Setting the prices for your staffing firm’s services can be tricky. Some of the costs that you need to cover are obvious — the pay rate of the worker, employer taxes (FICA, Medicare, SUTA, and FUTA), workers compensation, any benefits that are paid, plus overhead. But determining the remainder of the markup is difficult, especially when trying to stay within the range of market competitors while generating a level of profit that makes it worthwhile.
Writing for Staffing Industry Analysts’ “The Staffing Stream,” Kirk Reade, a senior associate with Brightfield Strategies, offered a two pricing models to consider.
Bill rate model
A bill rate pricing model, Reade says, offers three things. First, it creates greater flexibility in providing contingent labor to the client, which enables the staffing firm to average out the margins received across a larger number of contractors.
In addition, bill rate allows you to maintain a higher level of consistency between wage rates paid to contractors with the same job title. This can be helpful when the range of pay rates between similar skills stays fairly tight, something that’s important in an environment in which workers share wage information.
The bill rate model requires strong market intelligence about the wage and bill rates paid because it provides a benchmark for more commoditized positions, such as those utilized in a call center. When using this model, pay close attention to changes in the competitive landscape, as that could require an adjustment in pricing.
The pay rate plus markup model is very common and is used to do essentially two things. The first is to control the supplier cost model at the transaction level. Reade says establishing a set markup means that suppliers will not gouge the buyer in any single transaction. Using multiple suppliers to support the contingent worker program can enable the buyer to obtain the resources needed, with the comfort of knowing that a limited amount of the bill rate is going to the supplier.
The second benefit of the markup model is that it allows for wage fluctuations where a wide range of wages for a single skill may demand a broader pricing model — for example, IT jobs. With these positions, the markup model may be the way to go because there are a number of factors that can impact the true cost of a placement.
Something for yourself
While there are many things to consider when setting your prices, your agency’s profit margins are key to maintaining profitability. It may seem obvious, but sometimes profitability is sacrificed as firms seek out new clients to grow their business. Consider all of your expenses, as well as the competition in the market, when establishing your prices. And make sure you can justify your margins — not just to your clients, but to yourself.
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.