Current market conditions, marked by low unemployment, favor staffing agencies. Last year, the staffing industry saw sales increase 4.4 percent, according to figures from the American Staffing Association. However, sales alone aren’t enough to guarantee success.
To stay profitable, staffing firms need to keep their markup in mind as they pursue new business. Your agency’s markup is a critical determinate of profitability, and it’s based on two factors:
- The average rates of other firms in the market, particularly firms offering the same niche services
- The rates that an individual firm is able to negotiate with clients
Profitability, then, is largely a product of how well your agency understands the market, as well as its ability to effectively translate that knowledge to pricing.
Choose the right markup
Determining your agency’s markup can be tricky. You don’t want to leave money on the table either by paying temporary employees too much or charging customers too little. The losses might look negligible — sometimes just fractions of a dollar — but when taken together, it could mean significantly less money delivered to the bottom line.
Rates should also factor in market conditions. For example, one pricing strategy could be to set markups that are conducive to forming lasting client relationships. High-volume clients are typically granted a more favorable rate, with the hope that the volume of business makes the relationship profitable over the long term. In more competitive markets, however, agencies will need to negotiate each placement aggressively as they look to win business.
Staying profitable as you bring new clients on board is another consideration. In some cases, there may not be room to negotiate contract terms and conditions, a more common occurrence with large accounts. And with smaller accounts, sales representatives may take the initiative and negotiate markup rates. Firms, however, should carefully determine markups and other terms and conditions internally, closely analyzing margins and profitability before entering into any agreements. Don’t be afraid to walk away if the cost of servicing the account will exceed the revenue it generates.
Consider the big picture
Of course, profitability is more than just having the right markup. Staffing agencies must take a judicious approach to managing costs across the organization to achieve the best profit margin. That means paying careful attention to pay rate; statutory expenses such as state and federal unemployment tax, Social Security and Medicare Tax, and Workers’ Compensation; and gross margin.
It’s essential to understand the factors affecting your agency’s profit margins to maintain profitability as you seek out new clients to grow the business. Knowing the market and the competition, while key to setting markups, is only part of the equation. You must consider all your expenses, as well as your opportunities for cost cutting and revenue growth, to maximize profitability.
Still need help understanding your profit margins? TemPay has developed a spreadsheet that staffing agencies can use to calculate their profits for any combination of pay and bill rates. Enter various expenses into the spreadsheet manually to obtain realistic results. Email firstname.lastname@example.org for details.