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As I grow, how do I price my services to maintain a profit and still be affordable?
By: Bill Wortman
As I grow, how do I price my services to maintain a profit and still be affordable?
Answer: You have discretion in setting your prices. Your local competition, the status of the industry in your area, your particular employee wages and operating cost structure, how much profit/income you (the owner) want to make, and other factors will affect your particular service prices.
Also, performing competitive research among your local competitors is often required to get some idea of what others in your local market are charging and to determine whether your service prices are “affordable.” To price your services at a level that attains your profit goals while remaining affordable to your customers is a delicate balancing act. We do not know how you developed your current service prices, but as you grow your business, how you determine that your service pricing won’t differ dramatically from how you determine your service pricing now. While your revenues and costs will increase, this does not necessarily equate to dramatic price changes if you can maintain a steady flow of work and keep your costs under control.
In terms of general service business pricing considerations, service pricing has four basic components – employee and operating costs and expenses, what the competition charges, how much the owner wants to make as personal income, and what the customers will pay. Generally, a services business would establish hourly rates at 2.5 to 3.0 times the base compensation of the person doing the work. For example, if an employee makes $40,000 a year, or $20 hour, you may charge $50 hour (2.5 x $20) for his services. You have to analyze your company’s cost structure; however, this multiple is typically sufficient to cover labor, fringe benefits, overhead, and yield a reasonable pre-tax profit margin.
Generally, small companies can be flexible on hourly rates and other fees since their overhead costs are lower than larger companies, and small company owners can adjust their personal earnings which will often allow them to make money at less than 2.5x base compensation. To help evaluate your prices, you can review approaches to price setting at websites like the following:
- Product Pricing Can Spell Difference Between Success and Failure: toolkit.com
- Pricing a Service: smallbusinessnotes.com
- Pricing Strategy: netmba.com
You can also review discussions on ways to grow a business and maintaining profitability while doing so at websites like the following:
You may find the assistance of a local accountant or CPA helpful in analyzing your operation and evaluating your particular service pricing.
Published: August 6, 2013
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