The reason you went into business selling services to customers was to make a profit. If you were giving away your services for less than cost, or just breaking even, you’d be operating a non-profit venture – or a business that’s likely to fail.
Pricing Your Services
The good news is you have a great deal of flexibility in how you set your prices. The bad news is there is no surefire, formula-based approach you can pull off the shelf and apply in your business.
Pricing services is more difficult than pricing products because you can often pinpoint the cost of making a physical product but it’s more subjective to calculate the worth of your counsel, your staff’s expertise, and the value of your time.
You can, however, use some of the same underlying pricing guidelines to figure out your costs and operating expenses plus your target profit in setting your price for services.
Factors to consider in pricing
When pricing services, there is a bit more leeway than pricing products. “The price of a product is more objective. The price of a service is more subjective so that there is a gray area,” Toftoy says. “Pricing is both an art and a science.” Here are the factors that experts say you should consider when trying to determine what price to charge for a service:
This standard method of pricing in business seeks to first determine the cost of making a product or, in this case, providing a service, and then add an additional amount to represent the desired profit. To determine cost, you need to figure out direct costs, indirect costs, and fixed costs.
“With the cost-plus approach, the thing to remember is that if you’re paying someone $11 an hour, you may think you should charge $11 an hour for the service they provide, but you have to factor in all your costs,” says Jerome Osteryoung, a professor of Finance at Florida State University and outreach director of the Jim Moran Institute for Global Entrepreneurship.
Those costs include a portion of your rent, utilities, administrative costs, and other general overhead costs. “When I make a deal to sell a service,” he says, “I have to make sure to cover all my costs.”
You need to be aware of what competitors are charging for similar services in the marketplace, Osteryoung says. This information could come from competitor websites, phone calls, talking to friends and associates who have used a competitor’s services, published data, etc.
“I don’t think it’s a good idea for any entrepreneur to compete on price if you can avoid it. Compete on service, ambience, or other factors that set you apart,” Osteryoung says.
If you have to compete on price to win a customer, you may ask yourself whether that customer will be loyal to you if they find someone offering a service at a lower price. You want to establish long-term relationships in the marketplace. “You need to convince the customer that you are giving them tremendous value in terms of service and quality,” Osteryoung says. “You just need to be aware of what the competition is charging.”
Perceived value to the customer.
This is where a lot of the subjectivity comes in when setting a price for a service. When you have a product, you may decide to use keystone pricing, which generally takes the wholesale cost and doubles it to come up with a price to charge and account for your profit. With a service, you can’t necessarily do that.
To your customer, the important factor in determining how much they are willing to pay for a service may not be how much time you spent providing the service, but ultimately what the perceived value of that service and your expertise is to them, Osteryoung says. That is where pricing becomes more of an art form.