Paying the Dumb Tax

My top line revenue looks great for 3rd month in business, and should have generated decent profit, however not knowing how to correctly price my services has made this month more or less breakeven.

(5 minute read)

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Current Monthly Revenue (collected + receivables + booked cleans): $3,577.00

I was Horribly Wrong With My Pricing.

My pricing almost killed my budding business.

Until now, I was pricing my services at $50/hr/cleaner. So for 2 cleaners, $100/hr.

I was naively pricing cleans as a flat fee. For a 3 hour deep clean, I would price it at $300 for a team of 2 cleaners working for 3 hours.

I would make $120, and the cleaners would make $180. Sounds simple, right?

Wrong.

There are multiple different problems and issues with my old pricing that have left me with almost no profit this month.

In no particular order:

• Charging a flat fee is terrible when you’re paying labor hourly. If the estimated time is too low and the clean takes longer than expected, you have to eat the cost or try to negotiate a higher fee with the client. Neither is a great experience.

• Charging a base $50/hr and paying labor $30/hour leaves no margin for discounts and promotions which are crucial for attracting new customers. Offering a simple 15% discount reduces my gross margin down to less than 30%. YIKES.

• Not having a significant gross margin leaves no room for growth. While I can scrape by as I am currently, I want to grow through paid ads and hire a VA. This growth starts with a healthy gross margin.

By now it's obvious that I was charging too little and a flat fee is simply not an option when paying hourly.

But that’s just me still learning the business and paying the dumb tax.

So, how do we fix it?

Hello Healthy Margins!

Before we fix my margins, let’s get rid of my horrible flat fee pricing.

Instead, let's charge by the hour! Labor being paid hourly and charging hourly means I don’t lose if estimated time is off.

However, this opens up possibilities for small jobs such as a 1 bed 1 bath for only paying out $50 or so. This is not worth my time or the cleaner’s time to do the work.

How do we fix this? By implementing a 3 hour minimum charge. Assuming a rate of $50/hour, that same 1 bed 1 bath would be $150 (unless it takes more than 3 hours to clean).

This may deter some customers, but it is crucial for maintaining jobs that are attractive to my labor.

This fixes the worst of my problems, but what about my margins?

What is a good gross margin? A quick google search and it seems to be around 50-70%, although this varies a lot based on the industry.

That being said, for a service business like cleaning, it seems like a good profit margin is around 30%. I’ve seen this figure thrown around anecdotally and in @Remotecleanr’s interview with Booking Koala.

Given that 30% is a good for profit, we know that gross margin has to be greater. But how much greater?

I arbitrarily set a gross profit margin target of at least 50% because that’s what @iancushing teaches in his course (as you can tell I didn’t follow it very closely).

Considering I pay labor $30/hr, I need to charge $60/hr to get a 50% margin. In fact, I need to be charging more due to Stripe’s ~3% fee on each transaction.

After accounting for Stripe’s fees, I need to be charging $62/hr per cleaner minimum to achieve my target of 50% gross margins.

Let’s see how this works in real life if my business made $10,000 in a month (after Stripe fees) with some of my actual business expenses:

Real fixed costs:

• Booking Koala: $60/month

• CRM: $10/month

• Insurance: $52/month

Total: $122/month

Assumed Costs:

• Future VA will cost me $1000/month.

• Maintain $30/hr/cleaner

Revenue: $10,000

Labor: -$5,000

Gross profit: $5,000

Total fixed costs + VA = -$1,122

Net Profit = $3,878

A couple things to note:

• No marketing cost. Realistically, I would have had to spend on marketing. This cost can vary wildly. I know there are some people like @vamsidotdev who are killing it with paid ads. I am currently only acquiring customers through SEO, reaching out to Realtors, my network, and bandit signs.

• No taxes accounted for.

• No discounts accounted for. I am pretty generous with giving out discounts if it means a closed sale. The downside is a reduced margin.

• No pay for myself. Right now, I am not paying myself anything, and I intend to keep it this way for a few more months.

Overall, it seems like 50% gross margin seems like the absolute bare minimum I should shoot for to get close to a 30% profit margin.

In the coming weeks, I am going to see how high I can get this and report back on my progress.

One last thing: From the beginning, I wanted to charge at the top of the price range and offer a more premium service. Flat fee undermines this by incentivizing fast work to earn the most $ per hour.

Charging hourly allows the business to thrive in addition to incentivizing labor to take time and perform a quality service without being rushed.

As usual, I’m excited for what’s ahead!