CHAPTER 16-: This is the sixteenth chapter of “The Complete Guide to Starting a Cleaning Business.” No matter what field of business you are trying to make a name for yourself in, the biggest hurdle that you have to overcome when initiating a business is forming a competitive pricing model. In other words, nothing is quite nearly as difficult as pricing the job. This is one thing that entrepreneurs who have no prior experience in the business sector desperately struggle with.
After you have completed all the legal paperwork, procured all the necessary materials, formed a business identity, created a marketing strategy, hired the best employees in town, the one thing that leaves you scratching your head is coming up with the right price for your cleaning service. It is extremely difficult to put a price tag on your service, especially when the business is more or less set up and you have a ton of things to take into consideration when naming your price. It is safe to say that pricing is the most difficult part of running any business, especially one that involves a cleaning service.
Is Pricing Really Important to a Cleaning Business?
The answer is a resounding YES. In fact, your pricing model can either make or break your cleaning business. This is why pricing puts the entrepreneur in a state of mind boggling dilemma. As a business owner, you are always in the midst of competition with other companies. This competitive nature of yours will compel you to lower your costs and come up with the most affordable and reasonable price for your customers.
At the same time, the materialistic part of the entrepreneur in you will urge you to keep pushing your prices up in lieu of a bigger profit. The two opposite forces of entrepreneurship pull you from either side and you are left with a colossal conundrum in your head. Should you try and outshine your competitors by offering cleaning services with the most attractive prices? Or should you secure the continued existence and success of your business by raising the profits and bringing in much more revenue than you rivals?
At the end of the day, the choice is yours, but this is a choice that you should not be making without detailed knowledge and information about how an entrepreneur should price his serviced based business. In other words, the choice you eventually make should be an informed one, rather than a misguided, half hearted lunge at the unknown.
Before you even understand the dynamic of pricing and the importance of all the factors that you must weigh in, you should understand that staying in the middle is the key to coming up with the best and most lucrative price. If you quote too high, you will put yourself out of the range of the customer and hence lose the contract. If you quote too low, you will end up doing far too much for far too less and eventually you will be left with little money to pay for your people and supplies.
Choosing the Best Cleaning Service Rate to Charge Clients
The knowledge of what the right price should be is not something innate and it is certainly not something that somebody else can tell you. Yes, through surveying other cleaning businesses and reading about pricing models of ideal enterprises, you will attain sufficient information to conjure up an estimate of what the prices of your services should be and how you can go about putting those prices up without losing a chunk of your profit.
However, a business cannot survive on a platform of estimations. You need to be microscopically specific with numbers when trying to steer your business to success. This does not mean that you have to be a mad mathematician or a genius accountant. As long as you know what the perfect price figure for your business should be, you will be well on your way to dominating the perfect. Failure to come up with the right price on the other hand will lead to you losing the favour of the customers or incurring massive losses that you may never recover from. In other words, if you keep relying on the wrong number for your price, your business will become doomed.
Will Trial & Error Help You Decide the Best Price / Rate for your Cleaning Services?
Trial and error is a significant part of running any business. It is even more significant when you are trying to price your services. With trial and error comes experience and you can use this experience to formulate the perfect pricing model for your cleaning services. Therefore, before you can set concrete prices, it is preferable that you carry out a few projects from trustworthy and seemingly loyal customers. Start out by catering to your friends, family and acquaintances.
Once you have completed the project, make a comparison between what you charged and what the actual job was worth. This should give you a clear idea of whether you quoted too low or quoted too high, and how sustainable your current price offer is. Once again, it is important to note that when it comes to pricing, there is no one secret winning formula that you can use to do the trick every single time. With that being said, the following pointers will be of great benefit to you when setting a price for your cleaning services.
Factors to Consider When Creating a Competitive Pricing Model for your Cleaning Service
1) Labour and Materials– Estimate the cost of labour and the utility of the materials at your disposal. These estimates have to be as precise as possible. The margin of error when determining costs and prices is extremely narrow. One bad calculation mistake and your business may be in tatters. For calculating the labour cost, take into account the wages that are being paid to them as well as the benefits that you provide them (daily meals, refreshments, safety gear, transportation service, insurance etc.) The next step is to calculate the cost of all the materials you buy and the supplies required to use them. For instance, when calculating the cost of a vacuum cleaner, you need to consider the cost of the batteries that are being used to keep the vacuum cleaner functional.
2) Overhead Costs– If you have basic knowledge of economics, then you must be familiar with the term overhead costs. In the case that you are not aware of what these costs refer to, these are the costs that are exclusive of the labour and inventory costs. The most accurate description of overhead costs would be the cost of utility or in other words the cost of operating the facility that you use. Since you are starting a new cleaning business, it will be quite difficult for you to be 100% accurate when determining your overhead costs. Nevertheless, you have to be very careful in not being too wayward with your estimations.
It is also worth noting that you have to make adjustments to you estimations as time goes on and you gain more experience with the accounting side of your cleaning service business. The simplest and the easiest way to calculate your overhead is by adding in the cost of your business for one full year without taking into account the cost of the labour and the materials. Once you have a number in hand, divide it with your total expense on labour and materials. The final number that your calculation will produce will be your overhead rate.
Sometimes, you will find yourself in a position, especially during the days when your business is taking its baby steps, where you do not have anything to base your calculation upon. In other words, the lack of experience in the business gives you absolutely nothing to work with in trying to figure out your overhead rate. The smartest thing to do under the circumstances is use the industrial standard. Continue to do this for about a year, till you have substantial information in your hands to determine your overhead rate. It is only then that you can detach yourself from the generic industrial standards.
You can also resort to the simple trick of adding 20% to your labour and materials cost. This will give you a good enough estimation for your overhead and profit. If you ask inquire about the hourly rates of the employees working in some of the most successful and well established cleaning service businesses, you will find out that each man gets paid $40 per hour. If you weren’t familiar with the rate, then $40 would seem an incredible amount of money to be handing out to someone for one hour of cleaning. However, those with experience in this business will tell you that the best companies teach their customers the value and benefits of their services, and hence they hardly ever face complaints about charging too much from their customers.
3) Profit Margin- The central objective of any pricing strategy should be to widen the profit margin. If you are not pricing your services to make more money, you are wasting your time with your business. As mentioned before, profit is earned when your earnings exceed your expenses. The calculations for your overhead must include the profit margin. If your overlook this step, you will end up losing out on your profit and incurring monumental loses. Sooner or later, you will behind the pack and slowly be pushed out of the industry. Such is the significance of taking into account the profit margin.
The minimum percentage of profit that you need to earn in order to run your cleaning business operations smoothly and also lead a comfortable life is 20%. This may sound like a very good amount of profit, but when you consider the ever increasing expenses of your business and how you need to keep re-investing your profits to push your business up the ramp of development, 20% profit does not really matter much in the grand scheme of things. A lot of cleaning service business owners will tell you that 10 to 15% is the maximum amount of profit that your business operations will yield you in this sector. Those business owners may be content with an amount as scanty as below 20%, but as an aspiring entrepreneur like you who is trying to climb up the ladder in the world of business, aiming below 20% will reduce your ambition to ruins.
In addition to that, with profits as less as 10%, you will soon lose the motivation to continue struggling and striving in this business, and before you know it, you will be urging yourself to close the doors of your business. Those who pay close attention to each and every single area of the business are the ones who are able to amass 20% or greater profits. Once you have mastered the art of keeping yourself well clear of loses, you can build on your skills to maximize profit and educate your employees on how to maintain a respectable profit margin. Lowering costs and increasing profits are directly proportional to one another. If you concentrate on achieving one, the other is bound to follow on its own. As the saying goes, costs and profits are two peas in a pod.
Will Offering Cleaning Services on Credit Help your Company?
The answer is YES and NO!! You see, the concept of credit, its perks and its downsides are things that you must be well versed in before launching your cleaning service business. Extending credit to your customers must be approached with caution. In the case of corporate clients who have signed up for long term contracts, extending credit may actually help you develop your relationship with the client and attract other clients of a similar stature. All you have to do to receive the payment from them is send an invoice at the right time of the month and wait for them to send you the check via mail.
The same cannot be said for non corporate clients. These mainly include the home owners and small businesses. You must do your homework before lending credit to them. It is always preferable to convince them to deposit a certain amount of money before you begin work inside their homes or workplaces. This is particularly true for small business, which are notorious for not making payments on time and demanding extra work for free.
When you send an invoice for the payment, make sure that you include discounts for clients that are likely to come back and penalties for those who took an eternity to make the payment. Your discount and penalty strategies must be an important factor when coming up with a competitive pricing model.
The last thing you need to remember when it comes to pricing your business is that working with variables will be your biggest asset. Your pricing should be steady, but not constant. When doing business in a world of unpredictable variations, you need to have the capacity to adapt accordingly and change your prices to best fit the requirements of your business.