In simple terms, a markup is an amount added to the cost of material and labor to cover overhead and profit. In the world of service-based business, such as HVAC, plumbing, electrician and pool service companies, markups are integral to generating profit. Most businesses account for markups when establishing prices for the various services they provide.
Even with countless service-based businesses on the market today, there are tons of factors that influence industry markups. To ensure your business offers fair pricing for customers and remains profitable, read this blog to learn more about markups and how you should set yours.
Navigating the Tricky Markup Process for Service Businesses
Where product-based businesses can generate a profitable price based on labor and material costs alone, service-based business pricing can be a bit more tricky. With customer requests and requirements ranging significantly from job to job, it can be tough to establish one price that both covers the cost of work and provides a profit. For instance, a simple pipe repair job for one customer can turn into an entire excavation process for another.
To develop pricing that benefits your business, your technicians and your supporting customers, there are a few best practices you should keep in mind.
1. Calculate Your Costs
Undercharging for your services? Not only will you pay out some of the costs a customer should have covered, but you’ll be stuck with negative profits as well. For service-based businesses, the best way to avoid undercharging — and generate profit — is by utilizing a cost-based pricing technique. Using cost-based pricing, a business owner adds up the cost of their services from a direct and indirect standpoint.
Direct costs are the exact expenses involved with providing a service. From HVAC to pool cleaning companies, direct costs typically entail the materials required to complete the job and the cost of the labor. While this seems quite simple, it’s the indirect costs that can get confusing. Indirect costs are any expenses that are necessary to operate the business but are not connected to specific jobs. These costs can include company vehicles, marketing, utility and insurance costs.
Indirect costs are often what set product-based markups apart from service-based markups. With both direct and indirect costs in hand, you can begin to calculate your average monthly costs as well as how much you require to cover these costs and generate a profit.
2. Conduct Market Research
Although a variety of market factors influence how you establish your markups, some of the most prominent elements are your competitors and local standing. While you shouldn’t base your prices solely off competitor research, it’s helpful to understand what others are charging and the level of service that comes with those prices when developing your markups. If you plan to charge more than a local competitor, you will need to prove to customers why your services are unique and offer a better solution.
Next, you’ll want to take a look at your clientele. From location-specific needs to average income, local demographics can help you gain a better understanding of what customers are willing to pay for certain services. Conduct a basic market study to learn a bit more about your target customers and gain more personalized insight on what price ranges your target market is comfortable with. Though you might not want to aim at the top of their price range, you can determine a markup that’s fair for customers and profitable for business.
3. Establish a Profit Margin and Calculate Your Markup
To ensure business profits, you must establish a fair profit margin that works best for your company. A profit margin for service-based businesses is how much profit your company will bring in after subtracting your cost. Although profit margins will vary depending on industry, the typical average markup for a service based business is 10%.
To construct a price for a specific service, take the cost of the service and multiply it by your chosen percentage. Take that total and add it to the original cost of service. This sum is your final price with a markup. It will allow you to cover the total cost of the job and generate a percentage of profit of your choosing. Remember to account for your indirect costs when establishing this final price by constructing a daily average to be included with your service cost or by adjusting your profit margin percentage.
For service-based business owners, you may be wondering if hourly costs should be factored into your pricing as well. However, in industries such as HVAC and plumbing, common job needs can change instantly and can require a lot more material and labor than originally expected. To better protect profits, it’s wise to charge on a per project basis to ensure all material and labor costs are fully accounted for.
Keep Your Profits (And Your Payments) in Check
Establishing service prices for your service business can be tricky, but managing the influx of these payments can be even harder. Fortunately, it doesn’t have to be. Using FieldPulse’s field service management software, service-based business owners can send invoices, collect customer payments and record business transactions with the touch of a button. Schedule a demo with FieldPulse today to learn what our field service management software can do for your service-based business.
