Pricing can be tedious and time-consuming, especially if you don't have a knack for crunching numbers. Especially in the beginning, don't rush through this process. If your quote is too low, you'll either rob yourself of some profit or be forced to lower the quality of your work to meet the price. If you estimate too high, you may lose the contract altogether, especially if you're in a competitive bidding situation. Remember, in many cleaning situations, you may be competing against the customer himself; if your quote is high, he or she may think, "For that much money, I can just do this myself."
During the initial days of your operation, you should go back and look at the actual costs of every job when it's completed to see how close your estimate was to reality. Learning how to accurately estimate labor and properly calculate overhead will let you set a competitive pricing schedule and still make the profit you require.
To arrive at a strong pricing structure for your particular operation, consider these three factors:
- Labor and materials. Until you establish records to use as a guide, you'll have to estimate the costs of labor and materials. Labor costs include wages and benefits you pay your employees. If you are even partly involved in executing a job, the cost of your labor, proportionate to your input, must be included in the total labor charge. Labor cost is usually expressed as an hourly rate.
- Overhead. This consists of all the nonlabor, indirect expenses required to operate your business. Your overhead rate is usually calculated as a percentage of your labor and materials. If you have past operating expenses to guide you, figuring an overhead rate is not difficult. Total your expenses for one year, excluding labor and materials. Divide this number by your total cost of labor and materials to determine your overhead rate. When you're starting out, you won't have past expenses to guide you, so use figures that are accepted industry averages. You can raise or lower the numbers later to suit the realities of your operation.
- Profit. This is, of course, the difference between what it costs to you provide a service and what you actually charge the customer. Figure your net profit into your estimate by applying a percentage of profit factor to the combined costs of labor and materials and overhead. The profit factor will be larger than the actual percentage of gross revenue you'll end up with for your net profit. For example, if you plan to net 38 percent before taxes out of your gross revenue, you will need to apply a profit factor of about 61.3 percent to your labor and materials plus overhead to achieve that target.
If you're extending credit to your customers--and it's likely you will if you have corporate accounts or if you are in the janitorial business--you need to establish and follow sound billing procedures.
Coordinate your billing system with your customers' payable procedures. Candidly ask what you can do to ensure prompt payment; that may include confirming the correct billing address and finding out what documentation may be required to help the customer determine the validity of the invoice. Keep in mind that many large companies pay certain types of invoices on certain days of the month; find out if your customers do that, and schedule your invoices to arrive in time for the next payment cycle.
Your invoice should clearly indicate the terms under which you've extended credit. Terms include the date the invoice is due, any discount for early payment and additional charges for late payment. It's also a good idea to specifically state the date the invoice becomes past due to avoid any possible misunderstanding. If you're going to charge a penalty for late payment, be sure your invoice states that it's a late payment or rebilling fee, not a finance charge.
Finally, use your invoices as a marketing tool. Mention any upcoming specials, new services or other information that may encourage your customers to use more of your services. Add a flier or brochure to the envelope--even though the invoice is going to an existing customer, you never know where your brochures will end up.
Joining experts, editors and business writers, Entrepreneur Press delivers everything you need to know about starting and running more than 55 of today's hottest businesses. Learn more about Entrepreneur's Startup Series, available at EntrepreneurBookstore.com.