In order to make sure your business is not only successful, but profitable, it’s important to know how to price your IT services. But how? No two companies offer the exact same services, methods, and quality, so it’s nearly impossible to establish a market wide standard price.
Instead of trying to calculate the market value of your services, we at ConnectWise recommend calculating your full hourly overhead burden, or the cost to your business per hour of service. With this information, you can have more control over your profit margin.
1. Assess Billable Staff
The cost of employees adds up to more than their hourly wage or salary. When calculating your billable labor burden, it’s important to consider additional costs, such as healthcare, worker’s compensation, disability, and other costs. Overall, everything in the W2 of your billable employees should be included in this calculation.
2 . Account for the Overhead
Your overhead is the ongoing price of operations. This includes non-billable staff, such as administrators and sales professionals, as well as recurring costs like utilities and business taxes. All of these costs are part of your business’s burden, but they are not billable by the hour.
eBook - Calculate Your Business Costs Get the Guide
Calculate Your Business CostsGet the Guide
3. Calculate Your Annual Billable Hours
The only way to know how much an hour of operation costs your business is to account for hours billed directly to your clients for your services. These are the hours that your business is able to generate revenue. Remember, these hours do not include billable employee paid time off or sick days. Only service hours your client paid for directly should be included in this total.
4. Crunch the Numbers
Now that you have these three numbers – the cost of your billable labor, the overhead, and the annual billable hours – you can calculate the full hourly overhead burden. Add your billable labor burden and the cost of your overhead to understand the true annual cost of running your business.
Dividing this number by the number of billable hours you have annually gives you the cost of delivering your service. This cost is what you would need to charge your clients in order to break even for your business.
Knowing the full hourly overhead burden of your business allows you to calculate your prices in order to meet a desired profit margin. Simply multiply your full hourly overhead burden by your desired margin on labor. Once you have multiplied that percentage by your cost, adding this number to your full hourly overhead burden will show you the minimum hourly cost to your client to meet your desired profit margin.
Finding the true hourly cost of your daily operations may seem like a computational challenge, but it is one of the most important for you to undertake. These calculations are crucial to ensure you are pricing your IT services to earn your desired profit margin while simultaneously providing quality service to your clients.