As a small-business owner in the service industry, establishing a solid pricing strategy is likely one of the biggest issues you’ll face in the early stages.
Overcharge and customers could laugh in your face. Offer your services at rock-bottom prices and customers could see you as desperate for work and exploit that by offering you even less than your requested rate. Worse, they could doubt your skill or expertise altogether and choose another provider. Either way, you pay the price.
Many entrepreneurs have failed — often pretty quickly — because they don’t price their services in a way that allows them to remain competitive and profitable. Don’t make that mistake. Follow these tips to price your services effectively.
Calculate your Overhead Costs
When you sell services, as opposed to products, your overhead typically is lower because you aren’t paying to manufacture and/or ship your goods. In some situations, as is the case with many contractors, your only business expenses are your internet and phone bills. Still, it is important to assess how much money you must invest in your business each month.
Estimate all your expenses, including rent and utilities, employee salaries and benefits, materials, expected travel costs, equipment and software, marketing and advertising, licenses and certifications, taxes, and so on.
To profit, you need to make more money than you spend each month, and your overhead estimate offers you a baseline from which to establish your pricing. Make sure that you are covering your costs — and making enough money to support yourself, your family, and your long-term goals.
Set Prices You Can stick With
It’s not a good idea to start low and raise your prices once you are established and have a strong customer base. Even the smallest increases can spur your customers to find other providers.
Instead, aim for the market rate and offer discounts and one-time offers to attract first-time customers. Those customers receive a deal and you establish from the start a price point that you can sustain. Eventually, as your credibility and customer base grows, you will be able to charge new clients more for your services. But you don’t want to have to rely on price increases to keep your business going.
Don’t Fixate on Beating Competitors’ Prices
When you are starting out in the service industry, undercutting your competitors’ prices can help bring in new business. Just be sure not to undercut competitors to the point that you devalue your services. A better strategy is to beat your competitors on value, benefits, customer service, and factors other than price.
Spend some time researching your direct competitors and find out exactly what they are charging for similar services. Determine what sets you apart from them and how you can offer better value or benefits to your customers. Then sell that instead of focusing on price.
If you do want to offer a better price than the other guys, don’t discount your prices more than 20 percent of what the competitors are charging. Cut your prices too steeply and you cheapen your services.
Determine Your Payment Terms
The good news is that with a service business, you have some leeway in how you charge and collect payments from customers. That can offer you some leverage as you set and negotiate prices. Here are some of the most popular pricing models:
- Hourly rate: You and the client establish a flat hourly rate and you bill for the hours you work for the client. An hourly rate ensures that you are covering your costs and getting paid appropriately for your expertise and skill level. Some customers may resist this payment model, however, because they worry that you will take your time and overcharge them. Counter that by offering them an estimate of how many hours a job will take and sticking to that as closely as possible.
- Per-project rate: You charge a flat fee based on how much time you expect to work on a particular project. Customers — especially those who need to keep costs down — may be more open to this arrangement because they’ll know exactly how much your services will cost them. However, you could spend too much time on a particular project because of client demands or other issues and end up making a very low rate or even losing money. Include a clause in your contract that explains that you will cap the project at a specific number of hours or revisions and that you will charge extra fees should the project exceed the agreed-on time frame.
- Retainer: You commit to a specific number of hours during a set period of time and the client uses you on an as-needed basis. Typically, the client pays you up front, which can be great for your cash flow. One drawback is that you typically have to be available for clients when they need you, regardless of what else you have going on — including obligations to other clients.
- Tiered pricing: You establish different levels of pricing, offering an array of options for each that meet the needs of different customers. For example, a customer with budget constraints can opt for a basic service package, while a company with cash to spend can purchase your platinum package. While tiers are a bit more difficult to manage from an administrative perspective, they allow you to capture a larger share of your market.
Make Adjustments as Needed
Finally — and perhaps most importantly — you must continually monitor your operating costs, the profitability of each sale, your competitors, and your industry to determine if and when you need to increase or decrease prices. Then spend some time testing new prices, offerings, and benefits with new and existing customers. Making these adjustments is critical to your long-term success.