Your business requires a specific price to allow you to deliver the goods or services your customers need from you. Without being able to price your offering at a level that permits you to make the right investments to deliver those results, you fail to produce those results, and you disappoint your customers.
You need to make sure you don’t pay more than is necessary for all the things your business needs. All responsible businesses work to control their costs, a tricky balancing act between spending too much and spending too little. You also don’t want to invest too little and fail your customers.
In your business, you no doubt have a competitor (or two or three) who always undercuts the minimum price required to deliver the outcomes your customers need successfully. These lowest-price competitors force their customers to make concessions, concessions that you, no doubt, refuse to make. You wish you could be more convincing in helping them understand how those concessions harm them.
We share this unfortunate experience with you. Also, like you, we can tell you where our competitors are making concessions and how it harms their customers and clients. It may feel good to get what you perceive to be a great deal, but if your staffing firm gives you a fantastic low markup, you can be confident they are making concessions.
There are individual costs a staffing firm incurs that don’t vary much from agency to agency—if they vary at all.
All staffing firms pay the employee’s wage, match their Social Security and Medicaid contribution (FICA), as well as their Federal Unemployment Tax (FUI). The staffing firm also pays State Unemployment, with costs that vary based on how well that staffing firm controls their costs. The variations here are mostly negligible.
Like every business, staffing firms also pay for Worker’s Compensation, which is typically a staffing firm’s most significant expense after wages. Worker’s Comp is a variable cost based on the company’s experience. Even though this is true, the costs don’t vary much between firms placing similar employees in identical roles.
These government-mandated costs don’t change much, and no firm can do too much to lower these costs. However, there are other costs included in your markup that differ by the staffing agency and their business model.
Your staffing firm makes certain investments to serve you.
Staffing firms also make different investments when it comes to recruiting and advertising. At the time we are publishing this post, the labor market statistics indicate unemployment is at its lowest point in fifty years, and the number of open positions is at a record high. The cost of advertising and marketing for new candidates continues to increase. Firms with extraordinarily low markups can’t—and don’t—make the investments necessary to advertise and compete for the best candidates.
When a staffing firm doesn’t invest in advertising and marketing, they struggle to acquire enough candidates, sending lower caliber employees simply because they don’t have the resources to invest in advertising—nor do they have the staff to interview and screen them.
The lowest markup means you are taking money out of your program and making concessions that may not serve your business—or your customers or clients.
Some staffing firms try to make acquiring customers easier by lowering their markups. However, in doing so, they make it incredibly challenging to execute for those customers.
In the city where we have our headquarters, one staffing firm won business at very low markups. To make the company profitable, they stopped paying the correct worker’s compensation, misclassifying employees to pay less than owed. They were later successfully sued by the State.
In a number of the cities where we have offices, we have clients who have asked about our background check and pre-employment drug screenings because they are unable to hire the low markup staffing firm’s employees after they reach their conversion hours. Their employees failed the client’s background check or drug screening, a concession the client was unaware they were making until they were unable to convert their temporary employees into full-time roles after a full quarter.
In maybe the most egregious case, we have had several clients who shared with us their experience of using a staffing firm with a very low markup. When these companies went to hire the staffing firm’s assigned employee into a full-time role, the employees shared what the staffing firm was paying them. The staffing firm was paying the employees $1.50 an hour less than what they had agreed to pay.
If your candidates are not of the caliber you desire and expect, it might be that your employee value proposition isn’t strong enough to attract them (something we can help with, should you need data and insights), but it might also be a low markup preventing your staffing firm from making the necessary investments. Employee retention is a high priority, and that means starting with a good candidate in the first place.
Staffing Firms are generally a net 3-4% business, meaning they keep about three or four pennies on the dollar after paying all the costs of their business. To retain those three or four pennies, your lowest markup staffing firm is cutting somewhere—and we guess that they are cutting everything, everywhere, all the time. When you take the lowest markup, you agree to concessions, even if you are not aware of them until you struggle with results that are less than you need.
The lowest markup tells you your staffing firms is making concessions that are going to increase your costs.
There are many reasons you don’t want the lowest markup. First, and maybe most importantly, you don’t want your staffing firm to give their time and attention to their other accounts instead of yours because every other client they serve is more profitable.
You also don’t want your staffing firm to make concessions that ultimately harm your business. Too few people hurt production. People without the right skills also damage output. These poor outcomes can cause you to fail your clients.
In the end, a lower price always ends up costing you more in the time and energy you spend dealing with the challenges created by a staffing firm which promises you better, faster, and cheaper. You can get better and faster, but it won’t be cheaper. Most of the time, you find out about your concessions too late.
We would never suggest you pay more than necessary to produce the results you need. That said, we would also suggest that you don’t invest too little either.