What should I charge for service? Three methods calculate service price!
What should I charge for service? This is the question on every tradesman’s lips and the pinned post on every forum. Truth of the matter is that every contracting business, whether it’s electrical, plumbing and heating, HVAC, fire and security – you name it – will have to find an answer at some point. Some of the more experienced technicians on these platforms respond with helpful advice on not undercharging and not being afraid to ask for a reasonable rate.
This makes total sense. According to Forbes contributor and author, Kathy Caprino, undercharging is a terrible practice for both employees and customers, and is often the result of mental blocks against charging what your business is worth. Not to mention how it affects the industry. We’ve spoken a lot about how pricing trades should not be a fight to the bottom but a fair reward for a skilled worker.
But how do you not undercharge? What is a reasonable rate? How much should you charge in plain numbers? Here are three methods:
Without further ado, this is how to find you how much you should charge for your service:
Calculate your living expenses.
Calculate your business expenses.
Figure out your taxes.
Use the formula L/[H * (1 – T)] + B/H to determine your day rate. (Don’t worry, we’ll explain this below!)
Let’s break it down:
Yearly Living Expenses = (L)
Yearly Business Expenses = B
Total billable days/year = H
Total Taxes (%) = T
Your Day Rate = L/[H * (1 – T)] + B/H
Example: Let’s say you’re a one-man-band for now and need to make $36,000 per year to meet your living expenses. You expect your business expenses to be about $14,000 per year, your taxes are estimated at around 30%, and you plan to work 261 billable days per year.
Yearly living expenses = $36,000
Business Expenses = $14,000
Yearly Billable days = 261
Total Tax Rate = 30% = 0.30
Day Rate = $36,000/[261 *(1-0.3)] + $14,000/261
Day rate = $251
This is more of a retrospective method aimed at older companies that have already gathered data on their costs and profits. To start, gather the financial documents that detail the money you’ve earned on a particular job. That can include your receipts, tax documents, or signed contracts. Calculate the total amount paid for the work you did and the amount of time you spent on them.
Step 1. Compare your hourly pricing and revenue history.
Is your historical pricing adequate to meet your needs? If not, you’re undercharging. It’s important to identify why and to correct your pricing accordingly. For example, it could be that you’re often called out to diagnose a fault. If so, it’s key that you make clients aware they’ll pay a call-out charge plus an hourly charge after the first hour. That will make your prices transparent from the beginning.
If you’re afraid that this will upset customers, remember: It’s better to give them an accurate idea of your pricing up front than to have to chase them for money later. Or worse, they might post a negative review online if they think you’ve been dishonest!
LEARN MORE: How to Respond to Negative Reviews
Step 2. Take care of practical considerations.
Typically, customers will ask for a fixed price for a work order because then they know there will be no nasty surprises when the bill comes in. So it’s vital to provide one, even for relatively small work orders. The advantage for you is that you can plan your schedule accordingly.
The disadvantage is what’s known as Murphy’s Law: If something can go wrong, it will go wrong. To overcome this, you’ll need to add in a minimum of 15-25% buffer to the price to give yourself a chance of breaking even on work that causes you a headache.
Another risk is that while you’re on the site, the customer will make a casual request like “Since you’re here anyway, could you fit a new plug socket?”. This is especially likely to happen if the commissioning customer is not the same individual as the paying customer (e.g. in a tenant/landlord situation). Nice guy that you are, you’ll agree to carry out the job and then be afraid to add it to the invoice since it was never included on the original quote.
In Commusoft, a great electrician software, we have a useful feature to cover this eventuality called Additional Work Orders. This way the time and parts won’t get lost in your paper trail and if the (paying) customer inquires about anything, you’ll be able to provide a professional answer.
Here are the basic steps to charging what your services are truly worth to your customers.
1. Know what value means. It’s not the time you spend on-site!
2. Set your base hourly rate using your business expenses, desired income, and hours worked.
3. Figure out pricing that reflects the value of each type of work order. You can charge more for an after-hours emergency call!
4. Consider other factors that determine customer value.
5. Put it in writing. A pricing document will ensure your prices are clear to customers.
6. If you offer a premium customer experience, then you can and should charge a premium price.
Let’s break it down:
As we mentioned in Method 1, the answer to “what should I charge” should never be a simple addition of immediate costs (fuel, tools, parts) and hours spent but the actual, intangible value that you bring to a customer. Here is an out of the box example: Think of the last time you bought a perfume. You probably spent somewhere between $60 and $100, depending on your preferences. A study reported by AOL has shown that the literal value of the item is less than that of a cappuccino: no more than $4.
Think of the needs that these products and services satisfy. A perfume doesn’t have much practical value. It keeps you from smelling bad but so does a shower and that doesn’t cost $60! What about being without power in the middle of the winter? It might be just because of a faulty wire that would cost you little more than change to fix but the value that you bring to your customer far exceeds that of the materials. What about the value of a code correction to a company that stood to be fined a fortune for electrical code violations? We’re not saying that you should take advantage of customers in difficult situations but don’t fall into the trap of thinking your work isn’t worth the reward.
Of course, there are industries where the margins are naturally higher compared to the production costs but what we’re trying to say is that the rest added on top of immediate costs needs to cover everything, from marketing to warehouse rent to delivery. Only what you add on top of this will be your profit. Going back to the previous example: If a bottle of perfume costs $4 to make and you’ve paid $60, that doesn’t mean that $56 is pure profit. More likely that less than half of that goes into the pocket of the company. Don’t even get us started on how much needs to be invested back into the business. That’s a lesson for another day!
So make sure that when you settle on a price, you’ve covered every cost and if you’re not certain, just scroll up to our first method!
Always consider more than just hourly labour. A standard installation inspection with 25 appliances should be priced differently from fitting a new alarm system!
Remember, the value to the customer is unrelated to your time. The value to your customer isn’t how much time you spent, but that they now have a pool pump that won’t break down. That’s where call-out charges and standard service fees come in. A call-out charge makes sure every job is worth your while, and a standard service charge aligns your price to take into account customer value.
So in your Terms and Conditions, you might state that a standard check-up costs $80. That makes it crystal clear to the customer that your time has value and will also give you a good margin.
What makes it more difficult to research prices online is that many outside factors specific to your business come into play. The most important is your target market. For example, where you operate in the country makes a big difference, whether it’s a city center or a small town. Customers will have different means of covering costs and different priorities.
Someone with a day job will appreciate it all the more if you can send a tech around after work hours, saving them having to take a full day off. But if you find that you’re working for retired individuals or work-from-home types more often than not, it’s worth factoring that into your work day and prices.
Your Terms and Conditions should be an area of your business where it’s worth either spending more time or hiring a contract expert. Everything from deposits and deferred payments to invoices and charges should be in here. This way, you know that even if there’s an issue with a customer, you’re covered by your Ts & Cs.
Once you’ve calculated an hourly rate that reflects the value you offer, write up a pricing document with your Terms and Conditions to send out to your customers when a job is booked, so you’re clear and up front about your charges. When you have a professional-looking pricing document, there’s no opportunity for customers to misunderstand and, equally important, no confusion on your side. You’ll never again have to ask yourself, ‘Is $50 too much for that quick 20-minute check-up?’
Finally, we’ve discussed how field service customer experience is set to overtake price as a key decision factor in 2020. So it’s high time that you make sure you’re focusing more on offering an experience than a cheap service. More and more people will look for a positive impression than saving a couple of bucks, especially if it’s the kind of service that makes you stand out from the competition. Read more about how to improve your service call customer experience as well as your field service user experience here! If you’d like to download our free service reminder template, just click below: