Understanding profit margins probably won’t be high on your list of things you think about when delivering website maintenance to your clients.
But they should be.
Yes, you’re a web developer, not an accountant, but that shouldn’t be an excuse.
You have to understand your finances in order to grow an efficient website maintenance business.
Skill yourself up with at least a basic understanding of business finances and then hire a finance professional to help you with the rest.
Running a website maintenance business can be great – recurring revenues, regular payments and predictable cash flow.
But if you don’t understand margins, there could be problems ahead.
An introduction to profit margins
Your profit margin indicates the profitability of your business.
The higher the number, the more profitable it is.
Margins are usually expressed as a percentage and there are two types:
- Gross profit
- Net profit
Why do they matter?
Well, if you’re not making profit, your business isn’t going to last long – there will be more money going out than there is coming in.
Understanding them is also important in helping to see where the business is doing well and where it can improve.
Gross profit margin is a metric used to assess a company’s financial health by calculating the amount of money left over from sales after subtracting the cost of goods sold. Sometimes referred to as the gross margin ratio, gross profit margin is frequently expressed as a percentage of sales. (Source: Andrew Bloomenthal, Investopedia)
Now let’s apply that to WordPress maintenance.
What does your cost of sales look like?
Maybe you’re including hosting in your website maintenance service.
If so, then hosting costs would be a cost of sale as without it, you couldn’t have made the sale.
So have a think.
What else would you class as a cost of sale in your business?
AccountingTools.com describes net profit as the following:
“Net profit margin is the percentage of revenue left after all expenses have been deducted from sales. The measurement reveals the amount of profit that a business can extract from its total sales.”
Different from gross profit, this is how much is left after you’ve deducted all of your business costs from your revenue.
Let’s apply that to WordPress maintenance again.
Your business costs will typically include the following:
- You and your team that deliver the services
- Any software you use such as Glow
- Website hosting service providers if you include hosting in your maintenance offering
- Other ‘usual’ business costs that you’ll find in any business, such as office space, phone/internet and marketing spend, amongst others
Your business model
WordPress maintenance services tend not to differ too much from one supplier to another.
It’s fairly common to offer 3 or 4 different monthly plans, that include a generally similar list of services:
- WordPress core, plugin and theme updates
- Custom development time
- Uptime monitoring
- Speed optimisation
- Basic SEO work
- Security monitoring and testing
- Malware removal
- And more
How you price those plans is key in understanding your profit margins.
You should have a good understanding of how long each of those services you provide takes you to complete.
Whatever that looks like, you need to multiply it by your hourly rate (or your team’s average hourly rate).
Then you’ll know the labour cost of providing those services.
For example, let’s say that your lowest plan, on average, takes 30 minutes of time each month to service.
Let’s also assume the average hourly rate of your team is £30.
0.5 (hours) x 30 (£) = £15
So you now know that the lowest plan costs you a minimum of £15 to service each month.
I say ‘minimum’, because there might be other services you provide under that same plan that come with a cost to actually provide.
For example, implementing a professional backup solution for multiple WordPress sites is rarely completely free, so there’s a cost that you need to factor into your business model.
Add up all of these costs and you’ll start to get a good feel for where your pricing should sit.
Partner with a finance professional
Finance can be a complex subject to get your head around.
It’s also dangerous to your business if you don’t understand it properly.
Partner with a finance pro.
Try and find a trusted freelancer or consultant, rather than an expensive city centre accountant.
They’ll help with:
- Finding efficiencies
- Asking the right questions of your setup that’ll ultimately help you scale the business more profitably
Using the right software
As you might expect, at Glow we’re huge believers in the power of software.
The right software.
It should make your life easier and directly help with the efficient running of your business.
When it comes to understanding profit margins in website maintenance, you’ll want at least:
- Accounting software – so you can see all your numbers in one place for every month: revenue, costs, margins and understand trends over time. Xero and Quickbooks are both good choices for this.
- Time tracking software – such as Time Doctor, to track how much time is being spent on each client’s account. You could save a few pennies by using a spreadsheet like this or if you want to try and keep your SaaS products to a minimum, open a Glow account and turn on the time tracking feature – WordPress management and business efficiency tools in one place, nice!
Understanding your profit margins is essential if you’re going to grow your business.
Start by getting at least a basic understanding of profit and loss statements, balance sheets and cash flow forecasts.
Make sure you know your business model inside out and have a think about what you can do to make the picture better and improve profits over time.
Hiring outside assistance from a finance professional will be extremely helpful as they will be able to see things that you don’t and advise on where to make significant improvements.
Finally, get the right software in place – it’ll make things far easier to track and understand as you scale.
If you’re managing multiple WordPres sites, I’d love to know in the comments below about how your business model works and the kinds of margins you’re achieving.