5 strategies to increase profits for a service business
These go beyond charging higher fees or being more productive.
I have worked with many clients who asked me to share strategies to increase profits for a service business. These clients are service businesses that provide a range of professional services including in IT, international trade, marketing, training, consulting, and high-end design. But some of them are struggling to find ways to increase their productivity.
When selling a service, a business is usually trading hours for money. You spend a certain number of hours working to provide the service and you are compensated for your time.
- The compensation can be a one-off payment — for example, for a completed project.
- Or, it could be that you are compensated for the hours that you spent working (fee-based).
Either way, it can be difficult to scale up operations or increase productivity.
Most service businesses look for ways to increase the fees that they charge. They do this by becoming better at their skills. Or, they learn how to complete the work faster, so that they spend less time doing the work.
Scaling up the business usually means bringing in more people who also do the above.
The problem is that there is a limited number of hours in a day. Which means that there is a limit to the amount of work that you can do. And even if you bring in more people, they will face the same limits.
However, there are other ways increase profits for a service business.
What is a service business?
A service business is a business that sells services to customers. Human labour and expertise are needed to perform these services.
For example, an company selling accountancy services will employ accountants who use their knowledge, their previous experiences, and accounting tools to provide a specific service, like creating a profit & loss statement for a business.
There are three types of service businesses: professional services (also called business services), social services, and personal services. Usually these services are offered by experts who have specialised in a particular area. In this article, I will focus on service businesses that provide professional services.
Since they do not sell tangible products, like cars or computers, service businesses have to look for specific ways to distinguish themselves from competitors. Mostly, this will be by providing customer service that goes above and beyond.
Note that many companies that sell goods or products also add services as a strategy to increase profits.
- For example, a car dealer might offer annual car maintenance services.
- Or a construction company might also offer landscaping services.
What type of service businesses make the highest profits?
Generally speaking, service businesses that specialise in professional services such as legal, accounting, and consulting make the highest profits. This is because these services charge higher prices and strongly appeal to businesses and people who need expert advice and solutions.
In addition, service businesses in the technology industry such as IT consulting and software development also make high profits, because there is high demand for these services and they can charge high prices.
Choosing an industry that is known for high margins is an easy way to increase profits for a service business.
What is a good profit margin for a professional services business?
There is not one specific profit margin that is good.
However, if we look at the overall data for the professional service business industry in developed countries, we see the following:
- the average gross profit margin for a professional services business ranges from 5% to 40%
- the gross profit margin for a particular project usually ranges from 25% to 50%,
- the gross profit margin for an individual consultant could be anywhere from 50% to 400%.
Which gross profit margin is “good” for your business depends on you:
- How high are your overhead costs?
- How efficient are your business operations?
- How much down time do you have? AKA, how full is your work pipeline?
To increase profits for a service business, business owners should consider the following strategies.
Strategies to increase profits for a service business
1. Control your expenses
Services businesses depend on human labour to provide their services. As a result, labour is the biggest expense in these businesses.
Depending on the kind of work you do, software expenses might also be very high.
A key strategy to increase profits for a service business is to control expenses.
in fact, this strategy applies to all business!
Getting more control of your expenses can be achieved by cutting unnecessary expenses, streamlining your operations and negotiating better prices with suppliers.
For example:
- an accounting firm could negotiate with software providers to lower the cost of software licenses or switch to a cheaper software solution
- a consulting firm could reduce waste in their operations by implementing a more efficient work schedule.
2. Get more customers
Many service businesses only focus on their own region or country when they look for new customers.
But since a service is intangible — meaning it is not a physical product — it can be purchased by customers all across the world.
Meaning that it becomes an interesting strategy to increase profits for a service business.
Getting more customers can be done by reaching out to new markets, through online sales, or by exporting to other countries. The internet and online platforms are tools that can be used to support this strategy.
For example:
- a design firm might start offering services on platforms like Upwork or Fiverr to reach a global audience
- an IT firm in Indonesia could start exporting their services to other countries in South Asia
The key to doing this is two things: understand what kind of cutomer you are targeting and know what sets you apart from your competitors (or design your USP)
3. Diversify your services offerings
There are various ways to diversify your services. Generally speaking, you can choose to:
- add new services for your existing customers
- sell existing services to new types of customers
- create new services for specific new markets
I recently worked with an IT service business that provides webdesign and highly-secure hosting solutions to create an online offering and start attracting customers in other countries. Their customer base was mainly made up of NGO’s.
From a financial perspective, they were doing well, but there were some serious competitors entering the market . The business was worried that it would lose customers and was also looking for ways to grow faster.
I worked with the business to create a diversification strategy.
Add new services for existing customers
Let’s take the same example of the hosting company that also provides web design.
By adding new services — such as website building & management — the company was able to sell more products to existing customers.
Adding new services for existing customers is one of the fastest ways to increase profits for a service business. Customers already know and trust you and it is easy to find out what else they need.
Another example is of a small marketing agency that added branding implementation services to customers. They were able to encourage customers to spend more because they solved a problem for customers.
Sell to new types of customers
For the IT services business, we did market research and noted that there are many other organisations that also need secure hosting solutions, in government and in business.
By creating an offer — using existing products — specifically for these customers, they were able to expand their customer base.
Another company was a small law firm that started offering specialised tax consulting services in addition to legal services. They identified an underserved group of customers on their market and introduced these services to attract customers looking for a one-stop-shop-solution.
Sell new services to new markets
We started brainstorming about additional ways to grow the business. We concluded that the services that the business offered were in demand in other countries as well. However, we were not sure if the USP was strong enough.
So, we decided to experiment.
After some additional market research, the IT business created a service offering for two international markets. These were advertised through online platforms to reduce the risk perception for new customers.
So far, the initial response has been positive and the IT business is slowly improving their service offerings.
4. Improve customer service
Great customer service is one of the key ways that service businesses use to distinguish themselves on the market.
This can be done by investing in training for staff, creating a positive and welcoming atmosphere, and implementing a loyalty program.
One of the best things about being a service business is that it becomes possible to hire remote staff. Better qualified staff may help to boost your customer satisfaction.
This option will not work if you have to be on ground at your customer’s office on a daily basis. But if that is not the case, or if you have agreed a price for a project, it becomes easier to find and recruit staff who are based in other locations.
To achieve this, start looking at how to productise your services.
5. Benchmark and optimise your prices
Most businesses are afraid to increase their prices.
They believe that doing so may cuase customers to leave them. And it is true, you cannot and should not increase your prices without first having a well thought-out strategy in place.
Optimising your prices starts with market research to answer the following questions:
- How do the prices of your various services compare to those of your competitors?
- Are there things you could add — or remove — from your services ot justify a price change?
- Can you offer services at multiple price points or with various add-ons that let you charge better prices?
With this information, you can identify optimal price points for your services and make adjustments as necessary.
Conclusion
As you can see from this article, there are many ways to increase profits for a service business.
Especially when combined with a strong focus on high-profit margin industries and Most Profitable Customers, the above strategies can help you significantly increase profits and achieve faster growth.
And as always, the best way to find out which one is best for you is to experiment.
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Hi, I’m Tonia Dabwe, founder & director of GuideMyGrowth.com. At Guide My Growth, I help small and medium businesses generate higher profits so that they can grow faster without having to depend on outside funding. This article was originally published on Guide My Growth.
