This excerpt is part of Entrepreneur.com's Second-Quarter Startup Kit which explores the fundamentals of starting up in a wide range of industries.
In Start Your Own Staffing Service, the staff at Entrepreneur Press and writer Krista Thoren Turner explain how to start and run a successful staffing service. In this edited excerpt, the authors discuss how you determine your fees in order to make a good living with your staffing service.
How much can you expect your staffing service to make in gross sales? Figures vary wildly in the staffing services industry, but experts say privately held companies probably average somewhere around $750,000 per year.
The profit for staffing services is in the markup you'll add to the price of an employee's labor. Although industry markups have slipped in recent years, markups can remain high even in a slumping economy because there aren't that many qualified applicants to work with. In addition, today's workplace requires more skills and therefore more training.
Profit margins are healthy in the staffing services industry. Net profit margins (profit margins after you pay operating costs) in general staffing services can run from 4 to 10 percent. And what if your company doesn't do general staffing, but instead operates in one of the niche markets? "The sky's the limit," says staffing service owner Rita Zoller. Nevertheless, staffing industry profit margins vary widely. According to the ASA, a profit margin of even 5 percent, especially in the first few years of operation, is respectable.
One owner estimates that her gross profit margins runs about 46 percent. After operating costs, her net profit margin is probably 25 to 27 percent before taxes. She adds that without the permanent placement income, her profit margins would run 9 to 11 percent. Temporary employees are her mainstay, and they are also how she gets a lot of her permanent placements.
To determine the amount of markup you can earn for a particular type of placement, you'll need to consider all the following factors:
Competition. If you have relatively little competition in the type of staffing you do or the training you provide, you can get a generous markup. On the other hand, if you have a lot of competition, your markup is more likely to be average for your industry sector and your area. For example, Seattle's Law Dawgs has a markup that runs between 55 and 70 percent. But owner Dyana Veigele knows of a legal staffing service in nearby Portland, Oregon, that gets a 75 percent markup. "That would be great," she says, "but realistically in Seattle, we can't go that high because there's just too much competition."
Client relationship. A client who gives you a lot of business should get a more favorable billing rate, which means your markup will be lower. For example, Veigele's company has gone as low as a 20 percent markup. "Sometimes we just want to make the placement for that client, and the markup's not going to be great," she says. She gives special rates to high-volume clients or clients that have been with the company a long time.
Industry sector. In general, niche markets (e.g., IT) produce higher markups than do traditional staffing markets (e.g., clerical). Veigele notes that occasionally her firm's markup can approach 75 percent for a computer company client.
Local standards. Your service's geographical location will also dictate what kind of markup you can get. For example, although markups in the industrial sector range from 26 to 50 percent in the Indianapolis area, markups in the same sector appear to be a little higher in Chicago.
How should you figure out how much to charge your clients? Following are charges for three types of placements that happen routinely in this industry:
1. Temporary placement. For this kind of billing, use the following three steps:
a. Figure out the pay rate (how much you'll need to pay an employee).
b. Apply the markup you think you can reasonably get.
c. The total is the billing rate.
For example, if you're paying a talented interface designer $50 per hour and decide you can get a markup of 80 percent, your hourly billing rate would be $90.
2. Temp-to-perm placement. Some staffing services don't charge at all for this kind of placement, especially if they've had several months in which to make a profit from a temporary employee's labor before the client hires that employee permanently.
But some staffing services do charge a fee for temp-to-perm placements. This is reasonable because when a client hires one of your employees, you then cease to make any profit from that worker, in whom you may have invested a considerable amount of time and money to recruit and train.
If you charge a temp-to-perm fee, how much should that be? Like so much else in this industry, it depends. In general, the harder it is to recruit and train employees for the type of placement you do, the higher your fees will be.
The same four factors that help determine your markup rate (i.e., amount of competition, client relationship, industry sector and local standards) will also affect your temp-to-perm fees. As an example, legal staffing services usually charge 10 to 15 percent of the gross annual salary the worker will be making.
3. Permanent placement. If you place employees permanently without employing them as temporary workers first, then the fee you charge the client company will be much higher than it is for temp-to-perm placement. This, too, is logical, because you'll have no other opportunity to make a profit on the labor of a person you've recruited, tested and possibly trained.
A typical fee is 10 to 20 percent of the expected gross annual salary or wages. Some owners charge higher percentages for higher gross salaries or wages because it's harder to find those employees, and the recruitment costs are much higher. For example, one staffing service owner we interviewed charges a permanent placement fee of 1 percent per $1,000 of payroll. So for an employee who'll make $20,000 per year, the company charges the client 20 percent of $20,000, or $4,000.
Make sure that whatever type of placement you do provides you with enough profit to cover the costs associated with those employees. This is one way to ensure that your business remains profitable.