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How to Set Prices in a Service Business

A Step by Step Guide to Pricing Your Services (Pricing Strategies)

How to Set Prices in a Service BusinessThis guide will walk you step by step through all the essential phases of setting optimal prices in a service providing business. You will learn exactly how to set prices in a way that will allow you to make money and still be competitive

Here's what’s in the book:
* Common problems in setting prices and how to overcome them
* how to determine your costs
* Cost calculation examples
* How to set optimal prices
* How to raise prices without losing customers
* How to calculate hourly and project-based pricing
* all these and much more

Table of Contents

1. Introduction
2. Setting Prices Problems
3. Cost Determination
4. Cost Calculation Example
5. How to Set Optimal Prices
6. How to Raise Prices Without Losing Customers
7, Calculating Hourly and Project-Based Pricing

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Sample Content

This guide discusses costing and setting prices of services to assure that each job earns a reasonable profit. The figures used in the tables and examples do not reflect what your service costs, set prices, and profits actually would or should be. The figures are used to demonstrate costing and set prices and are rounded off for further simplicity. Because of the importance and sometimes complexity of costing and pricing, it is good business practice to consult your trade association and particularly your accountant to learn what are the best current practices, cost ratios, and profit margins in your service business.

Setting Prices Problems
Many businesses are not making a profit today because they do not know the basic concepts of costing and set prices. The situation is most serious in the service business because each service performed has a different cost. Frequently, the service business must bid for jobs by making a price quotation in competition with similar businesses. Can you calculate your costs for your service and quote a price that is competitive and returns a profit?
Without realizing what they are doing, some business owners set their selling price below their total cost. This may result in more business for the company, but a loss will be incurred on each sale. Occasionally, a business owner who lacks a knowledge of costing will try to compensate by setting prices very high. The end result is that the business is not price competitive and does not attract sufficient customers to survive. Frequently, a business earns a profit on some particular service and loses money on other services without knowing which services are earning a profit and which services are incurring a loss. The year-end income statement combines the profits and losses from the various services performed over the year. Therefore, it is impossible to determine the profitability of specific service jobs from a year-end income statement.
Use a simplified approach to cost accounting that reflects the needs of the business and reports the cost with a reasonable degree of accuracy. The total cost of producing any service is composed of three parts: 1) the material cost, 2) the labor cost, and 3) the overhead cost. Direct materials and direct labor + overhead = total cost of service.

Cost Determination
Direct Material Cost
The direct material cost is made up of the cost to you for parts and supplies that are used on specific jobs. Once the list of parts and supplies to be used is developed, a check with the supplier will give an up-to-date material cost. The shipping and other handling (storage etc.) costs for the parts should be included in the material cost.
Direct Labor Cost
The direct labor costs include those labor costs identified with a specific service job. The labor cost involved in providing a service is determined by multiplying the number of direct labor hours required by the cost per direct labor hour. It is very important to determine accurately the amount of direct labor hours involved to complete the service; therefore, you must use a time clock, worksheet, or a daily time card for each employee to determine the exact amount of labor time spent on each service job.
The hourly cost of direct labor can be figured (priced) two ways. One it can be the hourly wage only, with fringe benefits, Social Security, Workers' Compensation, etc., (all labor-related costs) allocated to overhead. Or two, the hourly direct labor cost can include the hourly wage plus the employer's contribution to Social Security, unemployment compensation, disability, holidays and vacations, hospitalization and other fringe benefits (payroll costs).

By this second method, the added payroll costs for vacations, holidays and benefits are expressed as percentages of direct hourly wages. For instance, if two weeks of vacation and ten holidays are given annually, this amounts to four weeks per year or 7.7% (i.e., four weeks off divided by fifty-two weeks 4 : 52 = 7.7%) of total labor cost was for time off. Thus, to determine the total direct labor cost per hour by this method, you must add the prorated cost of the payroll taxes, worker's compensation, holidays and vacation pay, hospitalization, etc., to the hourly wage paid. As a rule of thumb, the sum of the various payroll-benefit costs have generally been in the range of 20% to 30% of the hourly wages paid. It is more complicated to figure but more precise to use the higher labor cost (including labor related labor costs).

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