Before setting profitable selling prices, you must identify and calculate all the tangible and intangible expenses required to operate your business. You must then determine the proportion of those costs attributable to each task you quote. Only by recovering your true operational costs can you price your services profitably and earn the reward you deserve for the risks you take in delivering excellence to consumers.

If you think that statement is untrue, you would definitely be wrong, and it would be detrimental to your business. Think about it. If you do not know the true cost you will incur to perform any task, you can’t know whether the price you quote to consumers is above, at or below your true operational cost. 

Knowing your true operational costs allows you to set your price above the true cost of providing any service. This is the primary reason your business exists. 

Breaking even on any task as a rule puts you on the slippery slope to business failure. Constantly selling below your true operational cost is the direct route to bankruptcy. 

When you sell your services at proper, profitable prices, you can afford to deliver excellence while you fulfill the reason you entered the business arena. Then, consumers can receive value for their hard-earned dollars. 

In turn, you and the consumer can reach a meeting of the minds.

A “meeting of the minds” is the foundation of a contract, which records the agreement between you and the consumer, including each party’s obligations. When you perform the agreed services, the consumer is obligated to pay the agreed amount, reducing the potential for disputes after the work is complete.

Contracts should include a description of the work/service proposed to be performed, any terms and conditions, and the agreed price for the fulfillment of the contract.

Your agreement may establish a payment schedule that includes a precommencement deposit before services begin, progress payments at specified stages of performance, and final payment upon completion of your obligations. That is OK for tasks that will be performed over a longer period, such as days, weeks, etc.

Repair, replacement and service-type tasks performed right there and then are usually paid for by the consumer before the commencement of work or after the completion of work, depending on the agreement.

Obviously, tasks performed on a time-and-materials basis are problematic, since even though the consumer agreed to pay a certain amount per hour of performance and for all material used in the performance, the consumer never agreed to the number of hours or the amount of material. This would put the so-called meeting of the minds in question. 

Identify the costs you can measure

Therefore, understanding your business’s total operating expenses — and the costs associated with each task — is essential to your business’s success.

Your business’s actual operating expenses fall into two categories: tangible and intangible.

Tangible costs are expenses whose amount or rate you can identify before you incur them. Examples include salaries and related expenses, such as FICA matching funds; payroll-related liability insurance; unemployment, disability and workers’ compensation insurance; health insurance; vacation and holiday pay; and retirement contributions.

Technicians need reliable vehicles to travel to customers’ locations and respond to service requests.

Vehicles are tangible business expenses because they cost money to purchase, fuel and maintain. Fuel prices may be volatile, but you know the price per gallon at the time of purchase.

Inventory and tools necessary to perform services are tangible business expenses.

The cost of completed operations insurance, catastrophe insurance and liability insurance not included in tech payroll are all tangible business expenses.

Administrative responsibilities also incur costs to your business.

The space you use for your business administration incurs expenses such as utilities, maintenance, office supplies/equipment and rent, which are tangible costs to your business.

Communications expenses such as phones and answering services are tangible.

Advertising comes with tangible costs.

Accounting, legal and consultant professional services are tangible expenses.

These are only a few examples of tangible business expenses you incur to operate your business. Many other expenses are necessary to keep your business running.

In other words, if you pay for it with cash, check, credit/debit card or some other digital method, it’s a tangible expense.

However, tangible expenses are only one part of the total cost of running your business.

Account for the costs you cannot see

Your business also incurs intangible expenses. Unlike tangible expenses, these costs are not immediately visible. You do not pay for intangible expenses directly with cash, check, credit or debit card or another digital method. Nevertheless, they are real expenses to your business.

When your operational business costs are based on selling your maximum available, potentially revenue-producing hours, but you sell fewer hours, you incur the intangible expense of unapplied labor.

Callbacks spent rectifying problems with the workmanship or the material that you sold to consumers add to the unapplied labor costs. This is an intangible expense.

When a consumer refuses to pay a bill in full, even when you have a binding contract, and you either lower the price to get paid or take them to court for full payment, you incur the intangible costs associated with your chosen remedy.

Replacing material broken by your tech comes with an intangible cost to you: the cost of replacing the item. Since you never expected your tech to break the item, the tangible cost of the replacement is actually intangible, as you cannot recover the cost of the broken item.

Replacing tools before their expected lifetime is another example of an intangible expense.

Murphy’s Law, “Anything that can go wrong will go wrong,” sums up the identification of an intangible business expense.

To earn more than your business spends, you must identify and calculate both tangible and intangible costs, allocate those costs to the services you sell and apply a profit margin. Pricing above your true operational cost allows your business to earn a profit rather than merely breaking even — or, worse, lose money.