When you’re just starting out with your service business, it can be hard to determine the right pricing structure to begin charging clients. Below are Arborgold’s recommendations to determine pricing that will promote profitability in your business.
Know Your Expenses
Without this step, it can be easy to get caught up in matching your competitor’s prices and forgetting that every business’s expenses are different. Create a pricing structure that works for you by first knowing what your expenses are.
Your financials can be broken down into two categories in order to accurately account for them: direct costs and overhead expenses.
Direct costs influence the profit margin of your service and therefore should be calculated against the revenues of your service. The resulting figure would be the gross margin - your overall profit margin for your service.
Direct costs include raw materials that go directly to the service that you provide to your customer. For example, equipment (trucks, spreaders, mowers) and materials (fertilizers, weed control). Direct cost also includes the labor costs for personnel that are necessary to complete the job - essentially your entire field team.
Overhead expenses can include marketing costs, rent, Internet, insurance, software and other costs that aren’t directly involved in the execution of your product or service but are still required for the operation of your business.
Labor can also fall into the category of overhead expenses, depending on the functions of the roles within your team. For example, a manager’s salary is considered an overhead expense, rather than a direct cost.
Your overhead ratio demonstrates the relationship between operating expenses and your business’s total income. At a high level, you can begin to get a grasp on your overhead ratio by starting with this formula:
Overhead ratio = Operating Expenses / (Taxable net interest income + Operating income)
Here’s a helpful resource to help you get started on calculating your overhead ratio.
Determine Your Profit Margin
After finding your overhead ratio, you can begin to get clarity on what is a necessary profit margin in order for your business to run profitably. As a quick overview, net profit margins can be calculated with the following formula:
Net Profit Margin % = After-tax net income (net profits) / Sales (revenue)
The resulting figure you get after this calculation will show the profit that would be left over after all expenses are paid within your business. The higher your net profit margin, the more efficient your business is operating and converting sales into a profit.
If you’re just starting out with your service business, you can begin pricing based on charging for the time and material required to complete the job, but don’t forget the time it takes for administrative tasks for each job!
Using software features like Arborgold’s AutoPrice Calculator can help you standardize your service pricing with ease by using existing averages of employee cost, square footage, and overhead. Learn more about Estimating with Arborgold here.
Other Things to Consider When Pricing
Depending on the personnel on your team, your efficiency can fluctuate. Instilling a sense of urgency and quality of work in your team will result in higher productivity. By working “smarter” rather than harder with the right combination of staff and effective equipment, you’ll be able to price your job fairly without becoming too costly for your customers.
As they say, time is money, which is why taking time into account is always crucial to accurate and fair estimates.
Quality of Equipment
When considering your profit margins and your revenue, it’s important to consider the quality of your equipment. There’s a fine balance between cutting costs in the purchase of your equipment and choosing equipment that won’t cost your business high maintenance costs in the future.
Competitors and Customers
The lawn care and landscaping industry is highly competitive, making it often hard to decide on your pricing. While most customers may price shop, it’s important to have a clear vision of your ideal customer and the price they would be willing to pay, as well as their values in finding the right lawn care provider. If your goal is to provide quality lawn care, which results in a higher cost, it’s important to highlight the benefits of your services to your customer, rather than leading with price. By leading with your unique selling points rather than your price, you don’t encourage price shopping in your prospective customers.
After getting a firm grasp on your business needs and ideal profit margin, you can confidently provide estimates to your clients that are smart for your business and fair for your customers.
Begin Your Projects with Custom Estimates
Once you’ve determined your expenses and profit margin needs, it’s time to start sending your customer’s project estimates. With bidding and estimating software specifically designed to suit service-based businesses, Arborgold can save you time spent sketching and customizing proposals.
Many service businesses have found the features and functionality of Arborgold to help save time and maximize your customer relationships. Some of the features and benefits include:
Business Intelligence Reporting. This allows every key metric within your business to be measured and easily tracked, leaving you with a clear picture of what leads your business into profits rather than losses
Mobile-Friendly Design. By creating software that is not only accessible on the desktop but is also easy to use on the go, Arborgold allows any one of your team members to remain connected to your new integrated estimate software.
Customer Relationship Management (CRM). Spend less time following up on quotes and payments. Arborgold’s CRM software allows you to make the most of your customer relationships through timely responses, accurate records, and easy follow-up. The result is customers that enjoy the unmatched customer experience you’ve always wanted to deliver.
Improve Your Bid Process and Simplify Estimates with Arborgold
Separate your service business from your competitors by implementing professional and seamless software by Arborgold. Land the job with effective pricing, customer relationship management and accurate, customized estimates! To learn more and take a tour of the Arborgold centralized database, visit the website here.