Service-based businesses have a reputation for being relatively “safe” and recession-resistant in the business world. The conventional wisdom behind this theory is simple: sell something people actually need, do the work well, and they’re much more likely to give you their business even when money is tight.
That’s basic sales 101, but it’s also a dangerous oversimplification that can lull people into a false sense of security because being “needed” won’t make you immune to economic or market instability. Your profit margins will still shrink if the price of materials, labor, insurance, fuel, and equipment goes up.
I’ve spent over 30 years running service-based businesses, and what I’ve learned in my time at the helm is that price increases often do more harm than good. There are better ways to improve your margins that won’t put you at risk of pricing your customers out at a time when they may have even less to spend.
1. Sell More Services to Customers Who Already Trust You
A quick way to gauge the value of your existing customers is to compare the cost of acquisition against what the average customer is worth to your business over time. You’re aiming for a ratio of somewhere around 1:3, but that’s the bare minimum.
Here’s an example. Let’s say it costs your company $500 in advertising, sales time, office labor, and follow-up to acquire a customer. That customer needs to generate at least $1,500 of revenue for your business in order for them to be worth the investment.
Nurturing a customer who already knows and trusts you enough to give you their business almost always costs less than acquiring a new one. That matters even more when economic pressure is squeezing your business from both sides.
The solution?Look for opportunities to remarket your services to your existing customers instead of spending a fortune on chasing new leads.
You can achieve this by:
- Building future check-ins, like re-checks or touch-ups, into the original service.
- Expanding your offerings to include other related services your customers need.
- Using email, direct mail, or social media campaigns to keep them engaged.
- Creating educational content that provides value or makes their lives easier.
- Encouraging referrals and repeat business from satisfied customers.
Does this mean that you should stop trying to acquire new customers altogether? Absolutely not. You’re just diversifying your approach to bring in more revenue that doesn’t cost you as much to generate in the first place.
2. Get Brutally Honest About Which Jobs Are Worth Taking
When money is tight and the economy is clamping down on your industry, it’s easy to fall into the trap of taking every job that comes in. Seeing a full calendar of work on the roster when you’ve been stressing over the math for weeks is an amazing feeling, but a full plate doesn’t always equal healthy margins.
I’ve seen plenty of companies over the years actively lose money even when they had so much work on the roster, they had to hire new people just to stay on top of it. That only works if the work you’re doing is actually making you enough money to justify doing it.
Every service business has a job or two that doesn’t really make them much money but makes customers happy or helps attract them to you in the first place. It’s the repair that’s an hour each way for a small ticket or the customer who needs the quote redone three times before they say yes.
Book too many of these and your profit margins will start to fall, but the opposite can also be true. Chasing the biggest and most expensive invoice on the board doesn’t make sense if the cost to actually fulfill the work order is almost as high as what they’re paying you.
The fix is to sort last year’s jobs by margin instead of revenue. Get honest about what defines a “good” job for you in terms of the max distance, size, complexity, or even customer type. If it won’t make you any money, refer it out or decline the job and move on.
3. Stop Paying for Hours You Can’t Bill
Labor is the biggest line item in almost every service business, and it’s also the first place where waste tends to show up. Far less of the average worker’s day is spent on production than most owners realize, and unless you have serious cultural issues, the cause is rarely as simple as people slacking.
The real contributor is sneaky little productivity losses scattered through your workflows that are either so intangible or imperceptibly minor, no one really recognizes them as a source of loss. Crews waste hours driving because no one bothered to optimize their routes. Paperwork is so convoluted, it takes hours to fill out. Workers get to the job site, then have to sit around all afternoon waiting for materials to arrive.
These kinds of inefficiencies can chip away at your bottom line, but they’re also frustrating for the workers who are forced to deal with them, too. At best, it’s a waste of their time and talent, but it can also leave people burned-out, exhausted, and feeling unappreciated.
The fix is to actually review how the workflows, role by role, and ask the people doing each job what they’d change if they could make improvements. Crews already know which routes are time-consuming, which paperwork is the most confusing, and where the waste happens. All you have to do is ask.
Don’t consider this a “one and done” situation, though. Keep the rapport going so you can build a healthier, more organized work environment for everyone and save money at the same time.
4. Pay Closer Attention to Your Overhead
Labor isn’t the only area where inefficient spending can fly under the radar in a service-based business. In fact, I’ve found that it’s even more common to find it in your overhead, the fixed costs that keep the doors open every single day. In a way, it’s even more insidious because it can be harder to spot.
- The software subscription nobody’s opened in months.
- The per-seat plan for a technical tool that no one even uses anymore.
- The insurance premium that keeps climbing every year in spite of your pristine claims history.
- The vendor or supplier terms you haven’t renegotiated in a decade that are costing you a fortune.
- The “extra” vehicle that sits in the lot parked but still insured, fueled, and depreciating.
You won’t notice any of these unless you go looking for them, and the standard advice for what to do once you find them is to do a comprehensive audit and then start trimming. But don’t just start chopping away unless you fully understand the spillover effect of each expense. You may find the issue isn’t so much the wasted money, but that the process connected to it needs to be reorganized instead.
Build Better Margins, Save More Money
The instinct when business margins are thin is to go back to the drawing board and build something new, increase your prices, or spend even more money on marketing to bring in more leads. I’d argue that a business is just like the roof on your home: it needs regular maintenance to keep performing well. Trying to tear it all down and build something new would be wasteful when you can just improve what you have.
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