Simple Principles for Setting Prices
Always busy, but not reaching your income goals with your service business? You could be pricing yourself out of earning money.
Ever feel like you’re as busy as you can be, but aren’t making any headway toward reaching your income goals? Are you completing job after job, but just aren’t seeing the money you think you’re making? Have you been covered up with work, but find you’re dipping into personal funds to get the supplies you need to get a job done? Worse yet, have you found yourself taking on jobs just so you can make sure your people are paid for the work they’ve already done?
If you’re getting jobs done and getting paid on time, but still aren’t seeing a profit, you can bet you need to rethink your pricing.
You’re not alone
Does this sound anything like something you’ve struggled with (or are struggling with now)? Don’t worry. You’re not alone. It takes time to learn how to properly price your work so you can actually earn an income.
When you’re just starting out, knowing what to do when it comes to pricing your services, and how to do it to avoid losing money, can be quite a headache.
There are some easy ways to learn how to avoid pricing yourself into a hole. We spend a lot of time talking and working with small service businesses, and we’ve pulled together a few Simple Principles for Setting Prices we want to share to help you avoid the pitfalls of pricing.
1. Never price a job based on feeling
Nearly everyone starting their first service business guesses how a job should be priced. Heck, even customers do it. Maybe you hear what your customer is saying they need done, ask a few quick questions, and you feel like the job is going to be, say, $500. Once you say a number out loud, that price is going to be stuck in your customer’s head. It’s going to be tough to change it later. When that number is based on your gut feeling, without counting the costs and calculating a real price that makes sure you’re earning money, you should keep it in your head.
Always calculate the true cost of a job before quoting a price to a customer. They’ll appreciate it in the long run when you don’t have to come back and raise the price.
2. Never price a job you haven’t seen
Is someone asking you to do something you haven’t done before? Is your potential job coming from a new customer you’ve never worked with before? Is there something slightly different about what your customer is asking for on this job than what you typically do?
Don’t price a job until you’ve put your eyes on the work that needs to be done.
If you’re a cleaner, you need to see the condition of the home, office, or whatever kind of space it is you’re going to clean. If you’re a painter, you need to see the space and actually measure what you’re painting so you can correctly figure out how much paint and other supplies you need.
Don’t rely on your customers to give you all the information you need to get a correct price. Schedule a time to visit your customer and get eyes on the project. Ask lots of questions. Make sure you and your customer understand each other clearly, and agree on what needs to be done.
When you’ve seen the job and know all you need to know, then it’s time to start pricing the job.
3. Never price a job until you know how much it costs
We really can’t stress this point enough. It probably ought to be #1 in the list, but we’ve found after talking to some business owners that making points 1 and 2 a regular practice leads right into this one.
If you avoid pricing a job on gut feeling, and you never price a job you haven’t seen, figuring out what a job costs you to get done will just feel natural. It will also save you from losing money on jobs, and help you earn money instead.
Think about how you get jobs done. Somewhere in your head, even if you don’t write it down for yourself or your clients, you figure out how many materials and supplies you need to get a job done. You estimate how much time it will take you, and your estimates get more accurate over time. If you’ve ever built something, you’ve no doubt heard the phrase “Measure twice, cut once.” We think service business owners should start internalizing and sharing a similar mantra:
Calculate twice. Price once.
So, the big question then is just how do you learn how to properly calculate and price a job when you’re just getting started? We’ll dig into that more in our next set of posts, so we encourage you to keep an eye out for all the details.
A couple final points
There’s a lot of advice to be found out there about how to build a business and earn money. With service businesses, it’s a bit more of a challenge because you have to figure out exactly what your time is worth on top of knowing exactly how much it costs to get the jobs done.
Know what you need to earn
You can’t even begin to build a service business that helps you earn a living if you don’t know how much you need to earn. You should already have a firm number in your head — not just a number of how much you want to earn, but how much you need to earn. When you’re starting out, try giving yourself a monthly number and an hourly number — one is a goal to hit each month, the other is a minimum you know you need to personally earn for each hour you work so you can make a living while building your business.
We’ll discuss more on this in future posts. For now, let’s say we want to earn $5,000/mo, and the personal hourly rate we need is $25/hr. That’s good enough to get us started, and provides a handy metric for making sure we make money on each job, and gives us a goal to keep us going.
Simple math (and a calculator) is your friend
You can’t run a successful business if you’re afraid of math. And there’s no reason to be!
Running a successful and profitable service business won’t require anything more than simple math and a bit of patience to work things out.
Again, if you make it a habit to never price a job based on feeling, and never price a job you haven’t seen, you’re going to reach for that calculator on your phone, desk, or computer. You should start now. Mistakes will cost you money.
Ready to dig into pricing a job?
If you’re ready to jump into seeing how a sample job can be priced to make sure you’re counting the costs, and actually earning money on each job, then stay tuned. The next post in our series will tackle how to effectively price jobs so you and your business are earning money and on solid ground for being profitable.
Originally published at workweek.com on July 18, 2017.