For small business owners, pricing services can be a confusing, albeit important, task. From choosing between different pricing models to monitoring and changing prices as the market fluctuates, there are many things to remember when choosing the right pricing structure for your business. Here’s a guide on how to price your services.
Why is it so important to price your services?
It’s important to pay attention to the prices you set for your services as they can determine the success of your business. If you price your services too high, you can get pushback from clients and find you aren’t able to sell, no matter how much money you put into advertising. On the other hand, if you price your services too low, you’ll curb your cash flow and won’t have a viable business in the long run.
Pricing services can be a difficult task because it’s different from pricing a product. You price a product for its original cost, meaning you must charge a bit more than the item’s price point in order to turn a profit; however, pricing services is a much more subjective task because you’re attempting to pinpoint the exact cost of your experience, time and any education that goes into offering that service.
[Read: Brands Rethink Pricing Strategies to Boost Profits]
How to price your service in 4 steps
1. Conduct a cost analysis.
In order to know how much to charge for your services, you need to first conduct a cost analysis of everything that goes into your services. It’s important to look at both direct and indirect costs. For example, if you’re a photographer, you must factor in the direct costs including the rate per hour with a client and what’s given to the client at the end of their session. The indirect costs may include the rent for your photography space or the marketing materials that went into gaining clients.
It’s also beneficial to figure out how much revenue you’d like your business to accrue in relation to your business’s credits. Once you have this information, you’ll be able to find a solid starting point to base your service price.
Once you’ve conducted a cost analysis and know your market’s pricing, the next step is to choose the pricing model that best suits your business.
2. Know your market and costs.
Researching your competitors' pricing can be a great place to build on your pricing strategy after you’ve conducted a cost analysis. Look at what your competitors are charging for similar services in your market and see how their consumers are responding to their set prices. This doesn’t necessarily mean you must price your services the same, but it does give you a basic understanding of how services are being priced within your industry while gauging consumer interest.
[Read: What to do When Your Competition Drives Down Prices]
3. Choose a pricing model.
Once you’ve conducted a cost analysis and know your market’s pricing, the next step is to choose the pricing model that best suits your business. The two most common pricing models for services are either hourly rates or per-project rates. If you know the amount of time it’ll take you to perform a service, you may prefer to charge by project in order to simplify the process. If you’re offering a service that’s generally centered around your time, such as a lawyer or therapist, an hourly rate is usually the best pricing model. A third, less common option is utilizing a variable price point so you price your services depending on the consumer.
[Read: How to Set a Pricing Strategy]
4. Monitor and adjust your prices as needed.
As the market is constantly in flux, so should be your service prices. As you become more experienced in your field, you may find that you can raise your prices to better suit your experience level or meet rising prices in the market. Additionally, you may have to reevaluate your overhead costs quarterly to see what you’re able to safely cut in order to increase your profits.
It is also beneficial to monitor your business profits each month to see if there are any mistakes or changes you need to make, including raising or lowering your service prices. Ensure, though, that you’re not changing your prices drastically or too often, as it ultimately lowers consumer confidence and trust in your business.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
Follow us on Instagram for more expert tips & business owners’ stories.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
