How to price services is one of the most talked-about topics in the home service industry. Learn how to set just the right prices to satisfy customers and make your business profitable.
Many home service professionals struggle with how to price services appropriately. You don't want to set them too low and shortchange yourself, but you don't want to set them so high that people can't afford to hire you. Many factors go into determining just the right price for cleaning, painting, staining, roofing, and more. Keep reading to learn more about them and find out how to maximize your return on investment.
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How To Price Services: Key Factors
Cost Of Goods And Services
When you're learning how to price services, you need to know exactly how much you pay for the products and services you use to run your business. If you want to know how to price cleaning services, for example, you'll need to know how much it costs to buy glass cleaner, oven cleaner, mops, brooms, and other items used to do the cleaning. If you do roofing, you need to know how much you pay for shingles, roofing insulation, tarps, ice and water shields, underlayment, and roof vents.
Amount Of Labor Required
You also need to think about the amount of labor required to provide each service. Some tasks are more intensive than others, so they'll require more labor hours to complete. The more labor you need to provide a service, the higher your project price needs to be to ensure you make a profit after you've paid your employees or subcontractors.
Labor and cost of goods and services are direct costs involved in completing a work order, but they're not the only costs you need to consider. When you want to know how to price a service business, you have to consider the indirect costs of keeping your company running.
If you operate the business out of a commercial office, you have to pay for rent and utilities. Your office may have computers, printers, and other equipment used to communicate with customers, prepare estimates, and perform other activities. You also have to consider how much it costs to pay employees who aren't involved in customer projects. For example, if you have an administrative assistant or marketing associate, you need to account for their wages.
Here are some other overhead costs you need to consider when you're learning how to price services:
- Liability insurance
- Legal fees
- Accounting/bookkeeping services
- Credit card fees
- Travel expenses
If you're in a highly competitive market, you also need to think about what your competitors are charging. It's not the most important consideration, but it does matter. After all, you don't want to lose customers because your closest competitor charges 30% less than you do. The key is not to fall into the trap of thinking you always have to offer the lowest price.
Competition-based pricing makes sense in some situations, such as when you're new to the market and need a few quick wins so you can ask for referrals and get positive online reviews. It doesn't make as much sense once you're established, however. Instead of focusing on what your competitors are doing, focus on what you can do to add value for customers and make them want to hire you even if your services cost a little more.
Desired Profit Level
If you price a project at $2,000 and spend $2,000 on labor and materials, there's nothing left over for profit. That's why it's important to set a desired profit level for each service you provide. Setting a target allows you to add a markup to each service, ensuring you turn a profit every time you complete a project. If labor and materials cost $3,000 and you want a 25% profit margin, you'll need to price the service at $4,000. The remaining $1,000 would be your 25% profit.
Maximizing Your ROI
It's important to remember that you provide a valuable service and deserve to be paid for your time and expertise. If you're hesitant to raise prices, however, there are a few ways to maximize your return on investment so you can increase your profit margin without a significant price increase.
Remember that your profit margin depends on the amount of revenue you generate and the cost of completing each project. One easy way to maximize your ROI is to streamline operations, reducing your overall costs and allowing you to increase your margin without increasing your prices. If one method of doing a project requires 10 labor hours to complete it and another method only uses eight labor hours, for example, consider switching to the second method to reduce your labor costs.
Incorporating more technology into your business can also help you streamline operations without sacrificing quality. It takes less time to cut wood with a power saw than a hand saw, so buying a new power saw may be a way to reduce the number of labor hours required to complete a carpentry project. You can even use technology to automate repetitive processes, further reducing the cost of completing each project.
Improve Your Hiring Practices
Hiring a new employee takes time, but it's one of the most critical aspects of running a successful business. Many home service providers don't realize that tightening up their hiring practices can actually help them reduce their costs, resulting in increased profits without a significant increase in prices. To understand how this works, consider the following scenario.
You have two applicants. One applicant has one year of experience and is willing to take the job for $18 per hour. The other applicant has five years of experience and wants $24 per hour. Mindful of your labor costs, you hire the inexperienced employee at the lower rate. At first, your new employee saves you money just by accepting a lower starting wage.
Over time, however, you realize the inexperienced employee makes a lot of mistakes. You've had to purchase new materials to replace the ones they've damaged by using tools incorrectly or not being careful when transporting materials to job sites. At one point, you even had to hire an extra subcontractor to complete some tasks your inexperienced employee didn't know how to do. You're quickly realizing that hiring this employee is costing you a lot more than what you thought you'd save.
Provide Additional Training
When you run a home service business, you need enough employees to keep up with customer demand. Every time you hire someone new, you incur some costs: advertising the open position, conducting a background check on your top candidate, and onboarding the new employee, among others. One way to reduce these costs is to help existing employees develop new skills. If you're willing to train employees, you may be able to meet customer demand without hiring anyone new, limiting your overhead costs.
Analyze Completed Projects
Every time you complete a project, you should analyze it carefully to determine it was profitable. Think about what went right, what went wrong, and what you can do in the future to increase your profit margin on similar projects. Analyzing completed projects is a great way to identify trends that could be hurting your business. For example, a review of past projects may show one type of project is almost never profitable.
Take a house cleaning business as an example. These businesses typically offer a few services: move-in/move-out cleanings, weekly house cleaning, cleaning before special events, and helping hoarders get their homes in order. While reviewing past projects, the owner notices that cleaning hoarded homes is much less profitable than doing other types of cleaning. Based on this assessment, the owner can then decide if they want to raise their prices or stop offering the service entirely.
Another way to maximize ROI is to focus on reducing costs — both the cost of goods and services used to complete work orders and the overhead costs incurred in running your business. One of the best ways to reduce the cost of goods and services is to work with vendors that offer favorable credit and pricing terms. If a vendor offers a discount on project materials, your cost of goods and services will be lower than if you purchased from a vendor that didn't offer a discount. Credit terms are an important consideration if you plan to buy materials on account and pay for them later. For example, working with a vendor that charges no interest for 90 days can help you reduce the amount of interest you pay each year.
Negotiating With Vendors
You can reduce your overhead costs by negotiating discounts with service providers or cutting back on some of the services you receive. For example, if you work with an accounting firm and have a certified public accountant doing your books, see if the firm is willing to give your account to a bookkeeper instead. Bookkeeping services cost much less than the services provided by a CPA, so you'll be able to reduce your costs without having to handle the books yourself. You can still have a CPA handle your taxes and review your accounts once or twice a year, but a bookkeeper can save you a lot of money on other services.
Investing In New Equipment
You may also be able to reduce your overhead costs by investing in new equipment. This sounds counterintuitive, but the new equipment may increase efficiency so much that you quickly break even on the cost. If you have an old inkjet printer, for example, you probably have to replace the ink cartridges frequently. Depending on what type of printer it is, you may not even be able to run large jobs on it, forcing you to pay a professional printing company to handle some printing projects.
You can eliminate some of these costs by investing in a laser printer. The laser cartridges are more expensive, but they last much longer than traditional ink cartridges. Laser printers also handle bigger jobs, so you may be able to handle more printing tasks on your own instead of having to pay another company to do the printing.
Get More Business
Now that you know how to price services correctly, it's time to go out and look for new customers. Whether you operate a house cleaning business or install new roofs, you need customers to keep your business going.
If marketing isn't your strong suit, CraftJack can help. We work hard to give home service providers a steady source of qualified leads and make it easy to follow up with each one. CraftJack also offers tools to help home service professionals manage their reputations online.
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