Understanding and tracking gross margins is especially relevant for services and talent-based businesses. Margins reflect the company’s revenue quality and the customer’s value of the service. It is key to examine multiple views of gross margin.
A company with, for example, 60% gross margins proves that its service is more valuable to customers than a company that derives only 20% gross margin for its services. The former will have a higher relative valuation.
For successful agile decision-making, a business should be able to track margins. In a typical services business, gross margin means the gross profit expressed as a percentage.
COGS will include all of the direct costs, which are commonly billable headcounts.
Companies with higher gross margins have healthier businesses, provide additional optionality to managers, and capture more value from the customer overall. Their service is differentiated, reflected by the customer’s willingness to pay.
Not only tracking and monitoring the overall gross margin is relevant. A business should also be able to track margins by BU, geography, type of service, engagement type, customer, and even practice areas or individual team members delivering the service. This level of data granularity allows management to optimize decision-making.
At Alten Capital we invest in technology services businesses. Please reach out to explore a partnership.