Pricing for Professional Service Businesses
Submitted by Gerald G. Pentecost, Jr., CPA
Whether you are a mechanic, landscaper, plumber, personal trainer, or electrician, one of the first challenges you face in your professional service small business is developing billing rates for your services. Without good data on what your business should be charging, you might find that your pricing does not help you accomplish your financial goals. Pricing is a crucial element to your businesses success. If you set your pricing too high, you lose market share and have difficulty developing new client relationships. If you set your price too low, you may end up losing money and could face a business failure. I can't think of one decision in a service business that is more important to the "make or break" of a small business.
Setting prices too high can usually be caught fairly quickly. If you are too high, you will usually get feedback from your customers very quickly which will allow you to make adjustments to keep you afloat. But what if you aren't billing enough? Will your customers complain about that? When will you figure out that you aren't covering your costs? Usually by the time service business owners figure out that their rates are too low, they have dug a hole that is hard to climb out of. Here are some tips for evaluating your service business pricing and making sure that your business rewards you for your hard work.
- Start with a full projection/budget - Take the time to sit down and look at what your business will have to spend to stay running each week/month/year. Consider the cost of your supplies, materials, labor, and overhead. Use a format that will allow you to see exactly what revenue levels you need to meet your profitability goals.
- Get down to the nitty-gritty with the services you offer - Consider the pricing for each service or level of service that your business offers. Create a good spreadsheet showing the number of units (hours/jobs) you will need to sell in each category to make you profitable.
- Get some industry data - Whether through networking opportunities within your industry, conversations with customers, or memberships with professional associations, try to figure out what your competitors are charging. This may serve as a test for the billing rates you develop.
- Don't be fooled by the "hourly wage" comparison - If you are going from employee to business owner, you will go through a change in mentality. Sometimes a new business owner will think in terms of what he/she made in hourly wages working for someone else. Even a price substantially below the industry norm might be considered a good hourly rate for an employee. But don't forget that its now up to you to cover the overhead and pay the costs associated with your business. Once you add that to your monthly burn, you might find that a good "hourly wage" may not be such a good billing rate.
- Your CPA is always happy to help you when planning for your new business. Make sure to ask your CPA for advice and assistance when setting up your business pricing. At the end of the year, you will be glad you did.
Article Courtesy of Gerald G. Pentecost, Jr., CPA
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