If you own a small service business it’s vital to have a firm pricing strategy, one that takes into account all the costs associated with doing business, such as adequate gross and net profit and return on investment.
Pricing your service is both an art and a science. To benefit the most from both, you should be in a continuous state of review. I check my supplier statements on a monthly bases. If the price of a part goes up, I make the appropriate adjustment.
If you’ve been in business for a long time, then you probably have a working strategy for pricing your services, but if you’re a young business seeking long-term growth, you’ll want to thoroughly cement the concept of pricing your services. You absolutely have to know the difference between over-pricing and under-pricing.
Let’s review over-pricing first, since it’s the most prevalent. Over-pricing is quickly reflected in loss of volume, slow growth, and irate customers.
Here is a list of pointers that can reveal over-pricing:
- Competitors prices are lower
- High gross profit
- Customers are complaining about prices
- Low volume of calls
- More customers are asking the price of a service call, and then saying, “I’ll get back to you.
A more serious problem is that of under-pricing. A company that under-charges probably has a high cash flow and business seems to be good. But that won’t help pay the bills during a dry spell when the calls aren’t flowing in. If anything, you need to be consistent with your prices and consistent with all your customers. Don’t deliberately charge someone more because they have more.
Here are some things to watch for in under-pricing.
Low gross and no or low net profit
- Prices are much lower than the competition
- No complaints about prices
- No shortage of customers
- Labor and material costs have risen without prices being raised.
A good accountant should be able to determine whether a company is engaged in under-pricing. While it’s true that under-pricing makes it easier to sell your services, it doesn’t make surviving easier. You have to work harder to sell your service at competitive prices, but wouldn’t you rather be successful as opposed to bankrupt?
HOW TO PRICE YOUR SERVICE
When performing a service for a profit, the key question to ask is, “How do I price my services to be sure I’m making a fair profit?”
Here are three common elements that go into determining the selling price:
Cost of materials and supplies
Labor and operating expenses
Planned profit margin
GROUND RULES FOR PRICING SERVICES
Every job that you do should contribute to the financial position of your company. Unless you are sure it will increase your overall sales, don’t deliberately operate at a loss
- It’s imperative to have a good book keeping system that reflects all operating expenses and costs associated with your service
- You should know the difference between direct and indirect costs. Direct costs are associated with expenditures you incur when you perform a specific service for a customer. If you eliminate that specific service, you eliminate the costs that go with it. Indirect costs are quite different as they are constant. For example, you still have to pay the rent, utilities, phones, advertising, etc. Indirect costs are primarily there to keep the doors open.
Your mission is to find a bases of pricing that allows you to distribute and allocate indirect cost to each job. Of course the volume of calls is a major factor in this decision. After you know what it costs to produce a service call, you can use these costs to set your prices. This is called the “cost method.”
If you belong to a service group or a franchised dealer, there may be certain price schedules and customs that dictate your fees. In this case you may be limited to what you can do.
Finally, it may be that the quality of your service is the most important factor in shaping your prices. Many customers are willing to pay more for above average service. If your customers feel this way about your company, then you’re ahead of the competition.
UPGRADING YOUR PROFITS
One of the main goals of being in business is to upgrade your profits. Increasing your profits doesn’t always mean increasing your prices. Improving your operating efficiency can also increase profits. You can do this by cutting costs, buying in bulk, using third party manufactures, taking advantage of specials from your supplier or using more efficient service vehicles.
The level of costs, to a great extent, may be determined by local prices for labor and materials, but even so, you can often get a competitive edge by improving your operating efficiency.
Some small service firms improve their operating efficiency through adequate planning and scheduling of jobs. This is where science and art converge. Your revenue is a condition of your price strategy and your ability to build sales volume. Consider your market area. In what income category are your customers? Are they able to judge quality of service? Do they demand and appreciate superior service, promptness, personalized attention, friendliness and so on. You may be able to charge $150 for a service call in New York City or Beverly Hills, but you will have a hard time charging that amount in Tampa, Florida.
In a nut shell, keep on top of what’s coming in as revenue and what’s going out in expenses. You should know your average call volume. And if you make any adjustments, do so slowly, so you can evaluate if something works or not. Remember, every job should contribute to the overall profitability. Don’t be greedy, there’s plenty of work out there for everyone.