Pricing for Your Service Business
By Adam Underwood, CPA
Pricing can be quite a headache for business owners trying to figure out sustainability and profitability while staying competitive in the marketplace. Service businesses must take into consideration multiple factors when developing their pricing. Similar to a product-based business they must know what it costs to bring their service to the market.
The evaluation of the pricing model will take into account three aspect:
1.labor costs
2.overhead
3.profitability
Labor costs can be derived a couple different ways. One way is to look at what your competitors pay for a person in this position the other is what can the business afford. Its really a matter of working forward or backwards. The choice would depend on where you are in your business cycle. If you are just starting you would want to look at what your competitors are paying their labor force to come up with your pricing. If you are up and running already paying employees, you would want to look at your current costs and derive your numbers from there. Typically, you want to get to a place where labor costs are only 1/3 of your client billings.
Overhead is comprised of all the items that are required to provide a place to perform the services that you offer. These include buildings and all the expenses that go with occupying that building as well as the digital infrastructure that is required, not to mention vehicles and tools that employees use when providing services at the customer’s location. This component holds a lot of fixed costs and can be hard to cover if gross sales are low. Scaling this part of your expense structure to make sure that 1/3 of the billing can cover all these expenses is very important and difficult to do. It’s a good idea to have an objective person review your expenses to make sure you are not biting off more than you can chew.
Profitability is a very important item not to overlook. Without profitability you are limiting your ability to grow. Profitability is also known as free cash flow. This is where the immediate money comes from to add staff and upgrade infostructure to expand your business operations. Another important reason is to provide a reward to the owners for the risk that they have taken on by owning and operating this business.
The tried and true 1/3 employees, 1/3 overhead and 1/3 profit is a great place to start your planning for the pricing of your services. This will give you a good baseline to not only price your services but to make sure that you are competitive in the marketplace.
How we can help:
We work with our clients to achieve the most advantageous results for your business and life. Specializing in helping you develop a pricing structure to not only stay competitive in the marketplace but also drive profitability for your organization.
By Adam Underwood, CPA
Pricing can be quite a headache for business owners trying to figure out sustainability and profitability while staying competitive in the marketplace. Service businesses must take into consideration multiple factors when developing their pricing. Similar to a product-based business they must know what it costs to bring their service to the market.
The evaluation of the pricing model will take into account three aspect:
1.labor costs
2.overhead
3.profitability
Labor costs can be derived a couple different ways. One way is to look at what your competitors pay for a person in this position the other is what can the business afford. Its really a matter of working forward or backwards. The choice would depend on where you are in your business cycle. If you are just starting you would want to look at what your competitors are paying their labor force to come up with your pricing. If you are up and running already paying employees, you would want to look at your current costs and derive your numbers from there. Typically, you want to get to a place where labor costs are only 1/3 of your client billings.
Overhead is comprised of all the items that are required to provide a place to perform the services that you offer. These include buildings and all the expenses that go with occupying that building as well as the digital infrastructure that is required, not to mention vehicles and tools that employees use when providing services at the customer’s location. This component holds a lot of fixed costs and can be hard to cover if gross sales are low. Scaling this part of your expense structure to make sure that 1/3 of the billing can cover all these expenses is very important and difficult to do. It’s a good idea to have an objective person review your expenses to make sure you are not biting off more than you can chew.
Profitability is a very important item not to overlook. Without profitability you are limiting your ability to grow. Profitability is also known as free cash flow. This is where the immediate money comes from to add staff and upgrade infostructure to expand your business operations. Another important reason is to provide a reward to the owners for the risk that they have taken on by owning and operating this business.
The tried and true 1/3 employees, 1/3 overhead and 1/3 profit is a great place to start your planning for the pricing of your services. This will give you a good baseline to not only price your services but to make sure that you are competitive in the marketplace.
How we can help:
We work with our clients to achieve the most advantageous results for your business and life. Specializing in helping you develop a pricing structure to not only stay competitive in the marketplace but also drive profitability for your organization.