How to Protect Your Profit Margins

Is your company charging enough for maintenance work? That's a question that was nagging at Jim Bates a few years ago. Having just been hired as vice president and chief financial officer at Midcoast Aviation, a business aircraft MRO based in St. Louis, Missouri, Bates realized that "our sales people were selling services based on an hourly labor rate, rather than the actual costs of doing the work with a reasonable profit margin factored in." Although this approach hadn't pushed Midcoast to loss-leader prices, the emphasis on selling labor rates was dangerously eroding the company's profits. As just one example, paint jobs were not necessarily paying their way. "Like a number of other MROs," Bates admitted, "we only paint aircraft in order to capture other modification work."

To figure out precisely what Midcoast should be charging for its services, Bates dug into the company's accounting software system. "Our system is pretty good, but it had never been used to communicate costs to our sales force," he said. Bates changed this by using the accounting data to develop an Excel spreadsheet template for Midcoast's salespeople. With this template, they could compare the services needed by a customer with the actual costs of providing them, thus ensuring that job quotes were realistic.

"The template not only tracks the costs associated with each kind of job, but also the mix of disciplines needed to make it happen," Bates explained. "For instance, if a job requires a lot of heavy engineering and a little bit of sheet metal work, then the quote will reflect the fact that heavy engineering costs more per hour than sheet metal work. The quote also breaks the job down by discipline, with the time required for each clearly indicated. This makes it easier for salespeople to create realistic estimates for their clients."

Not surprisingly, Midcoast's new system sometimes results in higher prices than customers expected. When this happens, the salesperson has two options. He or she can either submit a quote based on the company's costing and profit margin goals or create a lower-margin quote that is automatically transmitted to their superior for approval/disapproval. "I can't quote [Midcoast's] margins," Bates said, "but I can say that if an MRO's margin is not in the double digits, then you have no room to maneuver when it comes to handling your own costs. There are times when you have to sell services for less than you think you should, for competitive reasons. Our goal is reduce the times when this occurs, but also to preserve this tool for our salespeople when it makes sense in the long run."

Of course, price hikes are never greeted well by clients. This is where the extra information provided by Midcoast's template helps sales staff overcome resistance. "When the price on a job has increased, it is important that our salespeople understand why," Bates said. "They can't sell a service successfully if they believe that we are overcharging the customer."

This said, every price change comes with some degree of fallout. In Midcoast's case, "we've found that our sophisticated clients tend to be more accepting of what we've done than our unsophisticated clients," he said. "By `sophisticated,' I mean clients in larger companies who deal with complex costs every day; they understand the kinds of stresses of pricing jobs correctly. By `unsophisticated,' I am referring to clients who have upgraded to a larger aircraft and then can't believe that it will cost more to maintain it."

In the final analysis, moving to a rational quotation system hasn't boosted Midcoast's profits, but that's okay: Bates was only trying to keep his company's profit margins from eroding. Still, linking job quotations to actual costs has improved Midcoast's finances and allowed it to expand. This change is critically important, Bates said, "because if you aren't growing every year, you're not going to be able to keep your operation up-to-date with the latest aircraft and technologies." -- By James Careless