In the three years to 2017, the price of payroll services has been increasing at an estimated average annual rate of 0.7%. This upturn has been facilitated by an expansion in demand for payroll services, although robust competition in the market has moderated the extent of this growth somewhat.
As the economy has continued to strengthen during the past three years, the number of employees has risen in line with a declining rate of unemployment. A growing number of employees has added to the complexity of payroll because businesses have had to do more back end work to integrate new workers into their operations. As a result, businesses have been compelled to outsource the administration of payroll to third-party processors, strengthening demand for payroll services. Meanwhile, as low interest rates have created favorable operating conditions for new businesses to raise capital, the number of businesses has increased across the United States. This growth has bolstered demand for services because many of these new businesses have enlisted the help of a provider of payroll services. Ultimately, vendors have raised the price of payroll services to reconcile growth in demand for services, curbing buyer power.
However, high market fragmentation has tempered the magnitude of growth in the price of payroll services. The market has a large number of vendors, and the number of operators has been increasing during the past three years due to low barriers to entry. A strong degree of competition has prompted vendors to compete on price with one another to capture a share of market revenue, keeping growth in the price of payroll services minimal.
Moreover, the level of price volatility has been low during the past three years, further benefiting buyer power. Despite some fluctuations in key price drivers, strong competition between suppliers has moderated how rapidly rates for services have changed year over year. As a result, buyers have been able to budget accurately for purchases of payroll services.
In the three years to 2020, the price of payroll services is forecast to rise at an average annual rate of 1.0%. Rates for services are projected to grow more rapidly as demand for payroll services increases during this period. However, growth in the price of services will be moderated as vendors’ wage costs fall as a share of revenue.
Corporate profit is projected to grow more rapidly in concert with economic growth during the next three years. A greater amount of corporate profit will afford businesses additional capital to invest in ancillary services to improve operational efficiency, including payroll services. Meanwhile, both the number of businesses and the number of employees are forecast to continue rising as the economy grows. As these drivers enlarge demand for payroll services, vendors will have greater pricing power over buyers, which will contribute to greater rates for services.
Despite a meager increase in average wages for employees of payroll services, vendors’ wage costs as a share of revenue are anticipated to decline as revenue outgrows these expenses. Given that wages account for the largest portion of revenue, this decline will temper the extent to which suppliers raise rates for services during the next three years.
Moreover, the degree of price volatility is forecast to remain low. Thus, the price of payroll services is not anticipated to fluctuate considerably on a yearly basis during this period, allowing buyers to budget accurately for these services. Although the price of payroll services is forecast to grow at a faster rate during this period, buyers are encouraged not to rush into a contract. Instead, they should take time to accurately assess service needs and choose a reputable supplier.