Pricing Strategy for a Service Business
If you have recently launched a business or decided to offer new services, you might be wondering what the best pricing strategies are.
There is a lot more to competitive pricing than providing the lowest price. Service businesses, in particular, should always try to align their pricing strategies with their business model and goals. This is why it’s so important to make sure you are pricing your services in a way that considers the nuances of your industry and the complexities of your job.
In this article, we will explore how you can create a good pricing strategy for your service business, its challenges, and the many opportunities you can unlock when planning ahead.
Why Is it Difficult to Find the Right Pricing Strategy for Service Business?
Discovering the best pricing strategy for your service business can seem, at first, quite taxing – particularly for small business owners. There are a few different reasons why many people consider this activity notoriously hard. For instance:
- Your company is unique, and so are its challenges. It can be hard to estimate a price when you have to take into consideration travel distances, training, competition, marketing, and other overhead costs and variable costs. Nobody knows your business better than yourself, so you might feel like the only way to come up with a suitable pricing strategy is to see the service unfold – and then make the crucial decisions. Which, of course, means you won’t know for sure how much you should charge for a product or service until you are already selling!
- There are too many pricing strategies available. Another reason many people find determining a price for their services so tricky is that there is an overwhelming number of pricing strategies that could be suitable for service businesses (at least ten popular ones, as we will see in this guide). With such an ample selection, it’s normal to wonder how you will be able to determine which one is best for you.
- You are scared of losing business opportunities. More often than not, you might find yourself setting lower prices for your services – just because you are scared you will lose customers. Or, perhaps, because you want to ensure you remain not just competitive but above your competition, too. Unfortunately, this can have the opposite effect and end up harming your business.
Choosing the right pricing strategy should not be a scary task. Just as with almost anything you do in life, pricing services is a skill that takes some time to master. There’s no reason to feel overwhelmed; if you have the correct information, you will be able to come up with an effective pricing strategy easily. We’re here to help, so you can start by reading this pricing strategy guide and see if it gives you a few new ideas.
What is a Pricing Strategy?
Let’s start with a definition. A pricing strategy is a method you can use to determine the price of your services or products. The term is broad, but it usually covers areas such as margins, variable costs, market demand and conditions, and the ability and willingness of a customer to pay a specific price for what you are offering.
There are many different price strategies, but the best thing is: You don’t have to restrict yourself to just one of them.
Why Is a Pricing Strategy Important?
If you are a service business, it’s essential to make sure you are always offering the best competitive pricing for your work. A good pricing strategy doesn’t automatically mean working with the lowest price. Actually, it’s much better if you can set one that aligns with the value of your service.
It’s important to consider the different available strategies carefully. In most cases, these will play a significant role in your business’ future.
The importance of Price as an Indicator of ‘Perceived Value’
Marketers often refer to the 6 P’s of marketing: product, price, promotion, people, and presentation. Price is the most important P in your marketing mix because it acts as a communicator of value in the eyes of your customer. If your client perceives that you are under-priced with regard to the services package you are offering, they will subconsciously associate your business with being a lower-quality service.
There are three main considerations when thinking about price for your business.
- Competition: Where are you trying to position your business versus the competition?
- Economics: At your current pricing point, is your business profitable? Can you scale your business?
- Customers: The impact of your current price-point on your brand position in the eyes of your customers.
Before we jump into pricing-strategies, consider the following price-quality matrix.
Where are you versus the competition? Where do you want to be?
How a Pricing Strategy Can Impact Your Sales
If your pricing strategy is to have the lowest price in the market or provide the cheapest services, you might be removing the importance of quality from your business. If your strategy is to offer the lowerst price, then you need to think in terms of operational efficiency and cost reduction.
If you intend to compete in the premium pricing space, then you need to consider all aspects of your business offering carefully. There is a lot more to providing a service than giving a customer a low quote. This might include things like the way you treated customers during your initial interactions, how you have communicated what you do, or whether your brand has a good reputation. This is especially the case if you are selling your service to younger generations, who prefer to work with companies that take a stand on values and product differentiation.
If you intend to operate in the mid-premium space, then you should begin to profile the types of customers you service well. Often businesses will seek to align the size of their business with the size of the serve provider. If you are a small business with limited resources, it might make more sense to focus on other small businesses until you have a team in place to consider the premium space.
Whatever pricing strategy you end up choosing for your service business, the most important thing to remember is that your goal should always be to align your pricing model with your general strategy.
Most Popular Pricing Strategies
There are many different pricing strategies you can choose to run your service business. Let’s go through some of the most common ones in detail.
Premium Pricing Strategy
If you have a service that makes you unique, you can charge higher prices for it. The same applies if what you are offering is not available from any other providers in your area. You can also use a premium pricing model if you want to give the impression that your service is higher in quality compared to the competition. Many luxury brands have implemented premium pricing, but it is not exclusive to them. SaaS start-ups use this strategy, too. Remember, it is very important that if you charge premium prices, you need to offer premium services. You need to ask yourself whether you are in a position to do so from a resource perspective.
Market Penetration Pricing Strategy
This is one of the most common pricing strategies for businesses that want to sell their products, but some service providers have also used it successfully. What you would do in this case is set up low prices so you can grow your market share more efficiently. One of its main advantages is that this strategy can help you grow your base more quickly, but there is also a problem you should keep in mind: By offering your services for less money, customers could consider them inferior compared to the competition. Most service businesses grow through word-of-mouth and referral marketing. Low-price customers will tend to refer other low-price customers. Be careful; it can be difficult to escape the low-price space once you have entered!
Competitive Pricing Strategy
A competitive pricing strategy considers what your competitors are charging and matches the price. This is a good option if you are just getting started with your business and you are not sure how much to charge for your services. However, copying others will inevitably ignore the uniqueness of what you are offering. It is a better idea to see what prices the others are handling and use them as a reference rather than a guide.
A helpful exercise is to build a price-quality matrix for your competition based on the above matric. Identify five competitors operating in your space and then allocate them a score between 1-5 to rake their offering in terms of Price and Quality.
Economy Pricing Strategy
If you use an economy pricing strategy, you choose to set low prices – usually because your overheads are low, too. There are many reasons why you can keep your costs down. For example, if you have a deal with a supplier, have a small team, find a cost-effective office space, or invest in accounting services. By reducing your overhead costs and operating expenses and adopting an economy pricing model, you can also reduce your services’ price as part of your strategy.
Psychological Pricing Strategy
A psychological pricing strategy is quite straightforward. There are several studies showing that punctuation and decimals can make a significant difference in how people perceive prices. Surprisingly, numbers that have more syllables when you pronounce them are perceived as higher, and odd prices (like $17.97) are more attractive than round ones (for example, $20.00).
Cost-Plus Pricing Strategy
In a cost-plus pricing strategy, you calculate the cost of providing a service and then add a margin so you can generate a profit.
Generally speaking, in a service business, you should be aiming for a Gross Profit after wages of 50% (sometimes up to 60%). This leaves you with 30% to spend on fixed overheads (marketing, software, rent, light & heat, telephone), targeting a Net Profit of 20%
Let’s say you price work with a value of €5,000. Ideally, wages should cost €2,500, leaving you with sufficient profit to pay for overheads and scale your business.
Hourly-Based Pricing Strategy
If you want to use an hourly pricing strategy, all you would need to do is estimate how much a job will take and then just multiply that number by your hourly rate. This strategy is better suited for new businesses, but you need to be careful not to be harmed by working too fast. There is also a risk your customer will question how long something really took to complete. Lastly, this pricing strategy puts an emphasis on the cost of the service rather than its value. For this reason, many accounting practices like ourselves at Around Finance are moving towards a value-based pricing strategy.
Value-Based Pricing Strategy
The opposite of the previous strategy could be one where you use value-based pricing (focusing on the benefits that your service provides to the target customers). For example, your service can give your clients peace of mind or help them save time. When you choose a value-based strategy, you can add a premium to your services and avoid some of the haggling that happens when you involve other price models. The idea is that your price is driven by your customers’ perceived value of what you offer.
Bundle Pricing Strategy
When you choose a bundle pricing strategy, you pack different services together and charge a single price for them. In general, this makes the costs lower for customers (compared to them paying for each of them individually). One of the benefits of a bundle pricing strategy is that you can upsell some of your less popular services and boost your profits more quickly.
Tiered Pricing Strategy
Lastly, you can choose to use a tiered pricing strategy to offer your services. In this case, you offer your customers different levels of service (or specific packages). For example, if you are a photographer, you can offer clients a basic option to capture images in a single location and produce 75 edited photos. Or suggest a longer session with more outfits and prints. Or a premium package with an unmatched variety of pictures. Each option should provide your customers with more value – and also tempt them to get a higher-quality service for a little more money.
Other Pricing Strategies
There are different pricing strategies you can consider. For example, freemium strategies offer a service for free, and then charge a flat fee for enhanced features. And break-even pricing sets a price point at which you will earn zero profits but can gain market share. Other viable pricing models are dynamic pricing (or a more flexible pricing strategy), luxury pricing, surge pricing, or a price skimming strategy (price skimming is listing a product as high as possible and gradually lowering the price to a market average).
How to Pick a Pricing Strategy for your Business
We have gone through the most popular pricing strategies businesses use to sell their services and products. The question that follows is: How do you pick the best one for you and your brand? As you can see, there is no such thing as the perfect price. There are a range of different pricing models available.
There are a few factors you should consider before making your choice. No single strategy is, on its own, better than the other. It all depends on what your business goals are. You also don’t have to pick one and forget about the others; you can use two or more simultaneously. For example, you can offer your customers a service that is value based priced based on value and offer bundles so they can choose the level they require. For example you might bundle services into a flat monthly fee which suits your potential customers budget and needs. This is something we have done here at Around Finance to some success.
We have found that over time as you build trust with your customers who are hopefully growing with your support, you can review your service package periodically to raise prices or add more services as necessary.
The three main factors you must keep in mind when choosing a pricing strategy are:
Your Business Goals
Your chosen strategy should depend heavily on your business goals. For example, a goal might be to increase your company’s total income by 10% over the next two years. Or to reduce your expenses by 5% over three. It might not have to do with numbers either; your goal could be to increase brand awareness or its share in the market. In that case, for example, you could choose a market penetration pricing strategy so you can facilitate rapid adoption of your services.
The cost of your overheads can help you determine your service prices and your overall pricing strategy. If you have lower ongoing business expenses, you can choose to have a more competitive price. If you need to pay for higher overheads, you might want to focus instead on what makes your service unique and choose to use a premium pricing strategy.
Your pricing strategy will also be determined, in some measure, by who you are. For example, if you are an established brand, you might be able to use a competitive strategy. If you are new, you might want to start with bundles or price your services by the hour until you learn how much you should be charging to cover your expenses and give you a profit.
The Fact That You Sell Services
There are some considerations that are specific to service providers. It can be hard to price your services when they are intangible and lack a direct production cost. In many cases, the prices will depend on your ability to deliver in time and the quality of your results. Freelancers and contractors can have a more difficult time pricing their services. So, if this is your case, you should always adhere to a strategy so you can grow efficiently and get paid fairly for your effort.
When you develop your pricing strategy, you should always make sure you are keeping your goals in mind.
You can use your strategy to increase profitability or improve cash flow, to create more market penetration, or expand your market share. Or you can work towards increasing your lead conversion.
One way to get started is to conduct a pricing analysis. You should look at things like:
- The cost of your product or service (including all your expenses and variable and fixed costs)
- The target market and customer base (you can run surveys or focus groups to determine how people react to your prices and how much they would be willing to pay for something – for example, a new service you want to launch)
- Your competitors’ pricing (you should cover both direct and indirect competitors, so you consider both services similar to yours and those that are, for example, in a similar price range)
- Any legal or ethical constraints (there is a line between being competitive and using predatory pricing!)
How We Can Help
If you need help coming up with a pricing strategy for your service business, we can help you. At Around Finance we can provide you with assistance and advice so you can set the prices that best align with your goals. Contact us today to find out more.