Last Updated on May 8, 2023 by Dave Schoenbeck
Learning how to price services for your business is often a painful lesson for business owners, especially in bid or contract work companies. It might seem straightforward, but before you know it, we fall victim to profit leaks and lose productivity when things go wrong.
To be profitable, we need to spend more time carefully estimating our pricing using minimum gross margin targets, followed by a rigorous business post-mortem analysis to identify your ending gross margin and calculate the profit shrink.
Why You Need to Manage Scope Creep
Scope creep is the enemy of learning how to price services for your business. Here’s how it happens:
We are asked to provide a bid or quote for a job. We estimate our labor and material costs and add some wiggle room if we estimate poorly. If sophisticated, we calculate the gross and net profit for the job to ensure it’s profitable enough, and we research whether this is a reputable client. We also must know what our break-even margin needs to be.
We submit our quote and win the job. Then disaster strikes. We receive lots of add-ons for additional work. If we’re good, we seek additional payment. If we’re average, we miss the chance to ask for an additional fee and get crushed when our profits aren’t what we expected.
Ultimately, we do a big job for an unacceptable profit margin. Then we ask the client for more work to make more of a profit. What could go wrong with this strategy?
How to Monitor and Manage Your Project Profitability
Too often, companies don’t consider scope creep when figuring out how to price services for your business.
Here are the steps you need to take to calculate an accurate estimate and complete a job with profit in tow:
- First, you must know the minimum gross margin percentage you need before you bid.
- Second, you must know your profit break-even point.
- It would be best if you built a contingency plan for mistakes. Often, the job scope increases due to errors or setbacks.
- It would be best if you did not eat the cost of scope creep. Instead, be courageous and ask for additional payment when more work is requested.
- You must charge for any additional services the client requests. Please don’t throw them in for free to make a good impression or to avoid awkward conversations.
- You must regularly manage your team to know how they perform against the job’s budget. The best measurement is the percentage of the fee used to date.
- It would help if you did a post-mortem calculation of your margin compared to your original estimate.
- You must fix the breakdowns in the process. Otherwise, you’re counting on luck and divine intervention to survive.
- Learning how to price services for your business isn’t magic. Instead, it’s about math and managing the path to profitability.
Learning to price services for your business doesn’t have to hurt your bottom line while you figure it out. Instead, a professional business coach can help you reduce trial and error to ensure you’re on the right track for profit growth. So please fill out my contact form and discuss your pricing strategy.
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