Before we start, I'll be upfront: I do not own a pumping business. Although, I have owned and operated a service business and the principles for pricing apply across industries - including the pumping business.
Pricing your services in a way where you can cover your expenses and make a profit can seem difficult to balance. Especially because it depends on a number of different factors: payroll, rent, truck loans, marketing, etc. Let’s dive in.
Why it’s important to price your services strategically
To keep it simple, there are two major reasons why you should be strategic about service pricing:
1. To make sure your expenses are covered and profit is made
2. To provide fair and reasonable prices to your customers
For example: I started my service business without having any pricing strategy in place. After a few months, I looked at my books and saw that there wasn’t any money being kept - it was being spent on rent, machines, etc. After writing down my monthly expenses and figuring out how much it cost to run my business, I figured out how much I needed to charge in order to make a profit. All the while, doing it in a way where my customers were even more satisfied than before!
How to Price Your Services
Most businesses in the service industry use a cost-plus pricing structure and add on as their business grows and changes. The cost-plus pricing structure is a straightforward way to make sure your expenses are covered and that a profit is being made.
The formula looks something like this:
Labor costs + Material costs + (overhead + equipment costs) + Profit margin
You can use the following steps to help calculate your cost-plus pricing:
1. Calculate Your Expenses
The first step is to calculate the cost of labor, material, and overhead.
Labor and materials are the costs necessary to complete a specific job - like employee wages and supplies. For example, in a septic pumping business, these may consist of employee pay, fuel, dump fees, DEF, PPE, chemicals/additives, etc.
Overhead is the cost of running your business. This includes rent, advertising, truck loans, administrative staff payroll, and other equipment.
Once you gather these numbers as accurately as possible, add them to your formula.
2. Assess your market
Next, take a look at what your competitors are doing and what the market is looking like in the area you’re servicing.
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What does the cheapest company charge?
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What does the most expensive company charge?
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What makes them different from each other and what makes them different from you?
This will help give you an idea of what you should be charging. The reason why it’s good to scope out competition is because it will help you know where you sit in comparison to others in the market and build a good reason as to why people should choose your business over others.
This also helps make sure you aren’t charging too little, giving you a chance to make healthy profit margins from the start and to not devalue the industry.
3. Choose a Healthy Profit Margin
The last part of the formula is your profit margin. This is calculated from and added to your expenses.
Your profit margin will depend on your costs, business goals, market, etc.
The most important thing is that your profit margin is made with your business needs in mind.
Once you have a specific profit margin in mind, use it to determine what your markup should be. Use the chart below to determine how much you will need to markup your cost by.
For example, if you find that your business should be operating on a 30% profit margin, then you will need to multiply your cost-plus pricing number by 42.9%.
Add Your Numbers
Once you have calculated your costs, scanned the market, and landed on a good profit margin, you will need to start applying it to individual jobs. Use the following formula:
Total costs x (1 + markup)
For example, if your total expenses cost you $200 and you’d like to have a 30% profit margin, then your markup is 42.9%. With the formula, you get the following:
$200 x (1 + .429) = $200 x 1.429 = $285.80
In this instance, you would charge the customer $285.80 with an expense of $200 and a profit of $85.80.
Other Pricing Strategies
While the cost-plus pricing strategy is a very safe and effective way to charge your clients, there are other strategies that you can use as your business becomes more established.
Value-based Pricing
After about 6 months of being in business, I changed my pricing strategy to “value-based pricing”. I did this because I established my company and services with a good reputation and built up a good list of clients first. Value-based pricing allowed me to focus on the perceived value of my customers’ experience and my services.
For example: if you have an established septic pumping business, then you may start looking into what your service provides for people and why they choose to pay you for it.
What is their want/need and how do you fill that for them? Maybe they want to keep up with their house and make everything look nice. Try to take before and after photos so they can physically see how much better their system looks.
This works because people aren’t paying for you to pump septic, they are paying so they can have peace of mind that their system won’t back up.
If you promise a little and provide a lot, then people will almost always be happy. You can make your service and experience feel like it costs $500 when you only charge $350. That’s where you set yourself apart in the market.
These are just a few steps you can take to raise the perceived value of your service and look into charging based on that.
Fixed Pricing
This model is the most simple strategy when it comes to pricing. It’s when you charge the same price for a service regardless of the time spent on a job or the tools/equipment used.
This model may be simple and straightforward, but can be harmful if you don’t account for the difference in cost. Your price will need to be high enough to cover your expenses a majority of the time. I don’t recommend this method.
Hourly-rate Pricing
This method of pricing is dependent on the time you spend on a customer’s job. It’s important to accurately track time if you choose to use this strategy. You can use software such as Jobber or others.
This pricing model works well for larger businesses with multiple trucks and employees - especially if the work is mostly commercial. If you mostly service residential customers, it may be more difficult since perceived value plays a large part in choosing your business for an individual.
Pricing your services correctly is one of the most important steps in starting and growing your business. It will determine if you make a profit, how much profit you make, how your customers view your business, and the longevity of your business.
If you are interested in a septic or pump truck, check out our inventory here. If you need septic or pump truck accessories, check out our parts store here. Happy pumping!
By Riley Reed