There are many things that small business owners and contractors must take into account if they want to succeed in their operations. One of the most common of these startup challenges is figuring out how to price your services. Here are some of the primary considerations to keep in mind as you do so.
1. Calculate Your Costs
If you want your business to survive, the absolute first thing that you must do is add up what it costs to operate your company. If your pricing doesn’t cover your operational costs, it’s only a matter of time before you run out of cash. Costs that a contractor should consider include:
- Direct costs: These are the expenses that you’ll incur while performing services. While you can’t be certain upfront, you can estimate the cost of a project by adding up things like the labor, time, and materials involved.
- Indirect costs: This includes any expenses that aren’t directly related to a project. Tools, vehicles, insurance and bonding, and even certifications and licenses should be included here.
By starting with your costs, you are immediately aware of the minimum price that you can charge your customers and clients.
2. Analyze the Market
Next, you should take the time to conduct some market research. Look up what the average salary is for a contractor in your area. You can use the internet to find general information as well as network with other professionals to discover what they charge.
Analyzing your market provides you with another helpful benchmark that can be used to avoid either overcharging or undercharging for work.
3. Understand Your Customers
Larger corporations often set rigid pricing structures. However, if you’re a small business owner or a contractor, you aren’t stuck operating in the same way. You’re allowed to have a certain degree of flexibility with your pricing structure.
One of the major areas of adjustment should come from understanding your customers themselves. For instance, if you’re hoping to bid on a remodeling project in a low-income residential area, you don’t want to come in talking about high-quality work at upper-end prices.
Instead, take some time to ask your clients some questions and then prepare a bid that focuses on working efficiently and within their price range. Of course, you should also be willing to tack in the opposite direction if you find yourself working with a client that has plenty of resources and only wants the best.
Being willing to understand your customers and work within their boundaries is a huge part of properly pricing your services.
4. Consider Time Invested
The time that you invest in a project is a critical factor in the pricing process. For instance, as a contractor, you may have all of the tools and equipment that you require to do a job. However, you may find that you have to get a certain certification or permit to work on a project. If a job is in another state, you may even need to apply for a contractor license in that region. Always take training and certifications into account when pricing your services.
5. Determine Billable Hours
Along with time indirectly spent getting certifications and licenses, you must also calculate the time that you and your employees will be directly investing into the project itself. Regardless of how many hours you actually end up working, you must pick a specific number of billable hours that you’ll actually charge your client in order to set your price. This is one of the biggest factors that can impact the price of a job.
For instance, if you’re creating a bid for a roofing job, the number of shingles or sheets of metal that you need won’t change. You measure the roof, calculate what you need, and you’re done. However, the number of man-hours required to do the work can vary dramatically.
Will you be doing the job with experienced employees, untrained workers, or just yourself? Are there multiple layers of existing shingles that need to be torn off? How long will you and your team need to reasonably get the job done? Estimating your billable hours can be tough, which is why the process deserves plenty of attention throughout the pricing process.
6. Decide on Reasonable Profit Margins
Another area that can impact your prices is your desired profit margins. How much money do you need to make on a project for it to be profitable for your company? If you’re a newer company trying to establish yourself, are you willing to take a hit to get your name out there? Are you so swamped with work that you can raise your profit margin to reduce the number of customers asking for your services?
Choosing a reasonable profit margin beforehand can help you gauge just how much you need to charge. This can then be compared to your market analysis and overhead costs to see if they line up or if your margin must be adjusted.
7. Determine Rate
Along with understanding how long it will take to complete a project, you also need to set a standard rate at which you can charge. This can be an hourly rate, per project, or even both; this decision should, should once again, be informed by your market research.
For instance, if you’re creating a quote to install siding on a house, you may charge a flat rate to put all of the siding on. However, if you discover as you go along that your client also wants you to do a minor repair or two, you can charge an hourly rate to do the additional work.
8. Adjust Rates as Necessary
Pricing your services should never be a process that takes place overnight. Nor should it be set in stone.
On the contrary, determining the value of your services can be an ongoing activity that you revisit on a regular basis. As you discover how long it actually takes to complete certain activities, you can adjust your rates accordingly.
With that said, you also should be careful to only change your rates when you have a justified reason for doing so. In addition, make sure to let returning customers and potential leads know about any rate changes so that they aren’t surprised when they go to hire you in the future.
By carefully setting your rates, staying flexible, and only changing them when necessary, you can both make a profit and build your business’s reputation over time.