Pricing is a topic we've written about pretty extensively over the past year. Pricing is an extremely important aspect of running a business, and it's often a struggle for small business owners to get it right.
Your small business will suffer if you aren't earning money on every job, every time.
One pricing tactic we haven't covered before is the importance of setting a minimum job price. So, let's talk about minimum job prices—how to set them, why they matter, and why they should probably increase every year as you build, run, and grow your business.
What's a minimum job price?
A minimum job price has a couple different meanings, and your business (and income) will thank you for thinking about both.
What is the minimum price I'm willing to perform ANY service for?
When you're just getting started, it's easy to take on every job that comes your way. Often, you might not even think about whether you're going to make money on it—you're still trying to get your name established, build up a customer base, and turn your business into something. However, as you continue to build up your business, some jobs might simply be too small to be worth your time—unless you're able to earn enough off the job to make it worthwhile.
Of course, as your business grows and your prices increase, some previous or potential customers might not be able to afford you. This is fine, and you shouldn't worry about it—they can find the economy option from someone who is just starting out like you were. Now, we aren't suggesting you should outright ignore a customer that is asking for a break, seriously needs some help you can provide, or discouraging you from discounting your work when you decide you want to. However, we have found that those instances should be the exception, not the rule.
Figure out what your minimum price is for showing up to do any kind of work. As a general rule, don't take on a job less than that unless you're doing someone a favor.
What is the minimum price I'll complete a specific service for?
Jumping off a bit from the first point, you should also consider the specific services you provide your customers. Some of those services no doubt cost more in materials and/or labor than others. And if you're going to build a successful business, you need to earn money every time, on every job. It's important that you take a look at your various services and figure out exactly what the minimum price per service is for your small business.
Perhaps you're a landscaper or lawncare professional. You should probably have minimum prices for mowing, edging, planting, trimming, and so on. If you're a cleaner, interior decorator, painter, drywaller, or some other interior professional, you'll hit the point where you need to have a minimum price based on square footage to keep your costs under control and earn a bit of profit. However, there may be other services you provide that are priced on different needs.
For each service you provide to customers, figure out your minimum price for showing up to perform that service. Don't take on a job performing that service for less than your minimum.
How to determine your minimum job price
Pricing is always tricky, and often a moving target, but the best way to determine a minimum job price is to start with a simple question:
What's it going to take to get me out of bed to do this job?
That is, what is the absolute minimum you're willing to work for? Once you know that number, you should probably add 5%-15% to it, because you're more than likely pricing yourself to low to earn any money.
After you've determined your absolute minimum, it's time to do the same for the types of services you offer. Is certain work harder? Do you enjoy some services that you offer more than others? How about travel time and the number of days required to complete the job—and don't forget travel time happens twice a day and is multiplied by the number of days on the job. Figure all these things out so you get an accurate minimum price per service.
Why minimum job prices are important
A lot of service businesses run on minimums, and it's scary how many small service business owners don't even realize it. We asked a few of our customers what they thought their average job price was, and they often told us a number that was 1.5–2 times higher than their actual average. We charted their invoice totals so they could see their estimates were off.
Most of our small business users charged half what they thought their average job price was.
Let's clarify the above chart.
One of our users thought most of their jobs were at least $1000 jobs. The chart shows that, in reality, most of their jobs earned them less than $500. These jobs accounted for around $22,000 (37%) of that company's annual revenue.
This business owner is in an industry where there just isn't a great reason to work for much less than $500 per job, yet they are undervaluing their time and work—and aren't even aware of it. If they'd simply had a minimum job price of $500, those jobs would have brough in $51,000 in revenue—an increase of $29,000 for the year.
Let that sink in for a minute—just setting a minimum, and sticking to it when pricing jobs, would have earned an extra $29,000 per year. That's why minimum prices are so important.
It doesn't always work
Now, numbers like we've mentioned above are pretty impressive, but it's not always that simple. You'll likely lose some jobs because customers aren't going to pay. Again, this is okay, and should be expected. You always have the freedom to work with your customers on pricing—you're the business owner, after all. Just remember you should always start at your minimum, then negotiate downward from there when you deem it necessary.
Never start setting a price for a job based on what your customers think it should cost.
Pricing should be fluid
Another important thing to keep in mind is that prices in general—including your minimum job prices—should change over time. Gas prices are fluid, the economy itself is fluid, and your prices should be fluid as well. Don't get trapped into charging the same prices for your services for 5 years, while gas prices keep going up, or inflation keeps raising your tool and material costs. The more it costs you to get a job done, the more you should be charging your customers.
If you haven't thought about or set minimum prices for your jobs, give it a try. Figure out your What gets me out of the bed? price, as well as your per-service minimums. If you already have minimums, now might be a good time to re-evaluate them.
If you have any questions, thoughts, or suggestions about how to price services, feel free to drop us a line at firstname.lastname@example.org!