Gross margin

Gross margin measures revenue remaining after direct costs of providing the service. Calculated as: (Revenue - Direct costs) / Revenue. Direct costs include parts, materials, direct labor (loaded rate), subcontractor costs, and equipment-specific costs.

For residential service businesses, healthy gross margin ranges by service type: simple service repairs run 50-70% gross margin; installs and replacements run 25-40% gross margin; recurring maintenance runs 50-65%; emergency/after-hours work runs 60-75% (premium pricing). Operations with sustained gross margin below 30% have either pricing problems, cost-control problems, or both.

Gross margin is distinct from operating margin and net margin. Operating margin subtracts overhead (insurance, vehicle, office, software, marketing). Net margin further subtracts interest, taxes, and any other non-operating costs. For service operations, the gap between gross and net margin is typically 15-25 percentage points (so 50% gross margin operations might have 25-30% operating margin and 18-22% net margin).

For operators, tracking gross margin by service type identifies pricing problems before they compound. Quarterly gross margin reviews against established targets keep pricing aligned with rising costs. Operations that don't track gross margin by service type often discover after years that specific service categories have been losing money silently.