Pricing your services can be tricky. Set prices too high, your customers won’t buy. Set them too low, they’ll might buy it but you miss out on valuable revenue. Thankfully, pricing doesn’t have to be a sacrifice or a shot in the dark. There are some pricing strategies that can help you better understand and discover how to set the right prices, so you can drive both revenue and profit.
Pricing your services can be hard. It is not just about internal costs, margin and what you should really be charging in order for you to be profitable. It has to be about getting to know your competition and how they are pricing their services, and most importantly, the value perceived by your potential customer.
The right price is a matter of balance. If you price your product too high, your customer won’t buy it. If you price it too low, they’ll buy it, but your margins will suffer.
As you read through the upcoming sections, remember that no strategy is better than the other and will depend on your unique business needs and goals.
Firstly, what is a pricing strategy?
A pricing strategy is a method for deciding the price you will set and charge for your services. The right price is the one that your customers will willingly pay, but which also maximizes your profits and business success.
Is pricing strategy same as pricing model?
In the minds of many businesspeople, the terms pricing strategy and pricing model mean the same thing. As stated above, a pricing strategy is a method or internal way you set the price. On the other hand, a pricing model is a kind of price format or simply the way you package and present your services to the customers. Also, it can be said that the pricing model provides specific rules or instructions for implementing the pricing strategy.
How many pricing strategies for service businesses are out there?
There are four most common pricing approaches, and none should be used in their purest form:
Cost-plus pricing: This is the oldest and one of the simplest pricing strategies. It calculates the price based on cost with a standard margin. Calculate the cost to deliver your services and add a margin for a profit. However, cost-based pricing has some drawbacks -- it is completely inward and has absolutely nothing to do with the market. It doesn’t consider what the customer is willing to pay and doesn’t support price differentiation based on customer segments. This is a straightforward pricing strategy, but it can cost you money because you may end up setting a lower price than what customers are actually willing to pay.
Market or competition-based pricing: With this pricing strategy, you're setting your prices based on what the competition is charging. This can be a good strategy if your business just starting out or give you a good idea of where to start, but it doesn't leave a lot of room for growth. Your business is unique and just because someone is charging a specific price doesn’t mean you should match or undercut them.
Value-based pricing (could be called “customer-based” pricing): this strategy is based on what customers think a service is worth, rather than actual costs. This means that you charge or set a price based on the value or benefit your service provides. For example, customers will pay more if it saves them a lot of time or if it solves some specific problem, boost production or increases sales and other. The price is set based on these values. Before quoting a customer, make sure you’re clear on the benefits your service provides and what they’re actually paying for. Pricing your services based on value is highly flexible, lets you charge a premium and protects you from the all-too-common price haggling that occurs with some customers.
Price skimming: If you set your initial prices as high as the market will possibly tolerate and then lower them over time, you'll be using the price skimming strategy. The pros are that you’ll maximize your profits upfront and grow a more sustainable business. The big drawback, however, is that if you can’t justify the price, you’ll struggle to get your business off the ground. This isn’t your typical pricing strategy for a service business. But it may work if you have services that are in high demand and are highly valued. Once the required profits are made, the price is then lowered for a wider market.
These approaches are mostly used in combination and improvise where necessary. Additionally, there are dozens of other pricing strategies such as penetration, bundle, psychological, premium and many other pricing strategies that must be consider in order to get the right price for your service.
What to consider when pricing a service?
To set right price for your services, you'll need to understand what the service is costing your business, find out what your competitors charge, utilize conversions and metrics, think about your ideal customer and set prices higher than you initially thought you would.
Understand service costs: Simply, understand your fixed expenses such as rent or mortgage, salaries, insurance and other. You should know how much cost you to run a business, or able to provide your services to customers.
Know your competition: A good research to find out what your competition is charging can help you gauge what people are willing to pay for similar services. Also, while having knowledge of your competitors’ pricing is valuable, it’s important to keep eyes on all movements your competitors make.
Understand your conversions and metrics: For more developed small businesses, it's key to know how much you're actually making on a certain service so you can determine if it's worth it for you. If not, adjust the pricing accordingly.
Think about your ideal customer: It is important to identify what your ideal customer looks like so you know what you are willing to do to keep them. Building a solution with your customer in mind is so important before sending the final quotation of service. You should detect how they perceive the product you are selling them by building them the scenario for the future. You have to focus on the outcome of the sell, what it will look like when your customer has this service and how will it benefit them.
Price higher than you thought you would: You have to manage your own insecurities, which may cause you to set low prices in the hopes of winning the business. Don't sell yourself short and be afraid to ask for what you think you deserve. The worst that can happen is that people don't pay it, and you can lower your prices or be open to negotiations from customers. If you're just starting out, you might quote your services too low because you don't have the experience and history in the business to really know what to charge. If you quote too low, however, you risk missing out on profits, or you may even have to sacrifice the quality of work you do to meet your price.
Conclusion and final thoughts
All pricing strategies are two-edge swords. What attracts some customers will turn off others. But, remember, customers don’t care about cost, they care about value. Also, a good pricing strategy doesn’t necessarily mean offering the lowest price. Instead, it involves setting a price that’s aligned to the value you provide.
Your pricing strategy is a strategic tool to help you achieve your business’ objectives. The most common objective is maximizing profit, but you may have others such as growing market share, edging out the competition or building lasting relationships with customers so they’ll continue working with you for years to come. The best pricing strategy for your business is the one that aligns with your business objectives.
Keep in mind, you should try different pricing strategies and not fear to change prices and strategies. Customers expect price adjustments from time to time, and as long as you price your services fairly (for the wellbeing of both your business and your customers: win - win approach), you should not run into too many unexpected challenges.
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