You could simply take a survey of your competitors and then try to undercut their prices, but not accounting for all your costs can quickly lead to financial disaster. Most businesses fail because their expenses exceed their income and they don’t manage their cash flow.
There is a basic formula for setting appropriate prices. It’s sometimes called a “cost plus” formula, and here it is:
Cost of Services + Overhead Costs + Buffer + Desired Profit
The Cost of Services should be easy enough to figure. That should take into account the hourly rate of the worker(s) who will perform the services, plus the cost of any goods consumed or delivered by the service.
Overhead Costs get a bit trickier, because those are the ongoing costs of running your business. In this category, you need to include a percentage of expenses such as leasing or purchasing buildings and equipment, maintenance and utilities, salaries of support staff, taxes and insurance, and so forth. After you know your annual or monthly cost for overhead, then you should divide this total cost into an hourly cost and assign that to each hour of service to fill in the Overhead Costs in the formula above.
So now you have your basic costs defined: Cost of Services + Overhead Costs. What’s the Buffer? A buffer is a percentage of the total expenses, added as “padding” or “insurance” to account for unplanned problems that even the most experienced businesses encounter. These might include scheduling issues, unexpected component price increases, accidents, illness, and so forth. The percentage you choose for a buffer is up to you and depends on the type of business you’re in. Some businesses add a buffer of 20%; others add 100%.
And finally, you need to determine your Desired Profit percentage. In other words, how much profit do you need or want to stay in business? Now, adding all these figures together, you should arrive at a price for your services.
After you have worked out a price that guarantees you will not lose money, it’s time to compare that price against the local competition. Is your price much lower than the competition? Then you may want to examine your costs again to be sure you’ve included everything. Many new business owners forget to include the costs of processing the paperwork for a job, for example, or they haven’t made the buffer percentage big enough to cover unanticipated events.
If your price came out higher than the average, don’t panic. Keep in mind that customers may not always choose the lowest price. Compare your services to your competitors. Do you offer additional services, have more experience or industry awards, or offer a guarantee or a warranty that your competitors don’t? If yes, then these may serve as "value added" components to justify a higher price, but then you need to highlight these benefits in your service proposal to inform your potential customer about why you are the best pick for the job.
However, if your price calculation came out with a total that is significantly higher than your competition, you may need to consider where you can cut costs. You may be able to balance the below-cost sale of one service by combining it with a profitable additional service. (The product or service sold below cost in this way is known as a “loss leader.”) There are all sorts of strategies for expanding markets and attracting customers, but it’s crucial to always keep your eye on the bottom line. Knowing your financials inside and out is one of the keys to running a successful and sustainable business.
If this all sounds a bit overwhelming, you should know that you don’t have to start from scratch. There’s a product that can help you determine prices and create proposals and other materials to market your services to your customers. Proposal Kit, like the name implies, is designed for writing business proposals of all kinds. You can use it to fire off simple job descriptions and estimates, or to plan and bid on complex projects with multiple deadlines and subcontractors and such. The product contains multiple checklists and spreadsheets you can use to help capture all the fine details that sap your profits, such as hidden overhead costs you might not think of adding.
Proposal Kit’s checklist worksheets include a Bid/No-Bid Checklist, a Proposal Development Checklist, and a Task Assignment Progress Report, just to name a few helpful ones. And here are just a few of the dozens of spreadsheets contained in Proposal Kit: Price Structure Calculator, Fee Structure Calculator, Quote Calculator, Estimate Calculator, Purchase Order Calculator, Services Cost Calculator, and Project Cost Summary Calculator.
There are also calculator spreadsheets you can use to project cash flow, to figure profit and loss, to analyze return on investment, to create invoices, and so forth. Each financially oriented template in Proposal Kit has an associated spreadsheet for you to fill in.
Proposal Kit has over a thousand topic templates so you can include all the information you should to convince a prospective customer. For example, there’s a template for a Warranty and one for a Guarantee, and templates for Company History, Testimonials, Referrals, and almost any other topic you can imagine. Each template contains suggestions and examples to help you efficiently describe that topic in your proposal.
Proposal Kit not only helps you create a complete business document, but the product helps you assemble an attractive one, too, because the template pages are professionally laid out and come in various design themes, so you can choose the perfect style to represent your business, or use your own logo.