I have a custom software business that is now, finally, growing. I've hired a sales rep and an assistant. I'm also going to switch from me doing all of the development work to hiring out all of the dev work, and me doing project management. Eventually, I will hire out PM as well.
So, my question: How would I figure out what a healthy profit margin is for a project? I'm going to calculate cost of goods sold as follows for any particular project:
1) Cost of all Dev time
2) Cost of all expenses directly related to that project (servers I have to spin up on Amazon for testing, etc)
3) Cost of my time if I hired it out for PM and requirements gathering work
4) Cost of any other assistance provided by helpers that directly relates to that project
5) cost of commission paid to my sales rep for the project
I'm thinking that 50% margin is what I should shoot for. If I happen to run over on an estimate, it won't kill me. And, if I'm correct on my estimate, it will provide plenty of profit do everything else with that I need to do to run the company, plus pay my salary and provide a profit on top of that.
I tried Googling, and ran across a study that said that custom software companies range from 8% (for $25M+ annual revenue companies) to 20% for small ($500K or less) companies - this was net profit margin. It didn't say anything about gross margin per project. Everything else that I found was for software companies that make a product that they then sell to end users. (and those gross margins are INSANE...like 90-95%)
Thoughts?
So, my question: How would I figure out what a healthy profit margin is for a project? I'm going to calculate cost of goods sold as follows for any particular project:
1) Cost of all Dev time
2) Cost of all expenses directly related to that project (servers I have to spin up on Amazon for testing, etc)
3) Cost of my time if I hired it out for PM and requirements gathering work
4) Cost of any other assistance provided by helpers that directly relates to that project
5) cost of commission paid to my sales rep for the project
I'm thinking that 50% margin is what I should shoot for. If I happen to run over on an estimate, it won't kill me. And, if I'm correct on my estimate, it will provide plenty of profit do everything else with that I need to do to run the company, plus pay my salary and provide a profit on top of that.
I tried Googling, and ran across a study that said that custom software companies range from 8% (for $25M+ annual revenue companies) to 20% for small ($500K or less) companies - this was net profit margin. It didn't say anything about gross margin per project. Everything else that I found was for software companies that make a product that they then sell to end users. (and those gross margins are INSANE...like 90-95%)
Thoughts?
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