Knowing what to charge for your contractor or small business services is a vital piece of establishing a profitable business. The weight of designing a pricing structure can certainly feel overwhelming, as you want your services to be valuable to your customers and clients, competitive with other similar businesses, sustainable to cover the business’s costs, and profitable to you for your services.
How do we juggle satisfying all these requirements when establishing a pricing model? In this two-part series, we’ll identify five essential components to helping you manage this significant decision: Cost, Clients, Calculate, Competition and Compare.
Part I: Cost & Clients
As business owners, the first thing you must consider when determining price is how much it costs you to provide the services to your clients.
Think about the costs of performing your day-to-day business. Your cost of business must be reflected in what you ultimately charge your clients because your pricing (i.e. what you charge your clients/customers) needs to cover those operations. According to InfoEntrepreneur.org, you want to account for two categories of costs:
- Fixed Costs—consistent costs that won’t be determined by sales (rent, utilities, salaries, etc.)
- Variable Costs—costs that may arise as you increase sales (additional labor, supplies, etc.)
Determine how much per year you need to cover your costs (i.e. overhead) as a business owner. This is simply the amount your business needs to make to, figuratively and literally, keep the lights on. Take that number and set it aside for now.
Establishing prices for your services involves more than just covering the business’s costs, however. After all, you want your business to be profitable, so it’s important to consider what the value of your services provide to your clients. What are they willing to pay to have you perform the service?
It may be difficult to measure value for your clients but think about what your quality services can accomplish or resolve for potential customers. Shelcy V. Joseph, a contributor for Forbes.com, encourages “highlight[ing] what working with you will lead to,” instead of just think about an hourly rate to charge your clients. There is more to your service, right? Quality work provides clients with more than just a job completed.
When considering how a client values your services, think about the following factors:
- How unique are your products/services?
- What benefits do your services provide customers?
- How can investing in your services provide long-term benefits?
Let’s look at an example where we can witness client value. InfoEntrepreneur.org describes how it may cost a plumber only $40 to fix a burst pipe, accounting for his labor, materials and travel time, but “the value of the service to the customer— who may have water leaking all over their house— is far greater than the $40 cost, so the plumber may decide to charge a total of $100.” This service provided value to the customer, which should be reflected in the pricing of the service, in turn resulting in a profit for the plumber.
While determining your cost of business delivers a concrete number for you to work with, the value for your clients isn’t quite as tangible of a number, but it is a powerful influence on determining your pricing for your services. What will your clients pay for your services and expertise? What is it worth to them and for them?
In part two of this series, we’ll identify the next key components to charging clients correctly for your business. Stay connected to our news page for more financial tips and insights, and visit our website to learn how Focus Financial can help you make the right financial investments for your individual and business goals.