- Setting the proper prices for your goods or services is one of the most crucial elements of business.
- To set fair and accurate prices for your services, you'll need to understand what the service is costing your business, find out what your competitors charge, utilize conversions and metrics, and price higher than you initially thought you would.
- Some of the most common pricing strategies are penetration pricing, economy pricing, psychological pricing, price skimming and product line pricing.
Coming up with a business idea is only half the battle. Determining a price for your services is another huge part. As a business owner, you need to determine a price for your services before you can start offering them to potential customers, and if you can't offer your services, you can't make any money. So setting a proper price is one of the crucial first steps in setting up your business.
"Pricing is a mix of art and science," said Blair Enns, published 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."
Business.com community member Jessica Federman asked fellow members how to charge for a PowerPoint presentation. PowerPoint is a service that should be customized to each client, because each one will have different needs. Therefore, it is important to determine pricing for the client, rather than for the job itself. Enns said the basis for the different prices should not be the time it takes to do the work or the number of slides, but rather the value of the presentation to the individual client or organization.
"Different clients will and should pay different prices based on the value of that PowerPoint design to the client," he said. "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 his new strategic vision to the board of directors."
According to Enns, the 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."
There are ample resources to help business owners or service providers determine their prices. The Small Business Association lays out a few tips for small business owners:
1. Understand service costs and their impact on pricing.
Components to understand are material costs, overhead costs, and labor costs, including salaries and benefits. Labor costs are wages and benefits you pay to employees and/or subcontractors who perform, supervise, or manage your service business. The cost of your labor will be higher during startup because you'll be putting a lot of your own time and energy into building the business.
2. See what your competitors charge.
A little research to find out what your rivals are charging can help you gauge what people are willing to pay for similar services. Take advantage of front-end, back-end and/or tiered pricing. If you offer different packages, each level should carry its own price that is compatible with the work that goes into it.
3. Understand your conversions and metrics.
For more developed small businesses, it's key to know how much you're actually making on a certain service so you can determine if it's worth it for you. If not, adjust the pricing accordingly.
The Entrepreneur piece explained that, when you're calculating the price of a service, profit is applied in the same number as markup on the cost of a product. It uses the example that if your labor costs are $210, and you plan to net 21% before taxes, you'll need to apply a profit factor of about 25% to your labor and overhead to achieve that profit goal.
4. Price higher than you thought you would.
Don't sell yourself short and be afraid to ask for what you think you deserve. The worst that can happen is that people don't pay it, and you can lower your prices or be open to negotiations from clients.
If you're just starting out, you might quote your services too low because you don't have the experience and history in the business to really know what to charge. If you quote too low, however, you risk missing out on profits, or you may even have to sacrifice the quality of work you do to meet your price.
On the flip side, if you quote too high, there is the chance of losing a contract or client. That is even more true if your service exists in a competitive area and customers have various options for the service. If there are lower-priced services out there for similar quality, that's where your target audience will go.
Types of pricing strategies to consider
These are some of the most common pricing strategies:
- Penetration pricing involves setting a price artificially low to gain the market share and then raising the price.
- Economy pricing means keeping all costs to a minimum to give customers the best price.
- Price skimming is setting a higher price because you have some sort of competitive advantage.
- Psychological pricing is designed to make customers respond on an emotional rather than rational basis.
- Product line pricing means setting progressively high prices for a variety of products.
- Optional product pricing involves getting customers to upgrade and spend more on other products or services that you offer as an optional add-on.