How to Calculate Route Profitability

,
 

Have you taken the time to look into making your routes more efficient & profitable? With gas prices on the rise, it has become imperative to cut down on fuel usage along your routes. Route profitability is a calculation to determine effectiveness and profits your business is taking home after your technicians routes are completed. Many startup companies try to calculate this on their own, but lack the tools to measure their profitability accurately. Keep reading to find out more about the importance of route profitability and how you can measure yours.

  • The “Why”
    • Introduce concepts and calculations for structured thinking on business success
    • Setup basic metrics to measure KPI (Key Performance Indicators)
  • The “Who”
    • This blog is for small business owners who want to take their operational thinking to the next level

Why Does Profitability Matter?

Think about why you are in business. Is it to support your community, employees, to serve others? Or to support yourself and your family financially? No matter the reason for doing what you do, what you “keep” at the end of the day matters. To stay in business and make a living, you have to make a profit.

Winning business and making more profits means your pricing has to be competitive and need to know when to increase your rates. Therefore, having knowledge of which jobs, routes and inventory are making you money is an important factor to keep your profits up. The first step to taking charge of your profits is to find a way to record, review and lower your costs.

Why Is Calculating Route Profitability Important?

Route profitability is an important portable and roll-off business KPI (Key Performance Indicator). It is also an easy indicator on how effective your current service routes are. Calculating route profitability will allow you to make more informed decisions about:

  • Reducing operational costs such as fuel & route time
  • Servicing more units on a route in less time

Knowing the profits your routes are making motivates you to optimize your service routes which allows you to:

  • Increases your driver’s productivity and safety
  • Helps you understand how many units you’re servicing per route, per day
  • Helps you understand each route dynamic – distance, service time, drive time, total time etc.

Not All Companies Are Made Equal!

It’s important to keep in mind that not all companies have the same situation. So, what works for one company may not work for another. All companies have many different route scenarios to consider. One factor is the geographic location of your company. Are you in a city where traffic is a huge factor? Do you service in suburbs and have many close stops? Or are you in rural areas where drive time to each site is much longer?

Another factor to consider is the type of product, service or inventory that a company deploys. An example for portable toilet operators is the varying time it takes for delivery routes and service routes. Also, route factors are different for the type on inventory you are delivering (ADA units vs. construction). And last but not least, it’s important to consider what the market conditions are like and what type of customers you serve. Is there a lot or little competition in your area? And are you mostly servicing construction sites, events, etc.? With these metrics, you will be able to create a better plan for reducing your operational costs. 

Important Terms to Remember

Before we dive deeper, lets go over the definition of the variables involved to calculate route profitability:

Cost 
  • Operational costs are ongoing expenses of running a business
  • Expenses used to deliver a service (COGS)
Revenue 
  • Operational revenue is the income a company earns from its main business-related activities, such as rental fees and services.
Profit
  • Financial gain. Money to put into your pocket or re-invest for growth.

Route

  • Collection of jobs in a specific order for a specific asset to execute on specific inventory type
    • E.g. All our toilet cleaning/service jobs on the West side of town on Tuesday

Route Profitability Formula

Profit = Revenue – Cost

Route Profitability = Revenue per Route – Cost per Route

Revenue per Route

  • Total charges of all jobs on the route

Cost per Route

  • All costs it takes to service the inventory on site (per job)

Working Example

So, let’s go over an example of calculating route profitability for company XYZ. Below is an example of the map you will see in ServiceCore for all your drivers optimized routes for the day.

Let’s assume we have route’s only servicing standard toilets (PTs)

  • What is my rate per unit per cleaning?
  • What are my costs per cleaning?

Now let’s look at a more advanced example that includes all operational costs:

Profit margins in this example are much lower than before because all operational costs are included in the calculation.

Let’s dive deeper….

Now that we have gone over how to calculate your route profitability, how can you increase revenue?
  • Determine different rates for each of your inventory products
    • Example: Renting construction Portable Toilet’s are different from event Portable Toilet’s or ADAs so pricing should be different for them
    • Make sales on old inventory to recoup costs for new units
    • Use site, geographic and customer specific pricing
  • Take a closer look at your recurring billing cycle
    • Monthly vs 28 day billing: learn more about the pros and cons of each and what the best method is for your company by clicking here 

How can you minimize costs?

  • Accumulate a full list of all your operating costs 
    • Understand the difference between fixed costs (wages, insurance, licenses etc.) and variable costs (seasonal costs, fuel, dumping fees etc.) as they will have different impacts on your calculations 
  • Understand your service area
    • Set service area boundaries and understand when routes are shifting to predict when route may need to be recalculated

Route Factors

Key Takeaways

  • Know your costs = know your levers
  • Periodically look into minimizing your costs
  • Consider price/rate increases to match increasing costs (win on service)
  • Consider price/rate increase based on variable factors (geography, inventory)
  • Extend your thinking and calculations to include inventory, customers etc.
  • Good data is key! Find a good software to support your business. 

ServiceCore is a great tool for businesses to optimize routes and expand their profitability. You’ll be able to cut fuel costs, spend less time on scheduling and routing, and provide better customer service. If you are interested in learning more about how ServiceCore can help your business increase your route profitability, click here to schedule a demo.