Authored by Phil Cohen
When creating a staffing company, one of the first tasks should be to determine what you will charge clients for services. You must balance profitability while also pricing services to remain competitive in the industry. While it is important to generate enough money to grow your business, you cannot price services much above the industry’s average in order to attract clients. Small business factoring can help with the initial cash crunch of starting a new small business.
How to Determine Pricing for Staffing Agency Services
Understand Your Competitors
In any industry, it is important to know who your competitors are for pricing strategies. Check around online and social media to locate your closest competitors. Look at their factors such as location, size and clientele. This information will aid you in your pricing strategy. If the competition is high, you will have to price accordingly. Staffing services are usually marked up 15-60%, but if there are a large number of competitors in your area, you may not be able to have a markup between 40-60%. If potential clients have the opportunity to pay less for the same services in a similar location for less money, they will likely overlook your company if you are priced too high.
Develop and Maintain Client Relationships
Developing relationships with potential clients and maintaining current client relationships can pay a large part of pricing staffing services for your agency. One tactic is to cater your pricing strategy for repeat clients to have a slightly lower markup to retain them as long-term customers. For example, if you normally mark up new client services to 12%, you could adjust your pricing to an 8% markup for high importance repeat clients. Retaining clients is critical for staffing agencies as they provide a service compared to one-time transactions of a business-to-consumer company. When you lower the mark up for certain clients, you will be able to maintain the high-importance clients with a slight price adjustment. Prioritizing client satisfaction can help your agency continue to grow, particularly for startup staffing agencies.
Conduct Industry Research
When constructing the fee structure for your staffing company’s services, conduct research on the type of market you are looking to serve. Different markets will drive markup percentages. For example, more in-demand industries can command higher markup than other industries. Also, the skills required for the positions can affect markup, as highly skilled workers, such as IT professionals, can lead to higher markups. Take a look at your target industry for insight into pricing fee structures.
Startup Costs for Staffing Agencies
There are two main categories of costs associated with starting a staffing agency: Establishment costs and operational costs. Establishment costs cover the essential expenses necessary to set up the basic structure of the business. These costs are usually one-time payments that must be settled before taking on the first client. This includes legal setup expenses, technology infrastructure, software, office space (if needed) and insurance. Operational costs are ongoing expenses incurred to secure employees, attract clients and deliver services. Startup costs in this category can change based on the complexity and skill level of job assignments. Some contributing factors to these costs include recruitment expenses, client acquisition costs and service delivery expenses.
Navigating the Initial Cash Crunch
There are several strategies you can take to manage the initial cash crunch that comes with starting a staffing agency. The first step is to understand and monitor your cash flow. By monitoring your cash flow, you can predict potential cash crunch periods and take proactive steps to address them. Before you start a staffing agency, it is advisable to establish an adequate emergency fund. This fund will act as a safety net during challenging times and give a cushion to manage unexpected cash flow disruptions. In instances where accessing a reliable cash cushion is difficult, staffing agencies should explore payroll financing services, also known as factoring. With factoring, businesses can obtain funds in advance based on outstanding invoices. Agencies can gain immediate access to a portion of the funds they are owed, which enables them to meet payroll expenses, manage business growth and prevent cash crunches. Other options to payroll financing include securing a business line of credit, obtaining a small business loan or seeking investment from external sources. Finally, staffing agencies can implement efficient cash management practices to mitigate the impact of cash crunches. This looks like closely monitoring and controlling expenses, negotiating favorable payment terms with vendors and optimizing invoicing and collections processes to ensure prompt payment from clients. These are all helpful options for navigating the initial cash crunch.
Staffing Agency Pricing Terms to Know
Pay rate: The amount of money your staffing agency will pay the worker. This is the largest aspect of the bill rate.
Markup: The percentage on top of the pay rate that is used by your staffing agency to cover employment taxes, workers’ compensation and insurance and your overall profit.
Bill rate: The sum of the pay rate and the markup. This is the total amount a client would pay your staffing agency for the service provided.
There are other factors that can change pricing, such as your competitors’ pricing, your client relationships and the nature of the industry. In the staffing industry, there are three types of placements. Each one commands a different fee and markup.
- Temporary Placement – If your staffing agency offers temporary placement, you are going to price your services just as the terms above are defined. For example, if you pay a temporary administrative assistant $30/hour and your markup is 60%, your total billing rate would be $48/hour.
- Temp-to-Perm Placement – Staffing agencies usually price temp-to-perm placement similarly to temporary placement, but there can sometimes be an additional fee. This fee is added when the worker becomes a permanent employee and your staffing agency will no longer be profiting from their placement. This fee can be established from the salary amount that the permanent employee would make. Using the example from above, if the administrative assistant was later hired as a permanent employee by your client with an annual base salary of $40,000, you could charge 5% of that figure as the added fee. Not all staffing agencies apply this fee, so you will need to decide if you want to charge your clients a fee.
- Permanent Placement – The fee for permanent placement will be much higher than temp-to-perm placement. This is due to the fact that your staffing agency will not make additional money from your hard work locating and possibly training a worker. The permanent placement fee is typically around 20%.
Factoring Companies Can Help Startups
Before you can decide on pricing your services, you first need to make sure your business generates enough profit to meet payroll. This is a common challenge startup staffing companies experience due to many customers having long-term payments. This is where factoring comes into play. Factoring can bridge the gap between slow paying customers and pay periods. For more information on what a factoring company does, contact Factor Finders today.
