Know your Costs. Price on Value.
Every business owner has different goals. Some owners want to grow a huge business with hundreds of employees that dominate a market. Some owners want a self-sustaining “lifestyle” business that lets them spend more time with their families or leave a financial legacy for their children. Some owners want to build something that benefits their employees and their community. No matter what your goals are, sustained profitability is what lets you reach your goals. To achieve this, you need to know your costs and price on value.
Knowing all your costs means that your decisions are guided by information and you can make smart choices about the risks that you are willing to take. At the heart of every service company are the employees and they don’t come cheap. For most service businesses, employee payroll, taxes, benefits, and costs related to insurance, licensing, and other fees represent over 80% of total expenses. The fastest way to drive your business into the ground is not understanding your costs. Its essential that you know what it costs to do everything in your business… not just the direct parts and labor it costs to do a job. How much does it cost you in advertising to get a new customer? How much does doing a job two towns over impact your net revenue.
It’s natural once you know your costs to start pricing your services based on a margin and typically that means pricing work on an hourly basis. It’s easym but it’s also the wrong way to run a profitable business. When you charge by the hour, you are choosing the margin you want on your employee’s time. Sure, it’s great for you because you know you’re going to be able to cover the employee’s time, but the downside isn’t worth it. When you quote a job, you’ve decided on that margin by thinking of a particular employee that can do the job… usually the lowest skilled (and least paid) worker who can accomplish the work. But what happens when it comes time to do that job and that employee is sick, or still on another visit? Now you have to send an employee with a higher expense to do the work. That cuts into your margin. Employee expenses also quickly outpace your ability to raise prices which means that over time, you are making less and less on each job and hurting your profitability.
Another fallacy about charging by the hour is that you’ll get paid for every hour that someone works. When employees make a mistake that needs to be corrected, you’re not reasonably going to be able to bill the customer for all the time, but you still have to pay the employee. This cuts drastically into your margin. In fact, even an extra half an hour of time you don’t bill on a 2 hour job is likely to make a job unprofitable.
Pricing by the hour also hurts your ability to sell. Customers hate uncertainty, especially when it comes to pricing. When you price by the hour and overshoot your estimate, your reputation with the customer diminishes rapidly. Even if you choose to waive some of the cost (and take a hit on your margin), you’ve done some damage to your reputation with the customer.
Bill based on the value you are providing, not just the work you are doing. Value is more than just the job, its everything you represent as a company. Having a clean, professional technician show up on-time in a narrow window is worth a lot to many customers who are willing to pay more for it. That’s value. Making periodic check-ups to remind customers that they may need service is value. Simple “Thank You” notes from your technicians referencing a personal detail the customer discussed with them is value. The best thing about billing based on value is that you get to decide what your value proposition is and how you deliver it.
The one thing you don’t want to do in a service business is compete on price. If you only compete on price, the only way to be successful is to have a lot of volume. Because you are a service business, more volume means more workers, which means higher expenses, greater need for cash, more human resources issues, and countless other problems. When you compete on value, you can find a niche that allows you to charge a premium and make more money per job.
This doesn’t mean you should take advantage of customers who are in dire straits. Instead, it means that you should focus on a fair fee for the value you are bringing to someone. To do this, set up one fee for each task you do and present that same fee to every customer. By selling work at a flat-rate, you’re giving the customer cost certainty and telling them that the value you bring is worth the extra expense.
This post originally appeared on the Field Nimble Blog. Check it out to read our other articles that go more in-depth about running a better and more profitable business.
