Valuing and pricing your services is one of the most difficult yet important aspects of running your business – I know, fantastic, right? There’s no denying it’s both an art and a science. Get your pricing strategy for your services wrong and you will create a problem you may never fix. Get it right and you will dramatically increase the likelihood of creating a profitable business that thrives.
The thing is, if you’re going to invest the kind of time, money and effort that’s required to run a business, then it IS worth taking the time to do the best possible job you can at valuing and pricing your services. To make it easier, we’ve run through everything you should consider below. We’ve also included three ways you can add value to your product or service (so you get to charge more).
1. Factors to consider in pricing
This standard method of pricing in business seeks to first determine the cost of making a product or providing a service, and then adding an additional amount to represent the desired profit. To determine cost, you need to figure out direct costs, indirect costs, and fixed costs. Those include your rent, utilities, administrative costs, and other general overhead costs. You have to make sure to cover all of these, and then add your desired profit on top.
You need to be aware of what competitors are charging for similar services in the marketplace. Get this info from their websites, phone calls, talking to friends who have used a competitor’s services etc. Compete on service, quality, or other factors that set you apart if you can. If you have to compete on price to win a customer, ask yourself whether that customer will be loyal to you if they find someone offering a lower price. You want to establish long-term relationships in the marketplace. You want to convince the customer that you are giving them fantastic value in terms of service and quality – you just want to be aware of what the competition is charging.
Perceived value to the customer
This is where a lot of the subjectivity comes in when setting a price for a service. To your customer, the important factor in determining how much they are willing to pay for a service may not be how much time you spent providing the service, but ultimately what the perceived value of that service and your expertise is to them,
Calculating your costs
Before you set a price for the services your company will provide, you need to understand your costs of providing these services to customers. Here’s what to consider:
- Materials cost. These are the costs of goods you use in providing the service. A cleaning business would need to factor in costs of paper towels, cleaning solutions, rubber gloves, etc.
- Overhead costs. These are the indirect costs to your business in providing services to customers. Examples include other staff like administrative assistants. Other overhead costs include your monthly rent, taxes, insurance, advertising, office supplies, mileage, etc.
- Labour cost. This is the cost of direct labour you hire to provide a service. This would be the hourly wages of your cleaning crew.
Determining a fair profit margin
Once you determine your costs, you need to mark up your services to ensure that you achieve a profit for your business. This is a delicate balance. You want to ensure that you achieve a desirable profit margin, but at the same time, you don’t want a reputation for overcharging.
2. Different Pricing Models
Now that you understand what it costs you to provide a service, what your competitors are charging, and how customers perceive the value of your services, it’s time to figure out whether to charge an hourly rate, a per-project rate, or try to negotiate a retainer for your services. This may come down to your industry and the type of service pricing that predominates in your sector. For example, lawyers tend to charge hourly rates for their services, although those rates can vary. Many construction firms charge a project fee. Here’s what to consider with the following pricing models:
Charging an hourly rate
For many businesses, pricing services on an hourly rate is preferred. This ensures that you are achieving a rate of return on the actual time and effort you invest in servicing each customer. Hourly rates are often used when you are pricing your own consulting services. Your rate should be determined by your amount of expertise and seniority; a more senior consultant will generally be paid a higher hourly rate than a less experienced or junior consultant.
Charging a flat fee
Many people and businesses may prefer to hire your services on a fixed-rate or flat-fee basis. If a project takes longer than expected to complete, you may risk losing money on the client. If you have a customer that insists on a flat fee, you may want to see if they are ok with putting a cap on the number of hours involved in the project or agree to pay additional fees if the project runs over that time.
In addition to determining a fair price for your services, you have to determine whether you will practice a fixed-price policy and charge all your customers the same amount or whether you want to institute variable pricing, in which bargaining and negotiation help set the price for each customer. Just be wary of customers finding out you charge different prices to different people.
Monitoring your price
In a service business, your biggest costs are usually your people costs — salaries, benefits, etc. If you are having a hard time selling services at an acceptable profit, the problem may be that your employee costs are too high rather than the price is too low. You may want to also re-evaluate your overhead costs to determine whether there are other cuts you can make to bring your price down and your profit margin up. Look at your expenses and see what you can cut.
Monitor profitability monthly
You need to understand the profitability of your company every month. By the 15th of every month, you ought to have your financial statements from the previous month. A mistake many entrepreneurs make is not spending enough time going over their financial statements. In addition to understanding your monthly profitability, you need to understand the profitability (or lack of profitability) of every service you sell.
Test the market for new services and prices
You should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your services at a better and better price. Often the perfect time to do this is when quoting a price to a new customer. Raise the price and offer a new and unique bonus or special service. Measure the response and difference in profit.
3. How to add value to your service or product
Expert advice and professionalism
If you are the ‘authority’ in your sector, then your services are expected to be more valuable than those of your competition. Your aim here is to reflect your value by increasing your price. Make sure you know the benchmark price range for your service, and then decide on the premium you feel comfortable with. For example, say you charge $100 per hour, but your competitor charges $200 for their hour. If you are providing an equivalent level of expertise for your services in your field, then perhaps you should try increasing your hourly rate to the same as your competitor.
Bundling and packaging
Simplify buying choice by offering bundled price deals. Packaging two or three related services and encouraging your client to buy all at once is economical and efficient for both you and your client. The idea is to offer your client an easier way to buy from you and provide choice, so that it is easier for them to pick the option that suits them best.
Transition and education
Provide ‘welcome’ or ‘transition teams’ to enhance the on-boarding phase. It’s exciting to secure a new client and, when you do, there is a fabulous opportunity for both parties to celebrate and build rapport. That’s why creating an on boarding or welcome service is a great way to become acquainted with your new client. One example is to host a breakfast or lunch at your office. Invite your client and their team or invite your client and your team. The purpose of the event is to informally explain people’s roles and introduce them to each other, so they know who they’ll be working with.
The price you charge for your product or service is one of the most important business decisions you’ll ever make. Setting a price that is too high or too low will – at best – limit your business growth. At worst, it could cause serious problems for your sales and cash flow. If you’re starting a business, carefully consider your pricing strategy before you start. Already established? Improve your profitability through conducting regular pricing reviews. It’s worth trying new strategies to see if you could make some simple changes for significant benefit.