Pricing a Service
Definition: To establish a selling price for a service
How should you set fees or prices for your service business? Procedures depend upon the business, but the same three elements must be considered for every service business:
- Labour and material costs
These factors must be considered not only during start-up but also during growth.
Labour and Materials
Labour costs are wages and benefits you pay to employees and/or subcontractors who perform, supervise, or manage your service business. If you as the owner are involved in a job, then include the cost of your labour in the total labour charge.
The cost of your labour will be quite significant during start-up, when most new business owners pour lots of time and energy into their businesses.
Labour costs are usually expressed as an hourly rate. Check in your library’s reference room for government publications giving national and state salary ranges for different occupations. The editors of trade publications also might have similar information.
Current rates are often cited in classified newspaper ads or available from your local chamber of commerce.
Labour can also be subcontracted–such workers are not on the payroll as employees. When labour is purchased for each job on a contract basis, the full cost is agreed upon in advance, which helps keep your costs fixed. The key is to carefully estimate the labour time it will take to accomplish each job on which you bid.
Profit is the amount of income earned after all costs for providing the service have been met. When calculating the price of a service, profit is applied in the same number as markup on the cost of a product.
For instance, if your labour costs for a job are R840, and you plan to net 21 percent before taxes on your gross sales, you’ll need to apply a profit factor of about 25 percent to your labour and overhead to achieve your goal. For example, say you have an operating costs’ subtotal of R1 296 and you want a profit of R324, so you quote the customer a price of R1 620.
If you compare the price of R1 620 with the cost of labour (R840) already estimated, you’ll notice that one figure is more than double the other. Some contractors use this ratio as a basis for determining price: They estimate their labour costs and then double that figure to arrive at a bid price.
Pricing can be time-consuming, especially if you don’t have a knack for it. Some contractors seem to have a sixth sense when it comes to pricing and they “guesstimate” on what they need to quote to make a job profitable to them.
If you’re just starting out, you obviously won’t have the skill of a seasoned pro.
If your quote is too low, you’ll either rob yourself of profits or be forced to lower the quality of your work to meet the price.
If you estimate too high, you may lose a contract, especially if you’re in a competitive bidding situation. Make it your business to learn how to estimate labour time accurately and how to calculate your overhead properly so that when you quote a price, you can be competitive, profitable, and successful as a service business.