 x 5 hrs = $145 |
Revenue (of a 5 Hour Job) | $145.00 |
Gross Profit | $55 |
What is Gross Margin?
Gross Margin is the portion of revenue left over after you subtract your direct costs divided by your revenue. It will be shown as a percentage (%). This might be the most important number your company works with today when estimating your items and services. The equation for gross margin is:
(Gross Profit / Revenue) x 100 = Gross Margin (%)
($55.00 / $145.00) x 100 = Gross Margin (%)
(.379) x 100 = Gross Margin (%)
(.379) x 100 = 37.9%
Cost | $18/hr x 5 hrs = $90 |
Price | $29/hr x 5 hrs = $145 |
Revenue (of a 5 Hour Job) | $145.00 |
Gross Profit | $55 |
Gross Margin % | 37.9% |
Finishing our example, and using our equation, we’ll see the gross margin, expressed as a percent, is 37.9%.
We see many companies bidding services based on the desired gross margin percentage of the item or service being performed. However, Aspire works differently in its pricing method! Read our next article, Understanding Pricing in Aspire, to find out how.
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