Are You Charging The Right Amount For Your Service?
One the biggest dilemmas that business owners face is, “How much do I charge for my service or product?” Even companies that have survived the three-year ‘do or die’ pinch continue to struggle with how to adjust the prices and at what rate. With the advent of what Forbes Magazine dubbed the ‘millennial startup revolution,’ endless debate and volumes of information have been written on this very topic over the last decade. Where much of the divergence in business rate analysis has come from is in actually crunching the numbers to a solid figure. What most experts do agree on, however, are all the contributing factors that determine your final price tag. There are lots of them. We highlight some of the most recognized below.
“Wake Up, You Gotta Make Money”
Leave it to a modern pop music group (Twenty One Pilots) to establish the foundational credo for a successful business. For whatever reasons, be it some perceived moral imperative (greed), character flaw (lack of confidence) or fear of success, it’s difficult to get startup business owners past the mental block of making money.
Let’s be honest. You’re not greedy, and you’re not out to swindle your clients. Once you get past the stigma of making money, you will see that you’re building wealth, thus, building the empire that is soon to be your contracting company. This is not greed. This is smart business. Therefore, the question you should always lead off with is, How much money do I want to make this year? Once you establish a calculated figure, all other decisions can be broken down into a systematic game plan that includes how much you should charge. If this task is too difficult, then seek counsel from a trusted financial consultant who can help with the details while finalizing your company’s figures.
Have a Solid Understanding of Your Market
When most business owners hear the word ‘market,’ the first thought that comes to mind is demographic. And while demographic plays a huge role in determining the scope and range of your market, there are items on the checklist to consider. Elizabeth Wasserman of Inc. shares these bullet points.
- Know Your Customer. “Undertaking some sort of market research is essential to getting to know your customer. This type of research can range from informal surveys of your existing customer base that you send out in an e-mail along with promotions to the more extensive and potentially expensive research projects undertaken by third party consulting firms. Then figure out which segment you’re targeting and price accordingly.”
- Know Your Revenue Target. “You should also have a revenue target for how much of a profit you want your business to make. Take that revenue target, factor in your costs for producing, marketing, and selling your product [or service] and you can come up with a that you want to charge.”
- Know Your Competition. “It’s also helpful to look at the competition — after all, your customer most likely will, too. Are the products or services offered comparable to yours? If so, you can use their pricing as an initial gauge. It may even be worthwhile to prepare a head-to-head comparison of the price of your product to your competitor’s product. Be brutally honest in your evaluation.”
- Know Where the Market Is Headed. “Clearly, you can’t be a soothsayer, but you can keep track of outside factors that will impact the demand for your product in the future. These factors can range from something as simple as long-term weather patterns to laws that may affect future sales of your products. Also take into account your competitors and their actions. Will a competitor respond to your introduction of a new product on the market by engaging your business in a price war?”
The Cost of Making a Profit
A fundamental principle of pricing your contracting service is that you need to meet your expenses and then determine the profit margin. You need to know how much it’s going to cost provide your service. It’s also important to have a solid understanding of how much you need to mark up your service and how many projects you’ll need to turn a profit within a given time frame.
Don’t forget that the cost of entering into a contracting project is more than your service fees. It will also include various overhead costs and fixed costs such office rental and utilities and variable costs such as equipment purchases and maintenance. You must enter these expenses in your assessment of how much it costs to perform any given job. This is where many businesses miss the mark. They either don’t account for all their costs, and offer rates that are too low, or they add items which are not essential for running the business and overcharge for their services. If you spend time giving free estimates and quotes, this needs to factor into your pricing as well.
Determining The Value of Your Service
One of the biggest mistakes that new contractors make in seeking their first few clients is to offer a bid that’s too low in hopes of landing the gig. But the rule of thumb of perceived value is the same for contractors as it is to any other industry. If you charge too low, you’ll cross the threshold of being seen as affordable into the valley of being perceived as cheap. The cost of your service should be in direct correlation to the quality of your work. If you can provide the same level of construction as an experienced contractor, then your rates should be reasonably competitive. Sure, take a few of the lower paying jobs, but don’t stay there too long. You may find that you’ll never get out of that bracket.
To summarize, here’s what you need to determine how much money you should for your construction service.
- Know your market
- Know your revenue target
- Consider the cost of running your business
- There is a correlation between the value of your company and the quality of your work
· Embrace an entrepreneurial spirit and go make some money!