October 30, 2016
Pricing a service can be more difficult than pricing a product. You can usually identify the cost of making a physical product, but it’s more subjective to calculate the value of your time or the worth of your knowledge and expertise. Whether you are new in business and setting your prices for the first time, or wish to review your current prices, here are four steps to getting your pricing strategy right.
Step 1 – Research Competitor Prices
Find out who your direct competitors are and what they charge for the same service. Take into account any point of difference you have and any add-ons you offer that your competitor does not. These might mean you can charge a bit more than your competitor. For a comparable service, however, charging more could mean losing customers to your competitors and charging less could give them the impression that your service is of inferior quality.
Step 2 – Work Out Your Costs
Cost-plus pricing sets out to determine the cost of providing a service and then to add an additional amount as profit. There are three types of cost to consider. These are:
Materials: These include the cost of the materials you use to provide the service. For example, a hair salon would need to factor in the cost of shampoos, hair dyes etc. and a cleaning company would need to take into account cleaning products, cloths etc.
Labour: This is the cost of the staff you hire to carry out the service. It would be the hourly wages of your hair stylists or cleaning team.
Overheads: Overheads include your monthly rent, insurance, tax, marketing, utilities, office supplies, mileage etc. A reasonable amount of these overhead costs should be apportioned to each service performed in an hourly rate or as a percentage. Overhead costs change over time so it is important to review them regularly and reflect them in your pricing, so that your costs are definitely covered in the rates you charge your customers.
Value-based pricing takes into account the perceived value of your service to your customers, in other words, what your customer is willing to pay for your service. Value-based pricing should be considered if you offer a higher quality service than your competitors.
Step 3 – Gather Feedback
Do a bit of research among your customers or potential customers regarding what they would expect to/be willing to pay for your service. A short online survey can work well. Ask your target market what they would be willing to pay and why, who they consider provides the best service in your local area, what they expect to receive for their money and how much they value certain aspects, such as experience, qualifications etc. If the survey is anonymous, people are more likely to give their honest opinions.
Gather feedback on your own service with real customers shortly after they have used your service and include a question about your price.
Step 4 – Set Your Price
Using the information you have gathered in steps 1 – 3, it’s time to set your price. If you are already in business and considering a price rise, it is a good idea to offer extra value at the same time.
Aim to review your prices every six months to reflect increased costs and other changes. It is better to increase your prices by a small amount every six months, than make a massive price rise every few years. That is a sure fire way to lose customers.
Having a clear pricing strategy will help keep your pricing on track.
Categorised in: Marketing Tips
This post was written by Rachel Robb