Setting a price for a service is more difficult than for a product. Before it is delivered the service in less tangible than a product and more variable in its delivery. Value needs to be easily translated, otherwise the service based business may suffer from a lack of differentiation. The following offers a basic outline to pricing the service offering.
The same three elements must be considered for every service business:
- Labor and material costs
These factors must be considered not only during startup but also during growth.
Labor 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 labor in the total labor charge. The cost of your labor will be quite significant during start-up, when most new business owners pour lots of time and energy into their businesses. Labor costs are usually expressed as an hourly rate.
Labor can also be subcontracted–such workers are not on the payroll as employees. When labor 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 labor 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.
Some business’s estimate their labor 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 labor time accurately and how to calculate your overhead properly so that when you quote a price, you can be competitive, profitable, and successful.
Contact GT Business for more information