One of the most important things you need to learn as a business owner is how to price your services! It may sound simple, but incorrectly pricing services you offer can eat away any profits you have, or even lead to losses that could really hurt your company. Below I will give you some great tips on how to calculate the price for your services!
Start With The Costs
The most straightforward way to price your services is to start with the cost it takes to provide these services to your customers.
Some common costs we can start with are labor and overhead. There may be material costs but those should be included in overhead.
The definition of labor is pretty simple – labor means the hours worked to provide your company’s services to your clients.
For example, suppose you provide cleaning services. Each customer takes three hours to clean, and you charge $20 per hour. Your labor costs for each customer will be $60.
This is a simple example but you can adjust it for customers who need longer or shorter hours.
Overhead means all the costs besides labor that are used to provide your business services, and is the second part of how to calculate the right price for your services!
Overhead includes things like rent, insurance, utilities, materials you need to run your business, and similar items. Because it is hard to calculate how much overhead each customer requires, companies use a predetermined overhead rate to calculate overhead.
It sounds way more complicated than it is! Let’s go back to the example we talked about. After adding all of last month’s overhead costs together, let’s say the amount comes to $1500. You then calculate that your company worked 200 hours during the month.
Then you divide the $1500 of total overhead by 200 hours worked, and come up with an overhead rate of $7.50 per hour.
$1500 / 200 = $7.50 / hour is your overhead rate
Calculating Total Cost
This last step is the easiest! You just need to take your labor costs per hour ($20) and add it to the overhead costs per hour ($7.50).
Your total cost per hour for your services in this example is $27.50.
This is only the starting point – you will of course want to make a profit!
Methods to Calculate How Much To Charge
Add a Markup
The easiest way to calculate the right price for your services is to just add a markup amount.
Back to the cleaning example. We figured out that it costs you $27.50 per hour to perform services. Next we want to add a 10% markup to achieve the profit margin we are looking for.
Using this method, we add the 10% markup to the $27.50 per hour, the price you now charge your customers for your services is $30.25 per hour.
You can change the markup as much as needed depending on your business needs and goals.
Compare to Competitor’s Rates
This is another easy way to calculate how to price your services! If your company is in a competitive industry with several competitors, comparing the prices they charge for services gives you a good starting point.
If your rival cleaning service company charges $33.00 per hour, you may decide to charge more than the $30.25 that you calculated from the markup method.
If you are looking to gain customers by offering a lower price, you can charge $31.00 or $32.00. This way you are still charging less than your competitors, but more than you would be charging if you used the markup method.
But if you believe the services you provide are better quality than your competitors, and you provide additional benefits like fantastic customer service – you should charge over $33.00 because of the added value you give customers.
It’s your call!
Which Method Should You Use?
You can see that both ways to calculate how to price your services have their advantages and disadvantages, so which one should you use?
The first method is good for businesses who have a good grasp of their labor and overhead costs and are comfortable with making the calculations. It takes more time, but can give you a more accurate price by using your actual costs.
If you are strapped for time, or just want to use your competition’s prices as a starting point for your own company’s price, the second method could be used. This takes less time but you should be sure to watch your financial statement to make sure all of your expenses are being covered!
Knowing how to price your services is going to be one of the most useful skills a business owner could have! We hope this article has helped, and for more information on how we can help, check out this article on why you need more than just spreadsheets to manage your books.