When adding a markup for your services, you might think figuring out the right amount is a pretty straightforward affair. However, the reality can be far more complex. With a markup the amount added to the cost of material and labour, this ensures you cover your overheads and generate profit. In service-based businesses, including plumbers, sparkies and HVAC, you should always account for a markup when establishing the cost of your individual services.
Yet this isn’t as simple as just coming up with a rudimentary percentage to add on at the end of the job, with a tonne of factors contributing to finding the right amount that keeps you competitive while still earning you cash. To ensure your business offers fair pricing for customers and remains profitable, read this blog to learn more about markups and how you should set yours.
Navigating the Tricky Markup Process for Service Businesses
Where product-based businesses can generate a profitable price based on labour and material costs alone, pricing for service-based businesses can be considerably more challenging. With customer requests and requirements ranging significantly from job to job, it can be tough to establish one price that covers both the cost of work and provides a profit. For instance, a simple pipe repair job for one customer can turn into an entire excavation process for another.
To develop pricing that benefits your business, your technicians and keeps your customers happy, keep in mind these best practices for establishing your markup.
1. Calculate Your Costs
Don’t get caught out undercharging for your labour. Not only will you pay for some of the costs the customer should cover, but you might see any profit evaporate before your eyes. For service-based businesses, the best way to avoid undercharging — and generate profit — is by utilising a cost-based pricing technique. Using cost-based pricing, a business owner adds up the cost of their services from both a direct and indirect standpoint.
Direct costs are the exact expenses involved with providing a service. Whether you’re talking about HVAC projects or pool cleaning companies, direct costs typically entail the materials required to complete the job and the cost of the labour. While this seems quite simple, it’s the indirect costs that can get confusing. Indirect costs are any expenses that are necessary to operate the business but are not connected to specific jobs. These costs can include company vehicles, marketing, utility and insurance costs.
Indirect costs are often what set product-based markups apart from service-based markups. With both direct and indirect costs in hand, you can begin to calculate your average monthly costs, as well as how much your markup needs to be to cover these costs and generate a profit.
2. Conduct Market Research
Numerous market factors influence how you establish your markups, with some of the most prominent elements being your competitors and your local standing. While you shouldn’t base your prices solely on competitor research, it’s helpful to understand what others are charging and the level of service that comes with those prices when developing your markups. If you plan to charge more than a local competitor, you have to take this extra cost seriously, as your customers will expect a higher quality service.
Next, you’ll want to consider your clientele. From location-specific needs to average income, local demographics can help you gain a better understanding of what customers are willing to pay for certain services. Conduct a basic market study to learn more about your target customers and receive personalised insights on what prices they are comfortable with. Supported by this data, you can determine a markup that’s fair for customers and profitable for business.
3. Establish a Profit Margin and Calculate Your Markup
To ensure you generate profit, you must establish a reasonable profit margin that makes sense for your company. A profit margin for service-based businesses is how much profit your company will bring in after subtracting your cost. Although profit margins will vary depending on your industry and target market, the typical markup for a service-based business is around 10%.
To construct a price for a specific service, take the cost of the service and multiply it by your chosen percentage. Take that total and add it to the original cost of service. This sum is your final price with a markup, allowing you to cover the total cost of the job and generate a healthy profit. Remember to account for your indirect costs either by including a daily average on top of your service cost or by increasing your profit margin percentage.
For service-based business owners, you may be wondering if hourly costs should be factored into your pricing as well. With jobs in industries such as HVAC and plumbing often changing quickly and requiring more material and labour than initially expected, it’s a good idea to charge per project to ensure all of your business costs are accounted for.
Keep Your Profits (And Your Payments) in Check
Establishing service prices for your service business can be tricky, but managing the influx of these payments can be even harder. Fortunately, it doesn’t have to be. Using FieldPulse’s field service management software, service-based business owners can send invoices, collect customer payments and record business transactions on the go with the touch of a button. Schedule a demo with FieldPulse today to learn what our field service management software can do for your service-based business.
Fieldpulse lets you know more about the top five business metrics that they think you should understand and how they can help you manage them. Read the original here.