In Simple Principles for Setting Prices, we talked about some best practices that should guide every service business owner when pricing a job.
Now let's dig into what kind of things you ought to keep in mind when figuring out how to price your jobs. We'll work through a sample job in the process. We'll also keep in mind that when we discussed knowing what we need to earn in Simple Principles for Setting Prices, we said we want to earn $5,000/month, and we need to earn at least $25/hr.
For this exercise, we're going to violate some of the principles because we all tend to think we've got a good feeling of what price a job should have (even when we're customers, we still think like that). Let's imagine we haven't taken a look at the work to be done, but based on what the customer said, we think it's going to be a $500 job. We've even told the customer it should be about $500.
Time to figure out if we're right.
Know your costs
Knowing your costs is the most important step of pricing a job that will earn money, not cost money. Here's some questions you should be able to answer:
- What supplies/materials do I need to get this job done?
- Is the customer purchasing supplies directly, or will I purchase them and be reimbursed?
- How much materials/supplies are needed?
- How much of my time is needed to get this job done?
- How many workers are needed to get this job done?
- How much of my workers' time will it take to get this job done?
- How much do my workers cost per hour?
- Are there any special things being done on this job that will take longer than usual (and increase time and costs)?
- Is there anything required on this job I haven't done before, and can't accurately estimate the time necessary to complete it?
We could go on, but we hope you get the idea here. Whatever your specific industry is, there are certain things that are required on each job. Your goal as a business owner is know what these things are, and how much they're going to cost. Think through each job and be able to tick these questions off like a checklist in your head.
You should be able to put actual numbers on each of the costs required to get a job done. Don't stop until you know all the costs.
Based on what we've said about the sample job, it should be clear we can't answer all the questions. We haven't put our eyes on the job. Which means we probably can't accurately know how much we need in the materials/supplies department. We also can't say yet if anything about this job is going to cost us extra time. We're going by feeling here—and that should be a red flag. Going down our cost checklist should let us know it's time to put our eyes on the job.
Count the costs
For this step, let's assume we actually visited the customer to get eyes on the job. Now we know what we need to total all the costs. Let's break our sample job out like this:
- Supplies/materials: $300
- My time: 5 hours
- Number of workers: 3
- Worker time: 5 hours
- Worker rate: $10/hr
We're going to pretend we have no special needs outside the supplies and materials needed to get the job done. We're also going to say that we're purchasing all the necessary materials, and the customer will be billed on our invoice for the total cost. So, let's total it up:
- Supplies: $300
- Worker salary: (3 * $10) * 5 hours = $150 labor
Alright, now we know that it's going to cost us $450 to get this job done. So, if we quoted the job at $500, we were pretty close, right? We made $50, right?
We might be feeling pretty good about how close our gut feeling was. But wait. Something's wrong here. Do you see it?
It's easy to forget to include the cost of paying yourself—and setting a bit back for the company—when you price a job.
Remember how we said we needed to earn $25/hr? If we only have $50 left over, turns out we're only paying ourselves $10/hr. That means we're paying ourselves like our employees/contractors, not like the business owner. Even worse, there's nothing left for the company to keep in the bank after everything is paid for. We are losing money on this job!
Paying yourself must be priced into the job
Earning a living is one of the primary reasons you're running your own business, right? When you're just getting started, the easiest thing to forget is making sure you're earning a living. When they're so focused on getting jobs and getting them done, new business owners often assume making money will sort of just happen.
If we've learned anything from working with small service businesses over the years, making money isn't something that just happens. You have to make it happen.
You can't earn a living if you don't price paying yourself into the job. Your business cannot earn a profit if it isn't priced into your jobs. There are a few strategies you should consider, and we're going to run through them.
PS: We're going to talk more about making sure your business earns a profit in our next post, so we'll skip that part for now. This post is focused on making sure you earn a living.
Pay yourself an hourly rate when you're starting out
One of the simplest pricing strategies when you're starting out is to think of yourself as an employee of your business. You set a rate for your time when you're on jobs, and you add it to the price of the job. Remember how we said we needed to earn at least $25/hr earlier? That means just to pay ourselves, we should add at least $125 to the price of this job, bringing the total to $575. Now, that still doesn't allow your business to earn any money, but at least you will be earning something from the job.
Pay yourself a percentage of each job
As you grow your business, you might find you're closing jobs to keep the work flowing and the business growing, but you're not necessarily actively doing the work on every job. Perhaps you have some people working for you, and they're able to get the work done, while you're able to keep working on getting new clients and jobs. This is a good place to be, of course, but it suddenly becomes a time when adding yourself and your hourly rate to a job doesn't make good sense.
When you start to encounter these growth challenges, it may be time to consider paying yourself a percentage of the job cost. Let's take a quick look at what that would look like on this job.
So far, we know the job is going to cost us $450 for supplies and our 3 workers. And we know if we pay ourselves an hourly rate, we need to add another $125, bringing the price to $575. Let's say we're growing, and we could be out doing some quotes for new work with the 5 hours our workers will be on this job. Assuming they can do most of the work on their own, and maybe only require us to check in and ensure everything is going well, we can play with some different percentage-based pricing strategies to compare the price of the job and see what's best for us and the customer.
- Pay yourself hourly: $575
- Pay yourself 10% of job cost: $495
- Pay yourself 20%: $540
- Pay yourself 30%: $585
So, now we see that our hourly rate comes out just under paying ourselves a 30% rate of the job cost. Maybe we'd like to give the customer a bit of a break to sweeten the deal, and we land on a 20% rate. If we pay ourselves a fair and decent percentage-based rate, we should find we're still earning a living from each job. While some jobs may not earn us as much, it seems to be a fair trade when we're no longer having to put the 5 hours into completing the job ourselves. What's more, we stay free to focus on finding more work to keep our business running and growing smoothly.
Pay yourself a day rate
There's one other pricing strategy that doesn't often get used in service industries, but can be fairly easy for both calculating pricing for a job, and ensuring we're earning a living—using a day rate. While it may not be the right strategy for every service business (especially those which typically do not measure jobs in terms of days). However, if your service business is the kind whose jobs take days to complete, you could consider a day rate to make pricing the job easier on you and your customers.
Day rates are ideal for jobs where the costs are easily known, predictable, and won't change. Whatever you're doing, if you can figure out the total costs, and add a flat rate per day to the job, your pricing will be easy to manage. What's more, it can free you from worrying so much about tracking each individual hour worked—some days might wind up being 6 hours of work, others might be a full 8 hours, and there could even be longer days. If you set your rates right, you can always be sure you're making money for every day worked.
Never work for free
Some might think this isn't even worth mentioning, but many service business owners who are just starting out can fall into the trap of providing services without charging for them without even realizing it. We were recently talking to one of our small business users who was telling us about how they do some work replacing items in homes like light bulbs and blinds that get damaged whenever they do a move-in/move-out cleaning for a property management company. They told us how they go out and buy the items that need replacing, then do the work of replacing them. We quickly realized they never mentioned charging the property management company for doing this work. They just did it. We helped them see this was doing work for free, and that they should be charging for this kind of maintenance work, because it's not the kind of thing you expect a cleaning company to do.
There are all kinds of examples we could come up with, but the core point is it's easy to give work away for free if you aren't watching out for it. Your customers might ask you to do one small thing and, because you're trying to provide good service and make your customers happy, you agree to it. But then you don't add it to your invoice, or ask the customers to pay for the extra time you put into the job.
Your customers should be paying for all the work you do. Make sure you charge them for it.
That was quite a lot to get through. Let's distill the major points down to recap how to price a job to make money:
- Never price a job before you know all the costs—identify all the things you'll have to pay for to get a job done
- Don't price a job before you know exactly how much it costs—don't quote a price till you've added up all the costs
- Paying yourself must be added to the price of the job—or you won't make any money
- Never work for free—always charge for all the work you do
That's it for now. In our next post, we're going to dig even further into more pricing territory by covering how to keep a handle on your business expenses so you can be sure your business is earning money whenever you price a job.