On the simplistic side of this issue we have labor and parts costs. On the emotional side is the relationship between the customer, technician and the purchase decision.
Labor cost is complex because of all the variables involved to deliver service. Here are items that you must consider when calculating your cost to provide each hour of service.
- Payroll (Hourly, commission or billable hour)
- Vehicle maintenance
- Vehicle depreciation
- Vehicle Insurance
- Licensing and vehicle registration
- Vehicle payment
- Marketing (factor the cost to stay in contact with your customers 3 times per year)
- Office (If you work from home factor a minimum of 25% of your rent or mortgage)
- Office utilities
- Office supplies
- Liability insurance, bonds and state licensing fees
- Dispatching cost
- Employee benefits (this is not limited to 401K and health benefits)
- Accounts billable (Carrying costs are very expensive)
- Consumables (latex gloves, solder, invoices, business cards etc.)
- Profit margin (if your profit goal is 15% you will need to factor approx. 25% to meet your goal)
- No charge invoices (factor the % of customers that do not pay for service or FREE ESTIMATES)
A common mistake when calculating your cost to provide service is not charging for future items. If you do not have a vehicle payment, office lease or dispatcher to name a few you must consider these expenses today to build your business in the future.
Once you have an hourly rate the next challenge you will face is mark-up on material/parts. Improper mark up on material is one of the top 3 mistakes responsible for a 93% failure rate for service companies within the first 5 years. Warranty issues are the obvious. Don’t forget stolen parts, damaged material and parts given to a customer for free as a customer satisfaction.
Below is the industry standard parts mark-up:
- $0.01 – $10.00 = 400% mark up
- $10.01 – $25.00 300% mark-up
- $25.01 – $50.00 200% mark-up
- $50.01 – $200.00 60% mark-up
- $200 & up 40% mark-up
The best way to secure accurate pricing in the field is to have a standardized price book for the most common services and a bid worksheet for tasks not serviced daily. Assuming your price book is designed to benefit the customer and the service technician it will reduce price negotiations, buyer remorse, negative emotions and most important build value. This is a proven method of delivering price in most industries well before the plumbing industry adopted menu style pricing. Any advantage your company can gain will be a positive outcome in this increasingly competitive market.