You’re in business to make a profit, so be sure you price right to make that happen.
When it comes to pricing products at a retail store you have a clear starting point: the product cost x dollars to manufacture and you paid x dollars to buy it from a vendor. Apply your markup and you’re done!
When it comes to pricing your service business services, the lines aren’t so clearly drawn. You’re dealing with variable labour costs for your employees and each job might require a unique set of supplies.
For example, if you own a cleaning business then one home might have plenty of windows requiring a lot of window cleaner, or a couple of cats requiring extra vacuum time.
And as labour and material costs change in the market, so should your service prices. If you never adjust the prices you started your business with, it’s only a matter of time before you’re out of business!
In other words, it’s important to examine your pricing periodically to ensure you’re always generating a healthy profit. But first, let’s review the basics of pricing.
Profit needs to be the focus when determining your pricing, but it’s not 100 per cent about your bottom line.
Profit, profit, profit
At the end of the day, a healthy profit is what’s going to keep you in business, otherwise you’ll be losing money or merely breaking even. Profit needs to be the focus when determining your pricing, but it’s not 100 per cent about your bottom line. To make the most of your pricing opportunity, you also need to think about the value you’re offering to customers. What we’re talking about is cost-plus pricing versus value-based pricing.
You determine cost-plus pricing by adding up 3 factors:
- Labour and materials: This is just like it sounds. If you’re a landscaping business you’ll estimate the employee hourly wages, sod, grass seed, and fertilizer you’ll need to complete a job.
- Overhead: These are indirect costs related to running your business, such as your office rent, software subscriptions (for business tools like NetDispatcher), advertising, administration staff wages, etc. You include a portion of these costs in the price of each of your jobs.
- Profit: This is how much the business makes after you pay for labour and materials and overhead. This number varies between industries, and regions, so it’s best to check with industry trade associations for standards, and discuss your needs and business goals with your bookkeeper or accountant to determine a realistic profit margin for your business.
Together these three factors, the costs of the job plus the profit, help you determine a price for your services, and it’s important that you take pains to be accurate.
“At times I have seen that small businesses will price from their gut based on a general ideal of wages, supplies and profit,” says Teresa Slack, certified professional bookkeeper with Financly.
Even if your labour and materials are straightforward to calculate, it’s worth consulting your bookkeeper or accountant to get an accurate picture of your overhead and profit to determine pricing, especially if your business experiences seasonal surges.
No matter what your bottom line needs are, your clients will either agree or disagree to pay a price for your services based on their perception of the value you’re providing to them.
It’s important to think from your client’s perspective when determining your prices. No matter what your bottom line needs are, your clients will either agree or disagree to pay a price for your services based on their perception of the value you’re providing to them.
The same way certain cars and clothing brands cost more than others, clients are willing to pay more or less for services depending on their perception of a business’ quality of work and brand.
Remember, you’re not just completing a job, maybe you’re making their lives safer or easier.
If they value speed of service, maybe you win in that category with your snow removal service and they’re willing to pay more to book your time. If your window cleaning service only uses green products, then clients who share those values will pay more to ensure only green products make it into their homes. If your target clients appreciate neatly folded toilet roll ends, that influences your pricing if your business is known for providing those elegant touches.
Mix it up
If you balance cost-plus pricing with value-based pricing then you’ll come to a final price that reflects your business needs, and allows you to speak to and profit from client values as well. By working value-based pricing into your final price you ensure that you aren’t underselling your services if you provide an extra benefit that separates you from the competition.
Hourly or fixed-price billing
You estimate about how much a job will cost you, but do you send your client an hourly or fixed-price fee?
There are pluses and minuses to both. Charging hourly leaves you more wiggle room if a job takes longer than expected, but can cause client conflict. Charging a flat fee might be easier for a client to digest, but can leave you in a lurch if you go over in estimated labour or material.
In either model you need to have a good understanding of how long certain jobs take. If your industry has a standard, then maybe there’s an obvious choice. If you’re looking for more information, check out our Academy!
Keep your pricing up to date
Establishing pricing that ensures your business a healthy profit is step one. After that, it’s important to reassess and change your pricing from time to time in order to respond to factors like competition, changing wage expectations, and the economy.
Driving a price down isn’t going to win you loyal clients. You’re more likely to attract clients who will jump to the next cheaper deal that comes along.
Be aware of the competition
But don’t compete with the competition based on price. Driving a price down isn’t going to win you loyal clients. You’re more likely to attract clients who will jump to the next cheaper deal that comes along.
Instead, figure out the value you provide that separates you from your competition, and focus on attracting people who appreciate that.
Look back and reassess
It’s good practice to look back periodically to evaluate your labour and material estimating skills and see how your pricing is working for you.
Are jobs taking you longer or shorter than you’re estimating? You might identify an employee that needs extra training in order to speed up their work, or you might realize that you’re leaving out a new step in your employee’s workflow when you estimate job time.
Test new pricing strategies
Pricing isn’t set in stone so test different packages, prices, and deals to see if you can boost booking of certain services.
If you’re a cleaner, offer a limited time deal to clients where they buy 6 months of cleaning and get 1 month free. If you’re a window cleaner, consider raising or lowering the price of an add-on such as a spot-free rinse and see if clients respond well and start requesting it more often.
And rather than raising all of your prices when you need to increase your profit, consider raising the prices of certain services that will still boost your bottom line without catching your customers off guard.
Determining pricing for your services is an ongoing process. Keep track of your costs, ensure you’re factoring in perceived value, and make time to periodically assess and test your pricing.
Throughout it all, keep an open line with your bookkeeper or accountant to get their expert advice, and you’ll be winning at the pricing game.
Are there any pricing tips or strategies that work well for your business that you’d like to share with other readers? Let us know in the comments below!