Being asked what your services are worth can seem like a loaded question. To ensure your home service business is around for future generations, a lot of thought needs to go into how to price your services. If you’re just starting a business, you may think the primary goal is to underprice the competition. Longtime business owners, meanwhile, may still think having the lowest price in town is the only way to compete. We’re going to show how to price your home services to make money and how to sell home services based on value instead of price.
Pricing home services correctly can be the difference between a business thriving and a business just barely surviving. It’s also a lot easier said than done. When bidding out a project, the focus is often on materials and labor costs. But there are more costs, such as overhead costs, that need to be figured into the pricing before you send a project estimate back to your customer. Overhead costs include rent and utilities, business licenses, regulatory compliance costs, insurance, advertising expenses, software, and office supplies. If you don’t factor these overhead costs into the pricing of your home services, your business will struggle to make a profit.
So how do you calculate overhead costs for your home services business? First, we need to calculate the overhead rate. We can do this by dividing the monthly overhead costs (indirect business costs) by the monthly sales volume.
Monthly Overhead Costs / Monthly Sales = Overhead Rate
Your calculation might look something like this.
$5,000 (monthly overhead) / $50,000 (monthly sales) = .1 or 10% (overhead rate)
In that case, padding your estimate with 10% to make sure you’re covering overhead expenses – in addition to labor and cost of materials – is a start, but that still doesn’t mean you’ll turn a profit. You’ll have to add an additional profit percentage to your project bid as well.
Scott Wadsworth from the Essential Craftsman provides some great insight on how to price your services and turn a profit in his video 5 Mistakes Most Contractors Make. In the video, Scott mentions adding in an additional percentage for profit. He adds an additional 20% of margin and admits that it took a long time to get to that approach. The key is to shift your mindset about the work you’re doing. Because you’re not putting together an estimate for yourself or someone who understands how to do the work themselves, how you personally feel about the price of your work is irrelevant. What you need to identify (and create) is the value your customers place on the services you provide.
Value and price are different things. Value is what a person receives from a service, whereas price is what a person pays or gives for a service. When pitching value over price, the conversation with the potential customer changes to what the customer is receiving beyond the service. As Blair Enns, author and CEO of Win Without Pitching says, “Price the client, not the job. And base that price on value, not inputs or outputs.”
One way to show value over price is to put the final return on investment to the homeowner. Think of the end of a home improvement show, when the host of the show says, “You put $50,000 into this renovation which made your total investment in your house $500,000, but now you could sell it for $575,000. That’s a profit of $75,000!”
Another way to pitch value is by how quickly the service can be completed. When you save the homeowner time, you save them money, adding value to the project. This is especially effective when it comes to repairs. If a homeowner needs their plumbing, HVAC, or electrical systems repaired, they’re probably in a bind! They’re probably willing to pay more for someone who can fix the problem fast.
Your customers also place value based on how they are perceived by their peers. Having the cleanest house, the best landscaped house, or the most uniquely painted and decorated home can set homeowners above the status quo. When your services have the capability to achieve the homeowner’s wildest dreams, you can charge a higher price because of the perceived value.
When it comes to pricing home services, business owners need to know their customers, their competitors, their costs, and how far they would like to grow their business. Knowing all these factors will help determine the right price for your market. Once you have the right prices set, then it all comes down to how you pitch your services to potential customers, based on value or price. Anyone can pitch a lower price, but it’s a true artform to pitch value with a great price to win the deal.
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