Calculate How To Price Your Staffing Services
by Adam Horwitz
Last updated on March 3rd, 2023 at 11:04 am
Recruitment Agency Bill Rate, Markup, Fees & More
So you’ve started a staffing firm or are thinking about starting one. Now, what should you be charging customers to keep competitive and still make a profit?
Calculate Your Profitably Now
How to Price Your Staffing Services
Owning a staffing firm can be profitable, but only if you know what to charge your customers. Charge too much; you might lose contracts to your competitors. Too little, and you are undervaluing your services and cutting into your profit margin. Striking the right balance is key and a big challenge for this competitive industry.
To succeed in your staffing business, you need a comprehensive understanding of pricing and everything that goes into it. To get you started, we have laid out some basic pricing terminology and definitions, as well as a sample profit assumption to help determine your bill rate.
Pricing correctly is a difficult balance to strike, so we’ve compiled a few simple points to keep in mind. For a more in-depth look into pricing, download the free How To Price Your Staffing Services whitepaper.
The Components of Pricing
Bill Rate
Bill rate is the rate a company pays to a staffing agency for the services of a temporary worker. There are several components of pricing to take into account when figuring out your bill rate.
- Gross Margin – The amount of money a staffing firm gets to keep after paying the temporary workers’ payroll, benefits, payroll, and other statutory expenses. Gross profit margin dollars are used to pay internal overhead costs and the owner’s profit.
- Burden Rate or Statutory Expenses – Taxes, insurance, and other charges required by law. For staffing firms, it includes:
- Federal Unemployment Tax (FUTA) – Unemployment taxes paid to the Federal government. The FUTA rate is 6.0% with a wage base of $7000, and employers can take a credit of up to 5.4% of taxable income if they pay state unemployment taxes. If you qualify for the highest credit, then the minimum FUTA rate is .6%.
- Social Security and Medicare Tax Rate (FICA) – A single flat fee/ rate to all employers of 6.2% for social security and 1.45% for Medicare tax. This is capped at a salary of $137,700 for Social Security for each employee in 2020. There is no cap on Medicare tax.
- State Unemployment Insurance Tax (SUTA) – Rates and taxable wage limits vary significantly from state to state. And Worker’s Compensation Insurance.
- Worker’s Compensation Insurance – An insurance policy that covers work-related injury and illness. Workers comp insurance rates vary by skill type, vendor, and state.
- Markup – A percentage charged by the staffing firm on top of the pay rate. Markups can include various factors; statutory expenses, overhead and operating costs, and profit. Operating expenses can cover rent, equipment, recruiting fees, commissions, and more.
- Pay Rate – The pay rate is the direct pay given to the worker and makes up the majority of the bill rate.
- Profit Margin – A measure of profitability is calculated by taking net profit (revenue-cost) and dividing it by revenue.
What Is The Average Markup?
The average staffing agency markup for temporary employees or independent contractors can range anywhere between 20 – 75%. Permanent placement markups are typically 10 – 20% of the employee’s gross annual salary.
Calculating A Profitable Scenario
Let’s say you have an administrative assistant on assignment who has a pay rate of $15. Assume your burden rate is 12%. Assume your mark-up is 50%. The formulas you need are as follows:
- Bill Rate = Pay rate * (1+Mark-up)
- Direct Cost of Labor = Pay rate * (1+Burden rate)
- Gross profit margin = Bill Rate – Direct Cost of Labor
Now let’s put the numbers into the formulas.
- What is your Bill Rate? – $15 * (1+.5) = $22.50
- What is your Direct Cost of Labor? – $15 * (1+.12) = $16.80
- What is your Gross Margin? – $22.50 – $16.80 = $5.70 per hour
The $5.70 hourly gross margin is what you have as a staffing company to cover your overhead and your net profit.
How does mark-up affect gross margin?
Let’s take the same example and calculate using a 30% markup rather than 50%.
$15 * (1+.3) = $19.50
Your direct cost of labor stays the same: $15 * (1+.12) = $16.80.
What is your new gross margin?
Changing your markup from 50% to 30% has a significant impact on your gross margin. ($2.70/hr compared to $5.70/hr)
Try the staffing profilitablity calculator
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Common Questions On Pricing Staffing & Recruitment Services
What should my margin be?
According to the Gross Margin and Bill Rates Trend report from Staffing Industry Analysts, the gross margin among staffing firms is typically between 14 and 41 percent, with an average aggregate gross margin among temporary staffing firms of 25%. While industries vary, profit margins in staffing are typically healthy, if not huge.
Are My Statutory Expenses Constant?
No. Statutory fees can vary widely based on location and skill set. State unemployment insurance costs can vary by state as well as supplier. For example, one supplier may have 10% higher SUI fees in one state over another.
What are the factors I need to consider when determining my markup?
Besides the statutory expenses and gross margin, there are factors to consider, including the number of temps needed, duration of the hiring process, amount of recruitment time required, compensation level of the resource, etc. Your markup can vary based on these factors.
How Do I Explain My Markup To A Skeptical Buyer?
Some buyers might balk at a 50% markup, thinking that your firm is intentionally gouging them to make a considerable profit. That is not usually the case because the majority of the markup will pay for expenses with a bit of leftover for profit. Unless they have intimate knowledge of payroll or accounting, some customers simply are not aware of what it costs to be an employer. The buyer should also be mindful of the costs they are saving by hiring a temporary worker: benefits, training, vacation, etc.
Should I Use The Same Pricing For All Clients?
No. Typically, a staffing agency defines custom pricing based on a client’s anticipated volume, rate management approaches, location, turnover rates, ease of filling the skill set, and knowledge relative to the applicable bill rates.
Considerations Beyond Pricing
When starting a firm, we think there are four key things you must consider:
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- People
- Technology
- Insurance
- Payroll Funding
The people you hire are by far your most important asset, and sound technology infrastructure is critical. For a new firm, you will need various insurance policies such as Worker’s Compensation. Finally, you’ll have to secure the appropriate working capital. Startup temporary staffing businesses have significant and immediate cash flow needs. It’s up to you to figure out which financing option works best for your goals.
Learn more about pricing your staffing firm with our full range of back-office solutions and payroll funding.
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