How to Price Business Services
Coming up with a business idea is only half the battle. Determining a price for your services is another huge part. As a business owner, you need to specify a price for your benefits before you can start offering them to potential customers, and if you can’t provide your services, you can’t make any money. So setting the right price is one of the crucial first steps in setting up your business.
If you were giving away your services for less than cost or just breaking even, you’d be operating a non-profit venture – or a business that’s likely to fail. There are various components that factor into whether or not a business is profitable, including location, leadership, market demand, competition, and so on.
Many service-based businesses struggle to come up with a fair and profitable pricing strategy. Unlike product pricing, you can’t precisely quantify all the costs that go into providing a service.
The expenses that go into providing a service are more subjective than those that go into making a product. How much you charge customers doesn’t always directly correlate with the amount you pay to perform services. If you own a retail store, you buy goods at a specific price.
To earn a profit, you need to sell the goods for more than what you paid. You determine how to price a product according to its cost. In service industries, finding a target profit margin is not as simple. You don’t have an original price to reference. Instead, your pricing formula for services should account for the intangible aspects of running your business, such as time and value.
Factors to Consider For Pricing
In short, pricing services is a tricky business. Because there is no set-in-stone method for pricing services, you have some flexibility in setting your price, but there isn’t a guaranteed formula that will enable you to set your price.
Here are the factors that experts say you should consider when trying to determine what price to charge for a service:
1. Cost-plus pricing
This standard method of pricing in business seeks to determine the cost of making a product or, in this case, providing a service, and then add an amount to represent the desired profit.
To determine the cost, you need to figure out direct costs, indirect costs, and fixed costs. Those costs include a portion of your rent, utilities, administrative fees, and other general overhead costs. When you make a deal to sell a service, you have to cover all your expenses.
2. Competitors’ pricing
You need to be aware of what competitors are charging for similar services in the marketplace, Osteryoung says. This information could come from competitor websites, phone calls, talking to friends, and associates who have used a competitor’s services, published data, etc.
If you have to compete on price to win a customer, you may ask yourself whether they will be loyal to you if they find someone offering a service at a lower price.
3. Perceived value to the customer
This is where a lot of the subjectivity comes in when setting a service price. The critical factor in determining how much they are willing to pay for a service may not be how much time you spent providing the service to your customer. Still, ultimately what the perceived value of that service and your expertise is to them, Osteryoung says. That is where pricing becomes more of an art form.
Guidelines For Setting Pricing For Your Services
Calculate 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. The U.S. Small Business Administration advises that the cost of producing any use consists of the following three parts:
1. Materials cost: These are the costs of goods you use in providing the service.
2. Labor cost: This is the cost of direct labor you hire to provide a service.
3. Overhead costs: These are the indirect costs to your business in providing services to customers. Examples include labor for other people who run the firm, whether administrative assistants or human resources personnel.
Other overhead costs include your monthly rent, taxes, insurance, depreciation, advertising, office supplies, utilities, mileage, etc. The SBA suggests that a reasonable amount of these overhead costs should be billed to each service performed, whether at an hourly rate or a percentage.
Determine a fair profit margin.
Once you determine your costs, you need to mark up your services to ensure that you achieve your business profit; This is a delicate balance. You want to ensure that you complete a desirable profit margin. Still, at the same time, particularly in a down economy, you want to make sure that your business doesn’t get a reputation for overcharging for services.
Now that you understand what it costs you to provide a service, what your competitors are charging, and how customers perceive your services’ value, it’s time to figure out whether to charge an hourly rate; a per-project rate, try to negotiate a retainer for your assistance. This may be predetermined by 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 and require that one third be paid upfront, another third be paid at the half-way point, and the remaining third be paid upon completion.
1. Charging at an hourly rate.
2. Charging a flat fee.
3. Variable pricing: Involves taking advantage of the flexibility afforded by service pricing to negotiate different prices to varying customers.
In a service business, your highest costs are usually your people’s 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 also want to 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. Keep track of the profitability of your company every month. 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. If you never raise your expenses, you won’t be in business for long.
You have to continually monitor your worth and your costs to be competitive in the market and make the kind of money you deserve to complete in your business.