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.
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.
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.
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.
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
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
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.
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.
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.
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.