Do you run a home service company? Whether you’re a painter, plumber, or pest control company, the way that you price your projects can make or break how successful it is.
There are many different factors to consider when pricing a project, and often people will just settle for what other companies are charging without considering their own unique situation.
There’s no point in doing a project if it doesn’t come out profitable…
Here are the most important factors you should consider when pricing if you want to reach higher levels of profit!
Don‘t Rely On The “Going Rate”
There is no “going rate”. There are some certain factors that determine how much you should charge for a project, but the bottom line is that if you want to earn more and work less, then it’s totally okay (and recommended!) for you to price your projects higher than other companies.
The truth is, most contractors use the “going rate” as their pricing model, without realizing that those other contractors don’t price to make a profit.
Many contractors started in the field and then decided to open a business.
They never learned the importance of knowing how to run a profitable business, so they are often working at a loss or barely breaking even.
The home services are a very lucrative industry. There’s no reason you can’t make a comfortable living running a home service company, but you do have to be smart about how you price your projects.
If you charge less than what the project costs (what it’s worth) then of course like in any business, with the law of supply and demand, that means you’re going to be able to take more jobs from people because nobody else will be bidding as high.
The problem with this is that it ends with you working more hours for less money and eventually getting burnt out and/or not being able to survive because you don’t have enough profit.
That’s why you should know how to charge a fair rate for your projects.
And if you’re consistently undercharging people in the beginning when you’re just starting out, then people come to expect low prices from you every time.
It will make it harder for you to charge higher prices later and get away from the cheap customers.
Don’t just settle for what other contractors are charging…
Set your standards higher and aim for better profit margins.
Understand Job Costing
As a business owner, you need to know how profitable your company is. That means job cost analysis should be a top priority while thinking about prices.
Job costing helps you calculate what level of profit margin your business can run at before making changes or worrying about getting paid.
Using this information, you can be confident when quoting jobs and giving estimates that your business will stay profitable.
If you don’t know how much it’s costing you to complete a project, then there’s no way of knowing if the customer is paying too little.
When running your business, make sure that you take time to job cost for Every. Single. Job.
Job costing simply means to figure out how much it costs you to complete a project, from start to finish.
That will help you know what to charge to make a profit, instead of just barely breaking even (or worse, losing money!).
A lot of companies will only job cost their materials and maybe their labor hours, but that’s not enough information — every single aspect needs to be considered.
Remember: if you want to manage something you have to measure it.
So if you don’t take the time to measure your money, there’s no way for you to know if you’re working at a profit or loss.
Accurate job costing includes anything that is an expense to your business during a job.
Some examples include:
Labor hours (total hours worked)
Materials
Permits if applicable
Equipment rental
Fuel and travel time
Any subcontractors
Even overhead for things like your shop space, office employees, marketing, etc. should be considered when you job cost.
The more you know about how much a project costs, the more accurate your pricing will be.
You don’t want to rip off customers, and you don’t want to rip off yourself, so you need to prioritize job costing!
Calculate Profit Margins
To run a profitable business, you have to understand profit margins. Once you know how much it’s costing you to do a project, it’s easy to figure out what kind of profit margins you can make.
Profits are just the leftover money you have from a job after subtracting all of your overhead costs and “hard” expenses like materials, labor, etc.
Profit margins will give you a guideline as to how much you’re making off of every project.
Profit Margin = Total Profit / Project Cost
So if your profit margin is 30%, then that means for every $1000 it costs you to complete a project, the customer pays $1300 when all is said and done ( $1000 + 30% profit margin).
Profit margins vary from industry to industry, but as a contractor, you should aim for 50% profit.
This will give you the financial flexibility to pay yourself and your employees a healthy salary, and have enough leftover to reinvest in your business. That’s how you can scale.
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Another good rule of thumb is that the more expensive a job is (in total cost), the higher the profit margin should be. This allows for a little safety net in case something goes wrong with a job or other unforeseen circumstances come up.
And once again remember; you can’t manage it if you don’t measure it.
When running your business for profit, make sure you know how much it’s costing you to complete a project, and then set your profit margins.
Make sure you have a good profit margin on every job — even if it means raising your prices.
Customers should respect what you do and pay you what you’re worth.
But that can only happen if YOU know what you’re worth.
And you can only know that if you understand the essential numbers of your business and how to price a project for a profit.
Do you take time to job cost every job? Do you know what your current profit margins are? What are some other tips you use for pricing a project? Share your thoughts in the comments!
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