The way you price out your services ultimately impacts your cash flow. If managed incorrectly, it can cut to the heart of your business. That’s why it’s important to approach your pricing systematically and time your ingoings and outgoings to generate a healthy profit.
Service businesses fundamentally require a different calculation when considering pricing. This is because with a product, you can just take into account manufacturing and purchasing costs, other COGS, add a margin and you have a good baseline of what your pricing should be. Service based pricing can be much more variable depending on the task.
Why Service Business are Different
When it comes to pricing your services, the lines on how much a specific thing costs isn't so clear when compared to a physical product. For example you’re dealing with variable labor costs for your employees. Certain materials will always be needed for certain jobs, and no material needed for others; this must be calculated. It is crucial to have accurate job quotes which capture all these costs.
As an example, if you own a cleaning business, some have carpet which requires a lot of extra cleaning materials in the form of rug shampoo. It may involve moving a lot of furniture which increases your labour costs.
Consider What Your Average Costs Are
It is important to have a baseline from which you can make accurate quotes depending on how the specific job differs. Mentally run through a task from beginning to end and carefully consider everything needed, try and remember every time something has to be purchased or fees to be paid and factor it all in.
Overhead also has to factor in as it ultimately impacts your profit. It is important to realise that overhead is generally indirect costs related to running the business, such as your leasing costs, subscriptions necessary such as sales software and utility costs.
A conversation with your accountant, bookkeeper or virtual cfo can make this whole process much easier. Don’t make these estimations based on your gut, evidence in the form of monthly or annual records should be used wherever possible.
Competitors Can Give You a Range of Figures
People in the same space as you can show how businesses can be run and pricings offered for their services. If you’re charging more than your competitors, it is important to clearly communicate what your unique selling proposition (USP) is. What is the thing that sets your offering apart and is worth them paying more?
If you think your competitors are overcharging, this could be an opportunity or a warning that you have not considered your costs carefully enough.
Improve Cash Flow
When considering pricing for a business, its direct impact on business cash flow must be a main consideration. A great cash flow tip is to always try to accelerate the flow of incoming money such as paid invoices, and delay the flow of outgoing cash such as money to suppliers.
If you have increased your prices recently, did that result in losing customers? If you didn’t see a big dropoff or experienced issues with closing sales then you would have a possibility to raise prices if you’re concerned about impending outgoings causing issues with cash flow.
Comparison to previous year's figures as well as general cost of living increases can give you a benchmark to work your pricing to. How much more is your overhead this year, is that a concern percentage wise?
Highlighting the ‘point of difference’ that your specific service offers can make the hard to see benefits or advantages very clear to your customers, bringing with it more business as customers can see the value in choosing your business over someone else’s.
Cash Flow is Key
Struggles with pricing for a service based business are all too common but you can overcome this with a great plan. Your general strategy is to consider your average costs, compare to rivals and always try to improve your cash flow.
By pricing your services effectively it helps with accurate quoting. Making sure your pricing is in sync with the market or at the least emphasising your USP should be among the main considerations. Finally focus on your cash flow and always try to ensure your income is coming in as quickly as possible, with outgoings delayed to keep the business solvent.