Service businesses can charge customers by the hour.
The term "service center" refers to a specific type of business that provides services only on its own premises. Service-oriented businesses may serve customers over the phone, via the Internet or at clients' sites, but service centers -- such as auto repair shops -- require customers to visit the location in person to receive services. Service centers can choose from among a range of methods for apportioning their costs and setting prices for customers. One option is to charge customers an hourly rate. Calculating this rate involves adding up all of the costs incurred in performing services and distributing those costs across all available working hours in the center.
Overhead Expenses
The first cost to account for when determining your hourly rate is overhead expenses. Overhead includes all regular expenses that are not incurred as a direct result of performing a service. Examples of overhead costs include rent, utilities and insurance premiums. Add up all of your overhead expenses for a specific period, such as a week or a month, and write down the sum.
Labor Expenses
Service centers employ at least two types of employees: those who directly perform services for customers and those who perform back-office support functions. Depending on the types of services offered, service centers may also employ sales staff to identify and engage potential customers. Add up all labor costs from the same period as your overhead calculation. If you pay service employees hourly, multiply the hourly rate by the number of working hours in the time period used earlier. If you pay salaries, adjust the annual amount to correspond with the chosen time period. Add your total overhead and direct labor expenses, and write the total to the side.
Direct Costs
Direct costs include anything that is directly used as part of providing a service to customers. In a car wash, for example, direct costs include things like water, soap and wax. Service centers may purchase or provide products as part of complete service packages, in addition to the materials used up while performing services. A computer repair shop, for example, is not in the business of selling computer parts, but may install new components in customers' computers as a part of its service. Other service centers, such as automotive repair shops, may sell products directly to consumers upon request, even if product sales are not a part of their primary business model. Direct costs may vary according to each specific job. If this is the case, add up the total direct materials cost for your previous 10 to 20 jobs and find a per-job average. Then, multiply the per-job average by the average number of jobs completed within your chosen time period.
Hourly Cost
Add your running expense total to your average materials cost to find your average total costs for the period in question. Next, divide your total cost by the number of working hours in the period to find your average hourly cost. For example, if your total overhead costs were $5,000 per month, direct labor was $10,000 per month, and average material costs were $2,000 per month, your total cost per month would be $17,000. With 200 working hours in a month (25 working days multiplied by eight hours), your hourly cost would come out to around $85 ($17,000 divided by 200 hours).
Profit Margin
Add your desired profit margin on top of your hourly cost to arrive at an initial figure for your hourly rate. For example, if you wished to earn a 20 percent margin in the example above, you could set your hourly rate at $102 ($85 multiplied by 1.20). Adjust this figure periodically according to customer demand and your competitors' price changes.
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