Aligning Your Staffing and Pricing Strategies 

by | Jul 10, 2024

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Maximizing Profit Margins for Service Businesses 

Service business owners face complex decisions every day, but one of the things we are asked about most is pricing strategy. It’s easy to see why – there are several factors to consider, and a lot of those considerations are outside of our control.  

One of the most significant elements impacting your pricing strategy is your approach to staffing. Finding the perfect balance between staffing and pricing strategies feels like walking a tightrope. You must protect your profit margins while keeping your employees happy and your clients satisfied. Any misstep could lead to employee turnover, low-quality work, or insufficient revenue to cover your costs.  

Here’s how Fritz Financial Solutions navigates this tricky topic and our guide to creating a strategy that aligns your staffing and pricing to safeguard your bottom line. 

The True Cost of Your Team 

For service businesses, your team is your greatest asset — but likely also your biggest expense. Hiring an employee may cost your company over $100,000 in hard costs alone. This calculation includes salary, benefits, payroll taxes (which can account for up to an additional 10% of someone’s salary) and paid time off. While great for stability, W-2 employees are a significant financial commitment, and there is always the risk that they may not fully utilize their hours, driving up the effective hourly cost of their labor or leave after you’ve invested in onboarding and training. 

Opting for 1099 contractors may seem like a cost-effective alternative. While you might pay a premium, you’ll have greater flexibility and won’t be on the hook for benefits or payroll taxes. This flexibility comes with its challenges. Managing and integrating contractors into your team can be difficult and time-consuming. A contractor may not be available when you need them. Many of the management strategies in your toolbox may not work with contract employees, which can be a frustrating experience for all parties involved. Most importantly, ensure you are compliant with the US Department of Labor’s determination on who is a contractor and who is an employee. You can find a 6-Point Test here

Pricing Models 

How you price your services should reflect the value you provide and how you compensate your team. Here are two common pricing strategies:  

Project-Based/Value Pricing Model 

The Project-Based/Value Pricing Model lets businesses set prices based on the perceived value of their services to the customer rather than the hours worked. This approach encourages efficiency and innovation among your team since the focus shifts from logging hours to delivering results. In using this strategy, it is essential to have a deep understanding of your customers’ needs and expectations, clear communication of the value your service provides, and excellent market research. 

A construction company specializing in residential remodeling may choose a project-based pricing model where the cost is based on the overall value and outcome of the remodeling project. For example, a kitchen remodel is priced at a flat rate considering the increased home value, the quality of materials used and the complexity of the design. This model focuses on the result — a beautifully remodeled kitchen tailored to the homeowner’s specifications — rather than the number of hours it takes to complete the project. 

A value-based approach appeals to homeowners because it provides a clear upfront cost without worrying about escalating expenses based on time. It encourages the construction team to work efficiently and innovatively to deliver the best possible outcome within the agreed price, enhancing customer satisfaction and trust in the service provided. 

Unfortunately, while project-based pricing offers clarity and efficiency in billing, it may present challenges for the construction company. Underestimating the scope and costs can lead to financial losses if additional labor or materials are required beyond initial projections. Pricing complex projects with accuracy, before the project itself, is challenging, even with years of experience! What if the prices increase a few weeks after the bid is submitted? Additionally, scope creep, where client requests expand beyond the original agreement, complicates the execution without necessarily increasing the budget. This pricing model may also tempt companies to cut corners to stay within budget, potentially compromising the quality of work. 

Hourly Rates 

We don’t have hourly billing rates here at Fritz Financial Solutions. While it’s the easiest strategy to understand and communicate, straightforward hourly pricing often disincentivizes efficiency. Finishing work more quickly means billing fewer hours. From the client’s perspective, hourly billing can lead to frustration due to unpredictability in final costs — there can be major sticker shock involved.  

Let’s consider some pros and cons. Imagine a software development company that charges by the hour for its services. A client approaches them to create a new app, and the company estimates the project will take 100 hours to complete. In this scenario, let’s imagine these developers are efficient, even though they are paid hourly. Thanks to their developers’ high proficiency and the use of advanced tools, the actual coding takes only 70 hours. The client gets their mobile app delivered faster and cheaper than expected, which is excellent for them! The final bill is significantly less than what they anticipated, and they are happy. This efficient service benefits the client, but the company earned less overall than they potentially could have if they had used value-based pricing. 

It’s easy to see how the reverse can happen. Due to unforeseen issues or unmotivated employees, the work takes 140 hours. The company and developers have earned more than expected, but the client is unhappy and may not be a returning customer. And while not necessarily the right thing to do, they may even refuse to pay such an expansive overage. 

Healthy Cash Flows 

One of the most significant challenges for service businesses is managing cash flow, especially when there is a delay between paying your team and receiving payment from your clients. This situation is particularly common in an environment where you bill for time. Your workers incur their hours and get paid within a couple of weeks for employees or within a month for contractors. Depending on your billing cycle, when you time to create client invoices and if you are billing on Net 30 terms, you could be getting paid up to a month or more after you paid for the work to be done by your staff, essentially financing the work for your customers. For project-based or value-pricing models, you can protect yourself by collecting a deposit in advance, billing up front or billing at specific milestones or time intervals. And if clients fail to pay on time, you have every right (and opportunity) to halt future work until their account is current. 

Key Questions for Setting Your Pricing Strategy 

To settle on a pricing strategy which aligns with your staffing model, ask yourself these questions: 

  1. What value does my service provide? Understanding your service’s unique benefits can help you determine a pricing model that reflects this value. 
  1. How does my team work best? Consider whether your staff consists primarily of project-minded individuals or those who prefer the steady pace of hourly work. Are they a group you think will slow their pace for bigger paychecks? Aligning your pricing model with your team’s working motivations can improve your profitability. 
  1. What are the industry standards? Researching how competitors are pricing their services can offer insights and help ensure your prices are competitive. If your prices are higher, be prepared to explain the additional value you provide over the competition. 
  1. Do I need flexibility or stability? Every company will rate its needs on this scale differently, especially for companies experiencing significant seasonal revenue fluctuations. Finding the right middle ground between the flexibility of contract workers and the stability of employing W-2 staff can help optimize costs without sacrificing quality or team cohesion. 
  1. What is my strategy for managing cash flow? Your projections of the money coming in and out will help you determine which pricing strategy will best support you, your clients, and your employees.  

Every business is unique. There isn’t a one-size-fits-all solution for matching your staffing strategy with your pricing strategy. You need to take the time to evaluate your company, team, and market dynamics to ensure you protect your cash flow, promote a happy and motivated workforce, and offer exceptional value to your clients. Remember, this isn’t a one-time decision but something you must revisit often to ensure that your employees remain content, your clients remain happy, and your business stays healthy. 

By thoughtfully making these decisions, you can create a strong framework supporting your service business’s long-term growth and sustainability. At Fritz Financial Solutions, we understand the challenges you face and are dedicated to helping businesses like yours navigate them. We want to ensure that your financial strategies align with your business goals. 

Brazen Fraud and Theft, Part 1 – Cash Crimes 

Over the years, we've had the unfortunate experience of discovering that several of our clients were victims of fraud or theft. (Gasp!) This sad but true situation is a reality for most business owners. We are not talking about the dramatic, masked burglar scenes from...

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