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Pricing: How to Competitively Set Your Prices

Oh, pricing. Choosing your pricing model is one of the most daunting tasks to complete when starting a business. You’re probably asking yourself questions like: how much should I charge? Is it too much for my target market? Should I undercut my competitors’ prices, match, or exceed them? How do I make sure I’m giving my customers a fair price while still growing my business’ revenue? All very important questions to consider.

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When it comes down to it, every business’ pricing model is unique, so it’s important that you model yours to best fit your business instead of sticking to industry standards or what other businesses are doing. As long as you’re not ridiculously overcharging your customer base (because you’ll be out of business in no time), create a pricing model that best suits your business’ needs.

 

There are many factors to consider when deciding on pricing, so let’s get right to it.

Decide What Types Of Work You’re Performing

If you haven’t already decided on whether your business will be geared towards residential work, commercial work, or both, now is the time to decide. The scale and expectations of these two different types of work differ dramatically, and will have a huge impact on how you choose to construct your pricing model.

 

Residential work offers far more flexibility when it comes to choosing when you perform a service, which can open up time for you to take on more work. Whereas with commercial work, you’ll be servicing a company rather than an individual, which means that you’ll likely have set work hours and less flexibility.

 

If you decide that your business will offer both of these types of services, be sure that you’ve got an excellent field service management software to help you manage the vastly different time requirements, scale, prices, manpower, and expectations of both.

A good rule of thumb is to start charging on the higher end, you can always reduce your fees if your target market doesn’t react well to them.

Define Your Pricing Structure

You’ll need to define whether you’ll charge your customers based on hourly or fixed rate. The good news is that you can always mix these pricing structures together, or switch from one to the other depending on your customer base. Some customers are more comfortable with an hourly rate vs. a flat rate, but always choose the option that makes the most sense for your business structure and the nature of your work.

Hourly

As the name implies, an hourly pricing structure is when you charge by the hour (rocket science, we know). An hourly pricing structure can be beneficial for accounting for variables and changes that may occur on the job. It’s also great for longer-term projects you’re unfamiliar with, or are unable to fully assess the scope of the work required. Don’t worry if you don’t already understand the time and labor requirements for every type of service you could possibly offer. When you’re new to the industry, it’s completely understandable that you’ll need time and experience to assess these requirements.

 

One downside to an hourly pricing model is that it can appear expensive to your customers, because you also have to factor overhead costs, material costs, and other expenses into the hourly rate. Most customers you’ll encounter don’t understand how much it costs to run a company, let alone to make it profitable, and will compare it to their own hourly wage despite the obvious differences.

 

Customers can also misinterpret the hourly rate as profit, versus covering non-billable time for administrative duties, which can make a price increase very difficult to achieve without losing some of your customer base. At times customers will judge the time the job took to complete and feel slighted, as if you’re taking longer to complete a task just to jack up their rate, which you obviously shouldn’t be doing. Don’t worry, we didn’t assume you were, unlike your customers.

 

Sometimes it’s difficult to help your customers understand and anticipate cost increases should you encounter a problem on the job. If you sense that this may occur, be sure to explain to your customer that the project may end up being much more expensive than they originally anticipated. This could be because they underestimated how long the job would take, or may assume you lack the experience to execute the project well if you can’t give a rough estimate. As you can expect, this will cause conflicts and leave your customer feeling resentful at the end of the job, which guarantees that they won’t be doing business with you again.

 

It’s important to note that while it’s good to compare your price to competitors, you shouldn’t feel limited by their pricing. See what competitive advantages you might have over them that justify a higher price, like experience, quality, or specialization.

 

A good rule of thumb is to start charging on the higher end, you can always reduce your fees if your target market doesn’t react well to them. Keep in mind that if you set your hourly rate too low, potential customers will assume that your work lacks quality, which can be a turnoff to high profit clients, and clients in general.

How To Calculate Hourly Pricing

Step 1: Determine overhead

First, determine your overhead prices, or how much you plan to spend on business expenses annually (e.g. advertising, transportation, etc.).

 
Step 2: Determine How Much you Want to Make Annually

Next, determine how much you want your salary to be annually. In order to stay in the green, you’ll need to charge enough that you can afford this amount plus your overhead.

 
Step 3: Determine Billable Hours

Next, calculate how many hours you can expect to work per year – with a healthy margin of error. How many of these hours are billable vs. spent on administrative tasks?

 
Step 4: Determine Profit Margin

Next, determine how much profit you want to make. One of the benefits of owning your own business is that you don’t just make a salary – you’re able to profit beyond that.

 
Step 5: Compare To Your Competition

Gather your competitors’ prices so you can compare. You can use our competitor research tools to help you gather this information.

 
Step 6: Add It Up

Now, you’ll want to add your overhead cost, overhead salary, and expected profit margin. That’s how much you need to make that year. Next, divide it by billable hours leaving a little wiggle room in case of emergencies. And ta-da. Now you have your hourly rate.

By Square Foot

Similar to hourly pricing, this model charges by the size of the area you’re working on. For this type of pricing model, you’ll need to know the exact measurements each service requires, not just what’s provided to you by customers. This model is great for factoring in time, tools, and other overhead costs.

How To Calculate Square Footage

Draw out a rough sketch of the object you need to measure, with the areas you need to measure clearly labeled. From there, you’ll need to calculate the length and width of each wall.

 

Next, multiply the width by the length to get the square footage of each area: Length (in feet) x width (in feet) = area in sq. ft.

 

Finally, add each area together to determine the area’s total square footage. For speedy calculations, utilize this pricing calculator that will assess the area and allow you to assign a price. Or, alternatively, if you use FieldPulse’s estimate tool, you can insert quantities based on square footage and include detailed descriptions of products and services to estimates and invoices with just a click.

Flat Rate

A flat rate pricing model occurs when you charge a fixed fee for your services. This model is best used for projects you can easily anticipate the scope for, and rewards efficiency. It’s also easier for your customers to understand, as they can account for overhead and materials while still appearing affordable.

 

This model will help you to manage customer expectations, and make you appear more professional. Customers will also see you as being more motivated to complete a project either on schedule or ahead of it, as you’re not charging them by the hour.

 

However, it is important to note that flat rate pricing does have some disadvantages. For example, if a project takes longer than anticipated, you’re at risk of underselling yourself and losing money, which clients will nine times out of ten try to negotiate and haggle for.

How To Calculate Flat-Rate Pricing

Step 1: Calculate Hours For Common Services

Calculate how much time it realistically takes to perform common services – with a healthy margin of error.

 
Step 2: Determine Overhead Prices

Calculate overhead costs like labor and non-billable time, transportation, materials, and administrative costs. You can use our business expense template to help.

 
Step 3: Add It Up

Now, to determine your price for a service you’ll want to first figure out how long it will take, then times that by your labor cost/hourly rate. That gives you the price of labor. Next, determine how much parts cost and a fair markup percentage. Then, add that to your labor cost. Then tada. You have the cost of a repair.

 
Step 4: Compare To Your Competition

Research your competitors’ prices so you can compare your rates using our competitor research tools.

Define Your Billing Structure

While there’s nothing inherently wrong with lump sum pricing, you’ll want to be prepared for customers who want their costs to be itemized, and be sure you’re anticipating all potential costs.

 

Utilizing a software like FieldPulse can make this simple, as you can save your product and service prices inside the app to create detailed pricing, and then hide products and services from customers as needed or group them together by price.

Lump Sum

A lump sum structure is by far the most straightforward, but it’s important to note that it might worry customers that they’re not getting all the information they need to compare quotes. Also, another competitor might make their price seem more affordable in comparison by pointing out services you already offer. This opens up your customers to feeling ripped off if they don’t know all the details that went into the work you completed.

Detailed

A detailed structure is far more comprehensive, and helps to show your customer the full scope of the project. It will also help you to catch costs you might have missed in your estimate and protect profit margins. Most customers find this structure more transparent, and will be more likely to trust you. Keep in mind though that they may want to haggle prices because some items seem higher than they expected.

Create or Purchase a Pricebook

You may be asking yourself, what exactly is a pricebook? A pricebook is a comprehensive sheet of prices for supplies that you can use when pricing your services. Often, this is a spreadsheet of products and services that can be consulted as you fill out estimates or uploaded to your estimating software, to speed up the process.

FieldPulse has a pricebook feature you can use, or you can upload your own price lists directly into FieldPulse and create detailed invoices and estimates on the spot. Plus, you can even bundle products and services into common services for easy insertion in estimates and invoices.

Download our pricebook template

Mark-Ups

A markup is an amount added on top of products and labor in order to cover overhead expenses and increase profit margins. The average markup for a service business is around 10%.

 

Formula: Markup Percentage = Sales Price – Unit Cost / Unit Cost x 100

 

This is using a cost-based pricing technique, you’ll need to look at the:

 

  • Direct cost: exact expenses involved in providing a certain, like materials and cost of labor
  • Indirect costs: overhead costs and non-billable hours

 

Next, you’ll need to establish a profit margin – how much profit your company will make – and work backwards from that. Not sure about prices? It’s a good idea to research competitors to learn what price ranges your customers are comfortable with.

 

For help with this, use this Markup Calculator or FieldPulse’s integrated tool.

Gross Margin Percentage

Once you’ve established your pricing strategy and markups, it’s time to determine your gross margin percentage. A gross margin percentage is the percentage of revenue beyond the cost of the products/services. In other words, it’s what you’ll make once you’ve completed the work. Be careful not to confuse your gross margin percentage with a markup, these are two very different things.

 

While the gross margin measures the raw amount of how much you’ll make after the job is complete, the markup is the percentage difference between the cost of the product/service/labor and price of service.

 

For example, if an item costs $100 and has a 25% markup, 100 x 1.25 = $125. Then, to get the profit percentage, you would divide the $25 profit by $125 and you’ll get your profit margin: 20%.

Presenting Your Price

When you give a customer a rough scope of how much a job will cost, it can go by many different names that are often used interchangeably: bid, quote, estimate, and proposal. However, it’s important to remember that there are some key differences between these terms.

Estimates

Appearance-wise, an estimate includes the same elements as an invoice – the difference is that the price hasn’t been finalized. As such, it’s important to distinguish the estimate from an invoice (which is final) by clearly labeling it at the top of the page. Estimates are less precise “ballpark” figures for how much the service will cost, and is best used when you need to account for variables. However, you should have the final price ironed out to the best of your ability before taking a customer’s signature on the estimate.

Quotes

A quote is usually precise, and best reflects the final cost – fully defined in scope. Quotes are commonly used in flat-rate pricing models. Remember, you should avoid using the term “quote” on your materials unless you’re sure that the price listed on that quote is the final number the customer will have to pay.

Bids

Bids are most commonly seen in government and large corporate projects. The structure of your bid will depend on industry standards as well as the project, often resembling estimates. In these cases, you’re usually one of three companies bidding on a project.

 

Be sure to include the fully defined scope of the project, with line by line details as to labor, material, and overhead costs. You should also include a project timeline, and the purpose of the proposal and project. Also, you should evaluate your competition, and consider offering additional products/services that may be low cost to you, but are high value for your client to help differentiate yourself from the competition.

Proposals

A proposal is by far the most detailed of the four options, as it gives you a chance to sell yourself and your skills, as well as explain the scope of the work. You can include elements in your proposal like customer testimonials and examples of your work to establish trust. Proposals also lend themselves well to more generalized projects, and will usually include a project timeline and the purpose of the proposal and project.

What Should Be Included?

No matter which pricing structure you chose to utilize, you should generally always include the following:

Tiered Pricing Options

Some contractors provide multiple pricing options like Good, Better, Best where there are tiered pricing options and side-by-side comparisons so that customers can easily compare and visualize the benefits and takeaways of certain options.

 

Offering tiered pricing helps customers to see the difference between services far clearer than they would if you simply explained the options to them, and fosters a sense of transparency and accountability, which is a huge plus. For example, if a customer needs you to repair their HVAC unit, you could offer a simple repair package, an install of a used unit package, and an install of a new unit package.

Signatures

Be sure to always include a line for signatures in your finalized documents. It’s very important that you have the customers sign any pertinent documents or contracts, as this will protect you, your business, and the customer should any issues arise. Whereas if you simply required a verbal agreement and an issue did occur, it would be up to a court to decide the fair outcome, which might not be so fair for you.

 

While it may sound counterintuitive, digital signatures actually offer far more security than physical signatures, as they’re easier to store/access, less likely to get lost in the shuffle, and carry more information like the exact time and date of signing, and more. It’s also far more convenient for your customers, and you should always be taking every opportunity to make the sales process as easy and simple as possible for them. So, try using an app like FieldPulse for easy digital signature collection and storage.

Contract/ Terms and Conditions

You can learn more about contracts in our detailed guide here, but in general, this document outlines the terms and conditions of the services rendered and is legally binding once signed by both parties. In this document, you’ll want to include the cost and payment terms and anything else that could cause conflicts.

Warranties

There are several types of warranties you can offer – on materials, labor, the full system, or even just a warranty through the manufacturer which may cover the cost of you coming out to fix the issue. Warranties need to be detailed and specific in case of misunderstandings and you need to make customers fully aware of the terms and conditions. You can learn more about warranties here. You can learn more about warranties here.

Pricing Guides

If you’re looking for some examples on how different specializations in the trade industry are pricing their services, take a look at our…

 

Industry Pricing Guides:

 

 

Deciding on a pricing strategy is a tedious process with lots of factors to consider, but hopefully after reading this guide you’re feeling a little more prepared to take on this task. We hope that we’ve answered all of your questions about pricing to your target market, what’s a fair price, and how to balance all of this while still growing your business’s revenue.

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