How to Price Your Services so that You Actually Make a Profit
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Last week, we talked about how to price your products, but if you’re a service-based company, today’s article is for you. We’re talking about how to price your services – what factors you need to consider and how to determine the best pricing strategy for your small business.
Factors to Consider
Figuring out how much to charge for your services can be a harder task than figuring out what to charge for a physical product. Whereas the latter is more of a science with specific numbers that can be plugged into a formula, the former is more of an art form. There are more factors to consider when pricing out your services beyond just the cost of materials:
Total Expenses + Profit
The first exercise to go through is very similar to the process a product-based business owner will do, and that’s to calculate all your expenses (both variable and fixed expenses), add your desired profit margin, and try to ensure that what you’re charging will cover all of your expenses and give you close to that desired profit margin. This is a good place to start to make sure you break even, but it’s not the only consideration to take into account.
Value to your Customer
Another very important factor to consider is what your service is worth to your customer. If you are wanting to charge $15k for a web development package, but your target customer is only willing to pay $5k for your package, then you need to do one of two things: Either you need to adjust your marketing to target a different audience or you need to adjust your pricing or your product to something your target customer is willing to pay.
The Competition
While this one is not the most important point, it is still something to think about. Look at what your competitors are charging for a similar product to yours. If your prices are much higher but your product is the same, then you may have a difficult time booking customers. On the flip side, if your prices are much lower but your product is similar, then customers may think that your product is inferior.
This is a fine line, and there is no one right answer to any given situation, but it is always a good idea to have your finger on the pulse of the market you’re working in and your customers are living in.
Pricing Models
Now that you have a rough idea of which pricing bracket you want to charge for your services in light of all the factors listed above, you need to figure out what pricing model you will use
Charge per Hour
This can be a very favorable pricing model for businesses with low or no material cost like consulting services for example. Billing per hour is a good way to ensure that you’re getting paid for the amount of time that you put into a project and can be good insurance if a job ends up taking longer than you anticipate. Like the other pricing models, your hourly rate will vary depending on your expertise and the value of your service to your customer.
Charge per Job
Many customers will prefer you charge them a flat rate regardless of how long it takes you to complete the job. This is safer for them, but more risky for you. An option that may be open to you is to agree to an hour cap on a particular over which you will charge an hourly rate.
You may also decide to charge a different flat rate depending on who your customer is and what they perceive to be the value of your product. Not all service providers operate this way, but just bear in mind that offering varying package pricing is an option.
Charge on Retainer
A third pricing model option is to charge a retainer fee for your services. This can work one of a few ways: Either the customer pays for a certain amount of hours every month, or the customer pays for a specific list of services every month, regardless of how long it takes you to complete the tasks.
Charging on a retainer basis works best when you have built up trust with the client and both desire a continuing professional relationship. The key to having a successful retainer relationship is frequent and honest communication between both parties.
Feeling Stuck?
Without accurate books, it can be difficult if not impossible to evaluate where your business is financially and determine the best pricing strategy for your small business. Thankfully, we’re experts at helping small business owners just like you get their books in order and keep their books in order. Give us a call today to find out how we can help you!
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