When you started your business, how did you land on a price point for your services?
I think it’s no secret that the key to a successful business is profit. High profit = good. Low profit = bad.
Seems simple enough, right? Yet, as business owners, we often forget to assess the profitability of our services regularly.
After working with hundreds of small businesses, we’ve learned that most business owners aren’t business experts. They are simply amazing at their craft and decided to start their own business.
So it’s not surprising when we find out that when it comes to pricing their services, there was very little number crunching involved. They either price based on what others are charging, or take a guess at what they believe is a “fair” price.
If this sounds familiar, it’s not too late. You can easily evaluate the profitability on all of your services, and this blog post will show you how.
Cost Analysis
The first step in determining the profitability of a service is to conduct a cost analysis. This involves identifying all the costs associated with producing or delivering the service. Here are some essential cost components to consider:
- Direct Costs: These are costs directly tied to the production or delivery of the service. This includes materials, labor, and any other expenses directly related to performing the service.
- Indirect Costs: These are costs that cannot be directly traced to a specific product or service but are necessary for the overall operation of the business. Examples include rent, utilities, and administrative salaries.
- Variable Costs: Variable costs change with the level of production or sales. Examples include raw materials, packaging, and shipping costs.
- Fixed Costs: Fixed costs remain constant regardless of production or sales levels. These include rent, insurance, and salaries for permanent staff.
- Overhead Costs: Overhead costs include all the indirect costs associated with running your business. It’s easy for a business to have inflated overhead costs as they can often fly under the radar. It’s important to keep a pulse on these and reduce when possible.
Pricing Strategy
Once you’ve identified your costs, the next step is to evaluate your pricing strategy. You should set a price that not only covers your costs but also provides a margin for profit.
To calculate the minimum price you should charge to break even, divide your total costs by your expected sale. Your profit margin is the difference between your selling price and this break-even price.
It’s important to price your services for growth. For example, a plumber who is doing all the work may have healthy margins. But when they decide to hire someone to handle the labor, those margins can disappear.
Keep those things in mind when setting your pricing structure. Will you hire someone to deliver the service later? Will you need a bigger building? What do you hope the business will look like 3, 5, 10 years from now and price accordingly.
Monitoring and Adjusting
Determining profitability is an ongoing process. It’s important to regularly look at your margins and see if they need adjustments.. If your product or service is not meeting your profit goals, be prepared to adjust your pricing, marketing strategy, or production process.
We know first hand that this can be an overwhelming process for business owners. That’s why we have a team of Profit Coaches ready to help. They can guide you through the process and make sure your services are as profitable as they can be. Click here to schedule a free consultation.
