Last Updated on May 7, 2023 by Dave Schoenbeck
Here is a big “aha” moment for small service-based business owners: your ability to scale a business is limited because you only invoice your client for hours worked. As a result, it isn’t easy to leverage your sales without adding additional labor hours. Of course, you can add cheaper labor to help you increase your profits, but it usually is a one-to-one ratio.
So how can these businesses generate more profit? It would be best if, first, you were sure you’re marking up the sale price accordingly.
How to Make Your Business More Profitable
A typical quote about service-based businesses goes something like this: a customer isn’t paying for the hour it takes to get the job done; they’re paying for the years of experience it took you to accomplish the job in an hour.
Our hours do not accurately indicate the amount of work on any given project. We may be accomplishing an amount of work in one hour that would take a competitor three hours. By solely charging for the hours worked, we’re doing ourselves and our staff a disservice.
So what’s the solution? There are a few ways to generate more profit and grow your business without stretching yourself too thin. Here are some answers to scaling a service-based business:
- Scaling a business starts with documenting your business processes to determine how much a project will cost you in employee hours. It would help if you also considered the invisible costs associated with this work, including the experience level of your employees. You will then need to mark up your final pricing accordingly.
- Avoid bidding on or quoting projects by the hour or group of hours. The project should be offered as a fixed price based on the costs you calculated behind the scenes, not as a list of hourly components. Likewise, it doesn’t matter how many hours it takes: you’re selling the project, not the hours.
- Add and charge for additional services that are not easily connected with a dollar value. Look for gaps where the market is underserved.
- Don’t try and steal jobs by being the cheapest amongst your competitors. To start, you should be in the middle of the pack. Too many underpaying jobs will burn out your staff and take time away from higher-paying work.
- Find a niche for your offerings. For example, can you focus only on guest houses, RV garages, or home offices instead of working as a general construction contractor? We lose pricing power and leverage when competing directly with competitors on similar offerings. Still, if you excel in a niche, you get pricing power and can charge more for the specialization.
- Find ways to add value by setting yourself apart from the competition. For example, can you deliver your services faster or provide better quality? Do you have a unique approach that you bring to the table? All of this allows you to charge more for your services.
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