Pricing Strategy For a Service Business
Many service-oriented businesses that are in demand still find a way to go under. The most common cause for this is the lack of a proper pricing structure in which you find a balance between what you must charge and what your clients are willing to pay. Here are some of the more common elements you need to consider when pricing your services so you can make a profit and stay in business.
Let’s face reality, in order to stay in business – any business, you absolutely must charge enough to make a profit. This means every minute you spend working must have a dollar figure attached to it that you can recover from your clients. You might be tempted to say that while it fair to charge the customer for services rendered, you certainly cannot charge them for time spent working on other things such as bookkeeping or designing your new marketing campaign. The answer is that not only you can, but also that you must.
Many service businesses commonly set their prices either by estimating what they think their customers will pay, or by some amount related to what their competition charges. The problem with both of these “methods” is that neither takes into account the real criteria for a well thought-out pricing structure. Instead, let us consider a more formal approach to pricing, and one where you are much more likely to survive.
When setting a price for your services, you need to take several items into account. The first of these is your overhead. This means your entire overhead, including your realistic hourly rate multiplied by the number of hours you spend on non-client work each week. This is in addition to your rent, advertising, equipment and supplies, taxes, etc. The only time you should allow prices that do not cover this is when you are first starting out and have few clients and will be forced to charge more than anyone would be willing to pay. Beware though, the longer you accept these lower prices, the harder it will be to raise them later.
The next thing you need to take into account is what your competition is charging. Rarely will a buyer be willing to pay more to a new business for the same service they are already paying someone else. When you investigate your competition, one of the most important things you will need to find out is what they are charging. Do not get the wrong idea here, though. If you are offering a superior service or if your competition has not been around very long either, than you have every right to charge more than they do. You will just have to convince your potential customers of this.
Lastly, you need to take into account your hourly rate when you are directly working for a client. This amount added to your total overhead will give you your total costs, which must be covered by the amount you are charging your clients. Remember, overhead divided by the number of billable hours added to your minimum hourly rate equals the minimum billable rate to charge your clients.
A well thought-out pricing strategy takes some effort but is worth the time spent. With it you can justify your prices more easily and more professionally to your clients and make you confident you are not only charging a fair amount, but also an amount that will provide enough profit to allow your business to survive for the long term.