Strategies and Formulas for Pricing for a Startup Service Business.
Do you own a service business? If so, you know that figuring out how to price services isn’t always easy, particularly when you are only just starting. Starting anything worth the while can be daunting, irrespective of recipes we all have to figure out what truly works and this takes effort. To make sure your small business is profitable, here are few tips for pricing services.
Why is pricing services so hard?
Many service-based businesses struggle to come up with a fair and profitable pricing strategy. Unlike product pricing, you can’t exactly quantify all the costs that go into providing a service.
The expenses that go into providing a service are more subjective than the expenses that go into making a product. How much you charge customers doesn’t always directly correlate with the amount you pay to perform the services.
If you own a retail store, you buy goods at a certain price, to earn a profit, all you need is to sell the goods for more than what you paid, which is basic and easy to fix profitable monetary pricing with products market where you majorly determine how to price a product according to the cost that brought about the finished product.
Unlike in service industries, finding a target profit margin is not that simple. You don’t have an original price to reference in the first place. Instead, your pricing formula for services should account for the intangible aspects of running your business, such as time and value which really don't have exactness in values.
In short, pricing services is a tricky business;
“As a service-based business, it’s difficult to price services because we need a model that is scalable yet flexible enough to solve our customers’ problems. Offering a scalable, one-size-fits-all price can turn potential customers off because their needs are typically not like those of your countless other customers. At the same time, offering 100% custom pricing can limit growth because of the time required to quote every facet of your services.”
So, how can you make strategic pricing work for your service business? You need the right service pricing strategy.
How to price services - Your 6-step guide
Because there is not a set-in-stone method for pricing services, you have some flexibility. Use the following six steps to learn how to price a service:
1. Calculate your costs.
If you want to avoid shortchanging your business, you need to know how much it costs to provide your services. To do so, use cost-based pricing.
Cost-based pricing is when businesses add up the costs that go into making a product or providing a service and mark up their prices from there.
As a service-based business, your costs are going to be a little different than that of a product-based business. You may not be stocking up on inventory, but you still spend money to operate your business.
Understanding the true cost of providing your services plays a big part in learning how to price your services.
You can break down your costs into two categories: direct costs and indirect costs. Add together your direct costs and indirect costs to determine the total amount of money you must cover during a time period.
Pro tip: Knowing your costs is just a starting point for service pricing. Remember that you must make at least your costs to reach your break-even point.
Direct costs — Your direct costs are expenses that go directly into providing your services. Examples of direct expenses include; Direct materials, Direct labor, Manufacturing supplies e.t.c
Indirect costs — Your indirect costs are expenses that you need to run your business but can’t pinpoint to a specific project. Pay special attention to your overhead expenses, which are a type of indirect cost. Examples of overhead include; Rent, Utilities, Equipment and maintenance, Insurance, Indirect labor (e.g., receptionist), Marketing and advertising e.t.c
2. Look at the market.
What are your competitors charging for similar services? How’s the market itself holding up?
Under market-based pricing, businesses look at what competitors are charging for similar products or services. On its own, using market-based pricing generally isn’t sustainable. You shouldn’t base your pricing for services solely on what competitors are doing. But, be aware of what other companies charge so your prices aren’t completely off base.
Your competitors are playing in the same arena. Ignoring their strategies for pricing services doesn’t help you break the mold in your industry. Instead, it leaves you ignorant about what’s happening in your market. And, you need to know how the market is doing before setting a price that nobody can afford.
Pro tip: Keeping an eye on competitor pricing reveals what sets you apart. If you charge more than your competition, show customers the value of the unique experience your company offers.
3. Know your customers(KYC) … and your perceived value.
No matter how much you charge, you won’t make money if customers are not willing to pay. You need to understand how customers perceive your business.
And to do that, you need to know your customers.
Use a market study to collect information about your target customers. Find out how much your potential customers are willing to pay. Look at things like their needs, income, family status, occupation, etc.
You can also distribute surveys and conduct focus groups to find out how much customers would be willing to pay for your services.
Learning more information about your target customers is part of a value-based pricing strategy. Under a value-based pricing strategy, a business bases its service prices on how much consumers value its offerings.
4. Consider time invested.
Looking at your costs, competitors, and business value aren’t your only considerations when pricing services. The time you put into the job done matters.
Think about how much time you invest in providing services. The longer you spend on a project, the more you should earn. Track how long it takes you to complete a project to help you come up with a fair price.
Also, consider how long you’ve been in the industry. The more time you have under your belt, the more value you add to your company and thus the offerings you provide. Generally, you can charge more as an experienced, trusted, and reputable individual in your industry.
Pro tip: You pouring time into providing a service usually translates to the customer saving their time. Don’t forget to consider your valuable time when coming up with a price— and marketing how much valuable time you’ll save your customers.
5. Come up with a fair profit margin.
Your profit margin is how much your business will bring in after subtracting the cost of goods sold (COGS). Coming up with a fair margin is key to turning a profit.
First, decide what percentage you want the profit margin to be. Profit margins generally vary by industry. But, a 10% profit margin is typically average.
If you want to know how to determine pricing for a service, add together your total costs and multiply it by your desired profit margin percentage. Then, add that amount to your costs.
Pro tip: Consider your costs, the market, your perceived value, and time invested to come up with a fair profit margin.
6. Charge an hourly or per-project rate.
Finally, decide whether you’ll charge customers an hourly or per-project rate.
You might consider charging customers by the project if you’re confident in the amount of time you think it’ll take you. Or, you might charge hourly if you don’t know how much time it takes you to perform the service.
Whether you charge customers per hour or project may depend on your industry. For example, a psychologist may charge per hour whereas a lawn service may charge per project.
What’s your fair price?
There isn’t one way to approach the pricing of services. It’s up to you to decide what your offerings are worth and how they fit into the market you serve.
If you’re calculating prices for the first time, you might think the amount is too high. But, it’s important to know how to calculate profitability accurately so your business can thrive. If you do a good job and take care of customers, you shouldn’t have a problem with your fees.
Deciding on a target profit margin is a careful balance. You want to mark your prices high enough to earn a good profit margin. But, you also must avoid getting a reputation for overcharging as consumers are smart. Most are willing to pay a fair price for a good service. But, it doesn’t take long for customers to figure out they’re getting ripped off. Know your worth and choose a service pricing strategy that matches the value of your offerings.
Twinkle and Blink Limited is a private consulting firm that helps businesses and start-ups manage statutory and regulatory compliance, engage with regulators and stakeholders and automate recurrent compliance processes. We understand that ease of doing business in Nigeria and Africa can be an illusion, but we are helping to change the narrative by letting businesses focus on their customers, whilst we focus on their compliance in Nigeria.
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