6 Key Factors to Consider When Pricing Services
Is your service company profitable? How profitable? How do you know?
Pricing for service-based businesses is often elusive for many business owners. If you look at the price for consulting or marketing, for example, you will likely find pricing and pricing strategies all over the place. If they are based on hourly fees, some firms will focus on a low price strategy, others will be more “middle of the pack” – basing their pricing on average market rates, and others present themselves as premium service offerings. If they are project-based, they may price based on estimated hours or even based on the future value of the service.
Regardless of the pricing strategy, in order for a company to be profitable, it is essential for the company to have a method for creating it. Below are some key principles to consider when establishing pricing for your service business.
- Profitability: Profitability is always going to be the most important element of your pricing strategy. If you are working on a cost-plus basis, where your pricing strategy is based on covering all of your costs – including a markup for operations, make sure to add in profit margin. Take a look at this article on business profit by thebalance.com
- Cover ALL of the labor: While most business owners are conscious about covering the costs of their staff, sometimes we as business leaders don’t cover the cost of our labor. You can use a cost calculator like this one provided by Tsheets by QuickBooks.
- Operating markup: while many firms will opt to have some type of operating markup, it is important to have a method of determining what that number should be. If you look at your operating costs for the month versus your total revenue for the month and find that you’ve been doing a 10% markup but your operations actually cost your 15%, you’ll need to make an adjustment. Your operating expenses are eating into your profit!
- Competitors: Find the firms that are most closely aligned with what you do – both direct and indirect competitors and learn what they are charging. Sometimes you may find that they are charging a lot more than you are and you are leaving money on the table! Keep in mind that the unique value that you provide may be something that your customers would be willing to pay extra for. Understand the benefits and disadvantages to this approach.
- Market: Your market has a mental expectation associated with what you will charge. Simply stated, if you charge more than they expect, it will be difficult to close them. If you charge less, then they will likely be suspicious of your abilities. Side note: the alignment between your market’s impression of your company and the price they will be willing to pay has everything to do with how the company is positioned. Positioning is part of what influences a customer to buy from you.
- Industry: Your industry may influence how you are able to charge for your services. For example, if you are in construction doing bid work, you may find that certain customers will want to see line-by-line what they are paying for, including any markup that you plan to include. Which means that if you don’t provide that information, you won’t be included in the bid opportunity.
Your company’s pricing strategy requires an investment in time to complete, but it should result in a pricing model that will allow your company to sustain. Having a process or methodology in place will help for when the market shifts. Not fully understanding your pricing strategy could lead to under or over pricing and make it very difficult for you to maintain solvency.
- When pricing services, it is important to ensure you have considered the following factors to ensure profitability with each transaction.
- Regardless of the pricing strategy, in order for a company to be profitable, it is essential for the company to have a method for creating it.
- Profitability is always going to be the most important element of your pricing strategy.
- Find the firms that are most closely aligned with what you do – both direct and indirect competitors and learn what they are charging.
- Your company’s pricing strategy requires an investment in time to complete, but it should result in a pricing model that will allow your company to sustain
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