Pricing your services is one of the most important business decisions you'll make. Whether you’re an established plumbing company or an up-and-coming drain cleaning business, the right economic strategy can make or break your success. Price too high and you'll drive away customers, price too low and you may struggle to cover costs. So, how can you find the sweet spot? It takes a little research and reflection, but these five steps are a great place to start.
1. Think about your goals
You'll want to begin by determining your goals for the year. Consider things like
- Annual Salary. How much did you make last year? How much do you need to make to be comfortable and motivated?
- Price Change Impact. Can you increase your pricing but continue to provide enough value to keep quality customers (the ones that are concerned about value and not just paying the lowest possible price)? As they say, if you double your prices and lose half your customers then you win.
- Revenue Per Customer. Your revenue per customer directly impacts your company's profitability. Can you increase this in the coming year?
- Market Position. Are you a value leader? Do you compete by offering the lowest pricing? Or do you set the gold standard for drain cleaning services in your area? Be wary that your pricing, branding and presentation match the position you want to be in.
- Market Share. How dominant was your plumbing and drain cleaning business in the local market last year? Do you want to expand on this? You can figure out market share by comparing your sales within a certain time period to the sales of other establishments in your industry using information provided by the U.S. Census Bureau. For example, the U.S. Census Bureau reported that in 2012 there were 1,689 plumbing, heating and HVAC establishments in Minnesota. Average revenue reported for each establishment was $1,820,000 and average revenue per employee was $196,000.
2. Do some analysis
Once you've established your goals, a little research can help you figure out how to apply them in the context of your market and the customers you want to reach.
First, take a look at your competition. How many other companies offer plumbing or drain cleaning services in your market? Look up their prices. In general, you have to offer both great service and value if you want to stand out.
Think about your target customers as well. How do they feel about the competition – and more importantly – your business? Social review sites like Angie's List, Yelp or Google can give insight into what customers are saying about you, your competitors and the going rates for similar services.
3. Consider your costs
Now it's time to crunch some numbers! Understanding your expenses is key to setting prices that help you meet your goals.
Identify the costs associated with performing your services. Equipment, materials, travel, labor and similar expenses should all be factored in. Be sure to divvy these up between fixed and variable costs:
- Fixed costs are consistent regardless of sales (rent, salaries, equipment depreciation, etc.)
- Variable costs rise as your sales increase (materials, hourly labor, travel expenses, etc.)
If you want to make a profit, you'll need to set a price that's higher than your variable costs plus an amortized share of the fixed costs.
Let's say your fixed costs total $5,000 per month and you’ve calculated that your variable costs are $80 per service call. If you serviced 100 calls in a month, you would need to charge an average of $130 per call in order to break even ($5,000 in fixed costs divided by 100 repairs plus $80 variable cost per repair).
4. Determine value
With a little math under your belt, consider your audience again. What is the perceived and real value of your services?
Your prices should align with why customers need your skills. In the case of plumbing and drain cleaning, most of the time, customers cannot make these repairs themselves. They're coming to you when they need your highly-trained skills the most – and they also often need support to help manage the situation.
Superior service, support and skills all factor into good value. Having top-of-the-line equipment to get the job done will also show your clients that you've invested in your business and want to deliver value and good quality. When they see this, they'll be more comfortable paying a premium. Along those lines your branding, the appearance of your staff, work presentation and the guarantee you offer can all be used to establish a premium.
Think about what differentiates your service and skills from the competition. If you're a newcomer, you can establish your value and market share by starting off with smaller projects at a lower price point. Alternatively, you can charge less for entry-level projects, and then move into a premium price range for more involved services. This can help you establish a rapport with your clients so they can trust that the higher price tag is worth it.
5. Pick your pricing strategy
Choosing whether to charge a fixed price per service, or charge by the hour, is one of your biggest decisions.
- Fixed pricing. Setting a fixed price for a job keeps things simple – the price is predictable, and your customers know exactly what they’ll have to pay before you begin work. But, customers may balk if a complicated job only takes a little bit of time, and the fixed price was high.
- Hourly pricing. Hourly pricing allows you to bill for total time spent on the project. It’s a good option for longer-term projects and can help you easily keep track of costs like labor – but customers may feel like they have to watch the clock. Charging by the half-day or a full-day allows you to quote in increments, so your customers have some idea of what they should expect to pay.
With that decision made, it’s time to implement your overall pricing strategy. Consider one of these common approaches, or create one of your own with the research you’ve done:
- Economy pricing. You can offer a low price to your customers, because you're able to perform services at a low cost. Service providers using this strategy run the risk of being considered “cheap” or “inexperienced”.
- Premium pricing. You price your services at a higher rate, but you offer a very high value to customers. Service providers using this strategy run the risk of alienating customers because of a high price tag for services without any justification, and other competitors can easily can come in at a lower bid.
- Competitive pricing. You offer the same rates as your competitors, but attract customers with your superior service or an incentive. Plumbers and drain cleaners using this strategy need to be careful not to get into a price war with their competitors.
- Value pricing. You price based on the value for your customers and how willing they are to pay for your services. This pricing strategy helps avoid competing on price and/or the need to justify premium rates.
Today, more businesses are choosing value pricing as their strategy. You don’t want to be a service provider that is considered cheap or unexperienced, and it is hard to justify premium pricing without brand recognition in the market. A pricing strategy that doesn't fit your business can hinder your growth. If you equip yourself with goals and a thorough understanding of your customers and the competition, you'll be ready to set the right price to ensure profitability and long-term success.
For assistance in your hourly rate calculation, check out the Hourly Rate Calculator for Plumbers and Drain Cleaners. This free resource helps you evaluate costs and set a rate that will help you meet your business goals.
The Drain Business is a series of articles written to help plumbing and drain contractors build and grow their business. For more resources like this, subscribe to MyTana's newsletter, where we'll keep you up-to-date and informed.