Do you find yourself asking any or all of the following questions?
- As a start-up business – What should I charge to begin with?
- As an experienced business – Am I charging enough?
- What do I charge so I don’t scare anyone away?
- An expert tells me I should be charging 10x what I am currently. Should I and, if so, how do I make that kind of jump?
While none of those questions has an absolute tried and true answer, one thing I know for sure is when someone says they’re not sure whether they are charging enough, they definitely are not.
Why is pricing difficult for service-based businesses?
- There is no one-size-fits-all formula, so many service-based businesses have difficulties coming up with fair and profitable pricing.
- Expenses for service-oriented businesses typically are more subjective than expenses going into the creation of a product so, what is charged does not always directly correlate with costs to perform the services.
- Finding a target profit margin is not clear-cut as there often is not an original cost basis to reference. A pricing formula for services accounts for more intangible aspects of running the business – like time and value.
The 3 “C’s” of pricing –
Knowing a business’ costs is critical. If a venture is not covering these, they’ll be out of business in no time. While this seems like common sense, often business owners do not really know these figures. There are two types of costs to consider:
1. Direct costs: These are expenses directly related to the services provided. Examples include:
- Direct materials and expenses. For example, a dog trainer may provide a leash, collar and treats for each customer’s dog. A digital marketer may incur direct costs of purchasing stock images or videos for a client. A painter takes on direct costs of paint, primer, and other painting supplies for project.
- Direct labor. A wedding photographer may incur a direct expense in hiring a second shooter for a wedding. A business coach may include the services of a digital marketing expert in working with a client.
The rule of thumb with direct expenses is that they can be traced directly back to the delivery of a provided service.
2. Indirect costs: These are expenses needed to run a business but that can’t be pinpointed to a particular service or project. (i.e. overhead or operating expenses). Examples include:
- Equipment and maintenance
- Continuing education
- Marketing and advertising
If a business owner does not have a handle on these costs, it’s time to dig into past annual and monthly financial documents. If just starting up, the business owner will need to estimate these costs.
The next important “C” is having clear knowledge of a business’ ideal audience, i.e. their target client or customer. Questions to consider include:
- Is the ideal client a business or consumer?
- If business, what size (revenue, employees)? What industry? Where are they located?
- If consumer, what are their demographics, behaviors, lifestyles? Where do they live? What do they do? What is their income, gender, age, or family status?
If a business is not clear on this, there is no point in moving forward as it will be guessing in the dark. Knowing the target audience is just as critical to know as a business’ costs.
Once the ideal client is know, the next step is determining what that person/business is willing to pay or – how do they value a business’ offerings. There are several ways to find this out through market research.
- Talk to trusted past/current clients
- Talk to potential and current referral partners
- Utilize market research surveys or customer satisfaction studies
- Coordinate focus groups
- Monitor social media
When conducting this research, a company should be clear about what makes them special or unique.
- Emphasize the clients’ ROI (Return on Investment). Oftentimes with service businesses, this is presented in terms of money and time. For example, my business coaching clients achieve their goals, on average, 50% faster with a plan and coaching than without. I have the data and examples to back this up. You should too.
- Emphasize intangibles – When an interior designer’s work is complete, for example, their clients experience having a beautiful peaceful retreat for themselves or a gorgeous setting in which to entertain others.
Last, but not least – research competitors! Look at their:
- Service offerings/capabilities
- Pricing models
- Market segments
- Marketing strategies
- Specialized skills
There is a wealth of tools to use for this research:
- Promotional materials
- Online articles, blogs, mentions
- Social media
- Referral partners
ADDITIONAL FACTORS IMPACTING PRICING
- Years of experience in the business
- Specialized skills
- Licenses, certifications, training
- Direct access to the business owner (For small businesses, this is a value-ad over larger businesses)
Consider these in all research.
Pricing Structure Considerations
- Hourly v. project-based structure –
The decision on which way to go here is often driven by the industry in which a business operates. For example, most attorneys charge an hourly fee. Landscapers typically charge by the project.
Hourly pricing is typically based on costs plus a profit margin determined through market research.
Project pricing still begins with an hourly rate estimate times the amount of hours estimated to be included in the project, plus an additional 10-15% (because time estimates almost always are too low). With time, a business owner is better able to estimate this.
2. Consider use of multi-level price offerings or tiered pricing –
Many consultants offer three levels of services. Highest fees are charged for one-on-one time. Mid-range may include group programs. The lowest fees may be charged for online resources.
3. Consider unique methods of pricing.
Our dog trainer charges a high amount for access to her over the entire lifetime of our dog. Many interior designers charge fees as a percentage of the client’s home decorating purchases.
ULTIMATE GOAL IS TO –
Focus on providing the best service at a price the target audience is willing to pay, with a suitable profit margin for the business owner.
On August 24th, I led a Masterclass on Pricing that Works for You and Your Client. Join my Facebook group, Streamlined Business Strategies, to watch the video.
Contact me at firstname.lastname@example.org if you would like assistance with your pricing.
*Focus on service-based businesses:
Because pricing varies widely between product and service based businesses and the majority of my clients are service-oriented, this post focuses on pricing for those businesses providing services to their clients/customers.