Starting a business involves much more than coming up with a great idea. You’ll need to understand marketing, financing, customer service and more. However, pricing your offerings optimally is a crucial factor many small business owners don’t consider enough.
Pricing services is more challenging than pricing products. Service pricing is more subjective and harder to compare against similar services. Service quality and scope vary widely depending on employee training, attitude, expertise and company culture. Perceived quality is another factor affected by marketing, business reputation and more.
We’ll explain what’s involved in setting prices for your services and share tactics for pricing your services optimally to attract and retain customers.
What to know about setting a price for your services
Product quality and other obvious factors affect product pricing. However, service pricing can be challenging. “Pricing is a mix of art and science,” said Blair Enns, author and CEO of Win Without Pitching. “For customized service firms — where each engagement is a blank slate of possibilities — it’s mostly art. For productized services, which are intended to scale to many clients or customers, there’s more science in the form of competitive analysis and audience segmentation.”
Service pricing is about your service’s value to the customer. For example, say your company creates PowerPoint presentations for clients, customizing them for each client’s unique needs. Your pricing shouldn’t be about how long it takes to do the work or the number of slides you create. Instead, consider the presentation’s value to the client.
“Different clients will and should pay different prices based on the value of that PowerPoint design to the client,” Enns explained. “For example, a PowerPoint presentation for a solopreneur small business coach that would be used to pitch new clients should be priced differently than a presentation the CEO of Microsoft would use to pitch a new strategic vision to the board of directors.”
According to Enns, companies that price this way tend to outearn their competitors.
“You should let go of the idea that any service, like designing a PowerPoint presentation, costs $X,” he said. “Price the client, not the job. And base that price on value, not inputs or outputs. It’s messier than counting hours or number of slides, but it’s far more lucrative, and it moves your focus from your costs to creating for your client. It’s a win-win.”
When selling services and intangible goods, focus on personalization and use videos, audio files and images to demonstrate how your offering works.
How to price your services
Ample resources are available to help business owners or service providers determine their prices. The Small Business Association offers some tips for business owners seeking to price their services fairly and accurately.
1. Understand service costs and their impact on pricing.
When pricing your services, consider inherent business costs. For example, look at material costs, overhead costs and labor costs.
Labor costs include salaries and employee benefits you provide to employees or subcontractors who perform, supervise or manage your service business. Labor costs will be higher during startup because you’ll put extensive time and energy into building the business.
2. See what your competitors charge for their services.
To keep your business competitive, conduct research to discover what your rivals are charging. Understanding competitors’ pricing can help you gauge what people are willing to pay for similar services.
Examine your competitors’ front-end, back-end and tiered pricing models. If you offer various packages, each level should carry a unique price compatible with the work involved.
3. Understand your conversions and metrics to price your services.
For more developed small businesses, it’s vital to know how much you’re making on a specific service so you can determine if it’s worth it for you. If not, adjust the pricing accordingly.
When calculating a service’s price, profit is equivalent to markup on a product’s cost. For example, if your labor costs are $210 and you plan to net 21 percent before taxes, you’ll need to apply a profit factor of about 25 percent to your labor and overhead to achieve that profit goal.
If you quote a project price, include the project’s scope in your business proposal and a rate you’ll charge for changes or additional work outside the initial scope.
4. Price your services higher than you expected — but not too high.
Don’t sell yourself short and be afraid to ask for what you deserve. The worst that can happen is that people won’t pay it, and you can lower your prices or negotiate with clients.
When striking the right price point balance for your services, consider the following:
- Quoting too low risks profits: When starting out, you might quote your services too low because you don’t have the experience and history in the business to know what to charge. However, if you quote too low, you risk missing out on profits. You may even have to sacrifice your work quality to meet your price.
- Quoting too high can lose customers: If you quote too high, you risk losing the contract or client. This risk is higher if your service is in a competitive area and customers have multiple options. If lower-priced services have similar perceived quality, your target audience will opt for them unless you lower your prices or increase your service’s perceived quality.
For customized offerings like consulting, don’t publish a price list or quote prices. Instead, schedule a discovery session for a fixed price to learn the client’s needs. Then create a custom project-based proposal and price and negotiate a win-win with your client.
5. Consider inflation when pricing your services.
During times of high inflation, you may need to raise your prices because your costs have increased. However, if costs have remained the same, you must decide whether to raise prices and make more profit or keep them the same — and keep more of your customers.
In an inflationary economy, if your customers are price-sensitive, consider keeping prices at or near the same. If customers are not price sensitive or there’s no close competition, consider raising prices to maximize profit.
Tip: If you keep prices the same while competitors raise theirs, mention this in your social media marketing efforts. You’ll demonstrate your honesty and dedication to your customers in contrast to the competition’s price gouging.
Types of pricing strategies to consider
Consider the following standard pricing strategies when determining your service pricing structure:
- Penetration pricing: Penetration pricing involves setting a price artificially low to gain market share and then raising the price.
- Price skimming: Price skimming is setting a higher price because you have some sort of competitive advantage.
- Hourly pricing: Hourly pricing is charging a fixed hourly rate, so the amount the customer pays depends on how much work was done. It can protect your company from low margins due to excessive customer requests for changes.
- Economy pricing: Economy pricing means keeping all costs to a minimum to give customers the best price.
- Psychological pricing: Psychological pricing is designed to make customers respond emotionally instead of rationally.
- Product line pricing: Product line pricing means setting progressively high prices for various products.
- Optional product pricing: Optional product pricing involves getting customers to upgrade and spend more on other products or services you offer as an optional add-on. This model involves upselling and cross-selling.
Some source interviews were conducted for a previous version of this article.