Last year I wrote a blog article titled “Organizing for Profit in a Staffing Company – 10 Issues to Consider”. One of the ten “issues to consider” was pricing. In this article I would like to dig a little deeper into this critical issue.
I have divided this topic into 5 key elements, the absolute necessity of profit, the market and competition, knowing your true costs, profit planning, and a “blended” pricing strategy.
The Absolute Necessity of Profit
This basic is obvious to all experienced business people, but two things: 1.) it is so critical that it bears repeating and 2.) there are significant details (see below).
Also, there will be readers here who are relatively new to being owners and managers of a Temporary Services company. They may well understand the basic principle but need to know more or be more aware of what they know.
Profit is necessary not only to survive a given fiscal year but, as well, to be sustainable for the next year and beyond. The business climate we have been in for the last year, due to the Covid-19, has taught us all a huge lesson in both survivability and sustainability!
In this regard, the American Staffing Association (ASA) was projecting a 17-19 percent decline in revenue for 2020 compared with 2019. And if your company was in the hospitality sector the loss of revenue was even greater.
The “great recession” of 2008-2012 was another huge hit and if you were focused on the construction sector you had a real problem with sustainability.
So, profit, plus the retained earnings, over time, gives the company a better chance at sustainability during tough times by, first, ensuring your company is “there” when better times return!
Retained earnings also allows you to make the investment in taking on a different market segment as in the present pandemic like switching from hospitality to warehousing. or in the Great Recession going from construction to food service, health care, agriculture etc
Profit and its ability to retain earnings is key for good times and bad. It provides the ability to “switch gears” quickly and make the investment to ensure success.
(Note: Many companies received government Payroll Protection Program (PPP) loans (grants) to help, but sustainability was certainly a big challenge for everyone! This PPP program was renewed and is taking applications now (January 2021) for those who did not get it last year and/or had a 25% reduction in revenue in 2020)
The Market and Competition
The market you are in or planning to enter is obviously related to the billing rates being charged by other companies and can have a significant impact, therefore, on profitability. But the “Market” is not simple. There can be weak competition that enables a more normal pricing with credible selling emphasis on quality, training, service, reputation, compliance history, etc.
“Knowing the market” means knowing these important details. The thoroughness of your market research will expose where the weaknesses and opportunities are that can be exploited while still enabling prices that can produce a sustainable profit.
There can also be niche markets within the larger market. These niche markets historically have also been the most profitable. You can often find them within the “vertical” of your existing clients. These clients, if your experience with them is excellent, can be your effective advocate within the vertical.
You can also sell staffing for other projects utilizing offshore talent in a host of possibilities from graphic arts, app development and programming to legal services, accounting, and architecture. Sell the project, staff it, supervise it, and make a good profit with a price that is still very competitive. (see below “a blended pricing strategy)
In this latter regard, see my article from last year titled: “Increasing Staffing Company Profits with the Gig Economy.”
Knowing Your True Costs
This is a basic but an important one that can make the difference between profit and loss, of falling short on your desired margin of profit making you more vulnerable to changing circumstances.
After taking inventory of all known costs, and being meticulous about it, it would still be a good idea to add a small percentage of gross revenue as a “contingency fund” roughly based on your own company’s historical happenings or those of other companies who are in the same situation.
It would not be necessary to include events that are covered by insurance except for the cost of your deductible. You should also have a replacement fund that amortizes your office equipment and furnishings. It would be good to have your accountant review you list of cost factors
Part of knowing your true costs is to know what the cost of acquiring a new client is? A client doing the same annual billings as your top-ten. Your history with client retention will let you know the figure. If it has only happened once every two years just divide it by two.
This will also be an important reminder that the cost of replacing a client is far greater than providing the level of service to retain good clients. Keeping clients saves time and money and keeps your pricing competitive.
Keeping costs low and your office efficient is also a function of your staffing software. In a recent “History of the Staffing Industry, Staffing Industry Analysts remarked that the advent of staffing software, smaller companies were able to compete more effectively with the larger staffing companies.
The hundreds of efficiencies operable in modern staffing software equals both increased professionalism and lower costs.
The relationship between your “pricing strategy” and your profitability is and will be discussed.
It is sometimes a good idea in establishing a competitive price, to work backwards. You may know what billing rate is acceptable in a particular market for particular job categories, and you might just go with them.
But for a few reasons, I believe it is better to work with the numbers yourself. Knowing every cost, contingency fund, replacement costs, a conservative estimate of sales. Then, figuring in a net income goal before taxes, you can personally derive what your billing rate should be to achieve that goal.
If these prices are at or below those you know to be competitive, great!
If your prices are above market, then a review should be done to see where these might be altered. If the prices are a bit above, you can just use them, explaining in very general terms, to clients how your pricing was arrived at.
Then, sell the client on your company’s professionalism, employee training program**, skill assessment, your regulatory compliance history, etc.
** See also my article “Building a Professional In-House Training Program”
A “Blended” Pricing Strategy
A staffing company today has three income streams. Two of these are well known, temporary contract employees & permanent placements. 85 % of staffing companies make permanent placements as a natural outgrowth of their focus on temporary placements which, often, will result in a permanent placement, usually called, “Temp to Perm”.
The other 15% of the industry focuses exclusively on permanent placements. We are talking here on the former sector which is the main branch of the staffing industry comprising about eighty-five percent of the industry.
But that main branch has recently acquired a new income stream derived from newer cloud-based web platforms that often draw workers and clients from a worldwide market. These very sophisticated websites like Fiverr, Upwork, Freelancer, and others are places where sellers and buyers of services can meet and contract with each other to accomplish many short term or medium term projects.
These platforms are still called “the gig economy” but are actually temporary service agencies just like the regular staffing companies. They hire temporary workers of various skills to perform temp jobs or Gigs for their clients for a percentage of the income from these jobs.
It is simpler than that. The platforms connect the workers directly with the clients. The platform takes a small percentage (roughly 10% of larger jobs & 20% of smaller ones.
Increasingly, a staffing company will propose a project to his client and agree to staff it, supervise, and deliver it for a fee. It could easily be 50-100% of the job.
The staffing agency then contracts with the worker (programmer, web developer, graphic artist, app developer, animator, etc.) to do the job for a price that he marks up 50-100%. This markup is achievable because you are working with a worldwide talent force where prices, even for highly skilled workers, are quite low by US standards.
Also, because it is drawing from a worldwide talent force, you are reaching 100% of the US market as well where prices vary from quite high in some major metro areas, to very reasonable is other areas. Keep in mind that you can get several bids for the same project and your workers are independent, working from home.
This tremendous resource now gives our US and Canadian staffing companies an excellent third revenue stream which allows for what I have called a “blended” pricing strategy.
What I mean by this is that a company can now be very competitive with standard temp services, higher margins on niche markets and special projects.
So, let’s say you did $100,000 in each of the three revenue streams; Gig projects with a 85% margin, niche project at 45%, and standard temp work at 25%, you end up with $300,000 at an average markup of 52%.or $156,000 gross profits on $300,000 using three market opportunities which are all readily available to the classic Temp Agency..
If you compare that with $300,000 at 25% yielding $75,000 you increase your gross profit by $81,000 on that same $300,000 in revenue ($156,000 -75,000 = $81,000)
See also my article (cited above in “The Market and Competition” titled: “Increasing Staffing Company Profits with the Gig Economy”.