The Hidden Key to Profitability: Mastering Your Cost of Services
For many service-based businesses, the path to increased profitability often seems to involve two main routes: raising prices or acquiring more clients. While both are valid strategies, there's a powerful lever often overlooked that can dramatically boost your bottom line without either: understanding and optimizing your Cost of Services.
When we hear "Cost of Goods Sold" (COGS), our minds typically jump to manufacturing or retail. We picture raw materials, production lines, and inventory. But service businesses have their own direct costs, and just like product-based companies, dissecting these expenses can unlock significant profit potential.
What Exactly Are Your Costs of Services?
Think about the direct expenses incurred every time you deliver a service to a client. These aren't your general overhead like office rent or administrative salaries. These are the costs directly tied to fulfilling a specific client project or engagement. Here are some common examples:
- Direct Labor: This is perhaps the most significant cost for many service providers. It includes the actual time you or your team members spend directly working on a client's project. This isn't just billable hours; it's the time invested in research, planning, execution, and client communication for that specific project.
- Software Licenses: If you use specialized software directly for client delivery (e.g., specific design software for a creative project, project management tools billed per client, or analytics platforms used only for client reporting), a portion of these costs should be allocated to your Cost of Services.
- Subcontractor Fees: If you outsource parts of a client project to freelancers or other businesses, their fees are a direct cost of delivering that service.
- Travel Expenses: For on-site client work, direct travel costs like flights, accommodation, and mileage directly related to a specific project.
- Materials/Supplies: While less common than in product businesses, some service businesses might have direct material costs (e.g., specific print materials for a marketing campaign, unique supplies for a training workshop).
Why Does This Matter So Much?
The beauty of optimizing your Cost of Services lies in its direct impact on your profit margins. Even small reductions in these direct costs can lead to substantial increases in your net profit, all without the pressure of finding new clients or the potential backlash of raising your rates.
Imagine you have a service with a 50% gross margin. If you can reduce your Cost of Services by just 5%, that doesn't just add 5% to your profit; it could be a much larger percentage increase of your net profit, depending on your overall cost structure. It's about working smarter and more efficiently, ensuring that every dollar spent on delivering a service is truly optimized.
How to Start Optimizing
The first step is to accurately track and categorize these direct costs. Many service providers don't have a clear picture of their true Cost of Services, often lumping them into general operating expenses.
Once you have a clear understanding, you can begin to ask critical questions:
- Are there inefficiencies in our project delivery process that are increasing our direct labor costs?
- Are we utilizing our software subscriptions effectively for client work, or are there redundancies?
- Can we negotiate better rates with our subcontractors without compromising quality?
- Are there technologies or process improvements that could reduce the time spent on repetitive tasks for clients?
Ready to Stop Leaving Profit on the Table?
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What's one area of your direct service costs you plan to review this week to boost your profitability? Let me know in the comments!
#ServiceBusiness #Profitability #CostOptimization #FinancialManagement #Entrepreneurship #ASmithStrategies
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Dear Black Business Woman,
I regularly publish short, powerful message cards across my social media platforms. These are direct messages written for and to Black women in business. Each one is designed to cut through the noise, call out the real barriers we face, and challenge the beliefs that keep us second-guessing our worth.
Here on the blog, I spotlight select message cards as a way to go deeper. These posts offer the story, reflection, and strategy behind the message—because sometimes a single sentence carries an entire journey.
Let’s start with this one.
I didn’t realize I was pricing for validation until seven years into running my business.
Scratch that. I knew it. I just wasn’t ready to admit it.
Not because I was unaware, but because I never saw myself as a people-pleaser. Still don’t. But that doesn’t mean I wasn’t trained, like many of us, to associate “being good” with earning approval.
My relationship with my mother laid the blueprint. A phenomenal woman who raised four kids in Detroit during the crack epidemic of the 1980s, she made sure our basic needs were always met. Food, clothes, clean home. That kind of love was never in question.
But emotional acknowledgment? That was harder to come by. Especially for the child who didn’t “need” her in the obvious ways—no trouble at school, no dramatic meltdowns, no real rebellion. Just quiet achievement, certificates, scholarships. Things that, in my young mind, would surely earn me attention.
They did not.
And so, I learned to create “need.” Asking for recipes I already knew. Stopping by for help with houseplants I didn’t care about. Playing vulnerable in subtle ways to feel seen. And somewhere along the way, I absorbed the belief that love, recognition, or even acknowledgment was something I had to earn.
That belief followed me into the workforce. Then into entrepreneurship. And once I was my own boss, it looked like this:
- Pricing my services based on what I thought people could afford, not what the work was worth
- Overdelivering to “make sure” the client was happy, even when the scope was clear
- Discounting, comping, and justifying it all by calling it “good service”
But let me tell you, approval doesn’t pay your taxes. It doesn’t cover your software subscriptions. And it sure doesn’t get you rest.
You can be generous and still have boundaries. You can be passionate and still demand to be paid. You can care deeply and charge fully.
I had to learn that validation and value are not the same.
Key Takeaways for Black Women in Business
If any part of this story hit home, here are three truths to carry with you:
1. Discounting isn’t generosity. It’s often unhealed conditioning. Pricing to be liked, chosen, or praised keeps you in a loop of seeking approval instead of building wealth.
2. Scope creep starts with you. If you don’t respect the boundaries you set, no one else will either. Compassionate service doesn’t mean endless labor.
3. Don’t train your clients to overlook you. When you undercharge or overextend, you teach people to undervalue not just your work but your role in the outcomes they celebrate.
BONUS: Two Pricing Approaches to Take the Emotion Out of the Equation
Let’s talk numbers without the guilt, fear, or second-guessing.
There are two foundational pricing approaches I recommend. The right one depends on the type of work you’re doing as a service-based business owner.
1. Effort-Based Pricing (for time-bound or deliverable-heavy services)
If your service requires a significant investment of time or has a clearly defined scope — like a QuickBooks cleanup, a full website build, or monthly billing for ongoing virtual assistant support — this method works well.
Formula: Time Estimate × Hourly Rate + Additional Costs + Profit Margin
This ensures you’re not undercharging for your time or overlooking business expenses.
But don’t stop here. This should be your starting point, not your ceiling.
2. Value-Based Pricing (for strategic services tied to client results)
When your work generates revenue, saves time, or helps avoid costly mistakes for the client, you’re not just selling hours. You’re selling outcomes. Transformations.
Ask yourself:
- What is the potential revenue gain for the client?
- What is the cost of not solving this problem?
- What impact does this have on their time, efficiency, confidence, or opportunities?
Then price accordingly.
A Couple of Examples
✅ Example 1 – Business Coaching or Strategy Session You help a client restructure their offer suite. Within 90 days, they bring in an additional $15,000 because of it. You didn’t just coach for 3 hours. You helped create a $15,000 result. Charging $1,500 to $2,000 for that transformation isn’t just fair. It’s conservative.
✅ Example 2 – Pricing Overhaul for a Service Provider You work with a web designer who’s been charging $500 for a site. You help her reposition her services and raise her rates to $2,500. She books four new clients at that rate in the next 60 days. That’s $8,000 of new revenue she wouldn’t have seen without you. Your fee of $1,000 to $2,000 is still a win for her and a step toward equity for you.
Final Thought
Hourly rate pricing says, “I’m trading time.” Value-based pricing says, “I’m delivering transformation.”
And Black women in business deserve to build pricing models that reflect the true value of what we bring, not just how long it takes us to deliver it.
We all have stories—personal, professional, and generational—that shaped our relationship with money, worth, and visibility. But those stories don’t have to write our future.
Unlearning is hard. Pricing with clarity is harder. But your freedom is on the other side of both.
I’d love to hear from you. Let me know in the comments if any of this resonates with you.
Have you ever felt the need to earn love or approval from someone you hold dear? If so, how did that carry over into other areas of your life?
And how do you approach pricing your services today?
Your Partner in Strategy,
Angeline
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