A good profit margin for a service business is one that still leaves real profit after you pay yourself a market wage, enough to fund a cash reserve, replace trucks and tools, and pay for growth. Work out that number from your own costs and plans, then price to reach it. A margin figure copied from a benchmark can be wrong for you in either direction.
That sounds like a dodge, so here is why it isn't, and how to get to a number.
Why benchmark margins mislead
You'll see confident figures for "good" service business margins. Before using one, check three things.
Gross or net? Gross margin is revenue minus the direct cost of jobs (field labor, parts, subcontractors). Net margin is what's left after everything: office, rent, insurance, vehicles, marketing, owner pay and interest. A healthy gross margin and a thin net margin can describe the same company.
Is the owner's pay in it? In a small shop the owner often takes money as draws, not wages. If a benchmark counts that as profit, a "20% margin" may be the owner's salary and nothing else.
Which trade and size? Install-heavy work with large equipment costs runs very different margins from service work that is mostly labor. A number averaged across both describes neither.
So build your own target.
Build your target margin
List what profit has to pay for each year, after a market wage for you is already counted as a cost:
R: cash reserve you want to build (for slow seasons and surprises)V: vehicle and tool replacement not already in depreciationG: growth spending (the next truck, a hire's ramp-up, marketing)D: debt principal paymentsX: the return you want as owner on top of your wage
With expected annual revenue S:
Target net margin = (R + V + G + D + X) ÷ S
That is your floor for this year's plan. Below it, something on the list doesn't get funded.
Turn the net target into prices
Net margin is made on each job's gross margin minus overhead. Work backward:
Required gross margin = target net margin + overhead ÷ revenue
If overhead (everything that isn't direct job cost, including your wage) is 32% of revenue and your net target is 13.6%, each job needs to average about 45.6% gross margin. Check that against your real jobs with job costing and gross margin per job. If the average falls short, the fix is in the price, the job mix or the overhead, not in working longer.
Where service margins leak
Unbilled paid hours. Drive time, waiting on parts and callbacks are paid and not billed. They raise direct labor cost per job without raising the price. A rate built on billable hours, as in the break-even labor rate calculator, prices them in.
Callbacks. A return visit doubles labor and drive on a job you already billed. Track the callback rate.
Discounts with no rule. A 10% discount on a job with 40% gross margin removes a quarter of its gross profit. Decide who can discount and by how much.
Old prices. Costs rise every year. A price book that hasn't moved in two years has quietly cut your margin.
How to check where you stand
Ask your accountant for a profit and loss statement with owner pay shown as a cost at a market wage. Then compute:
- Gross margin = (revenue − direct job costs) ÷ revenue
- Net margin = net profit ÷ revenue
Compare net margin to your target, not to a published average. The field service pricing guide covers how to rebuild prices if you are short.
What to take away
- A good margin funds reserves, replacements, growth and debt after you pay yourself a market wage.
- Target net margin = (reserve + replacement + growth + debt principal + owner return) ÷ revenue.
- Required gross margin = target net margin + overhead share of revenue.
- Check benchmarks for gross vs net and whether owner pay is counted before trusting them.
- This is a planning method, not accounting advice. Have a CPA check your inputs.
Common questions
What is the difference between gross and net profit margin?
Gross margin subtracts only the direct costs of doing jobs: field labor, parts and subcontractors. Net margin subtracts everything, including office, vehicles, insurance, marketing, owner pay and interest.
Should owner pay count as a cost when calculating margin?
Yes. Count a market wage for the work you do as a cost. Otherwise you can't tell whether the business makes a profit or just pays you.
Is a 10% net margin good for a trade business?
It depends on what that 10% has to fund. Run the target formula with your own reserve, replacement, growth and debt needs. If 10% covers them, it is enough for this year.
How do I raise my profit margin fast?
Review prices against current costs, cut callbacks, set a discount rule and raise the share of paid hours that are billable. Price changes act fastest.