Often beginner entrepreneurs face the problem of pricing their services. The fact is that many in this matter are guided only by competition and try to beat other offers with the lowest price. And this is fundamentally the wrong approach.
There are 3 main factors to consider in the pricing process:
- Consumers. The level of demand for the service sets the highest price. This is the maximum amount buyers are willing to pay for this type of service.
- The company providing the service. This is the minimum price threshold that will make the company profitable.
- Competitors. As active market participants, they set the price range in the niche.
This means that considering these 3 points, you can calculate the cost of your services according to the criteria: maximum price, minimum price and optimal price.
3 main approaches to pricing your services
Own cost + projected profit
Own cost in this case is the expenses associated with performing the necessary operations of the services provided. They can be divided into 4 contingent groups:
- fixed – these are costs of depreciation of equipment, rent for premises, Internet access, etc;
- variable – costs of materials needed in individual cases;
- direct – salaries of employees and subcontractors involved in the provision of services;
- indirect – remuneration of legal advisers, accountants, as well as various qualification courses.
Separately it is worth taking into account such an expense item as taxes and advertising. After calculating the cost of the service, you should add a percentage of the planned profit.
Orientation to competitors’ prices
In this case, we take into account companies that offer services of a similar level of content and quality. The essence of the method is to monitor the offers of direct competitors and set competitive prices. However, it is not enough to simply set prices “as in the market”. After all, despite the similarity of the service provided and the target consumer, you may have completely different expenses. Therefore, you should also consider your costs when choosing this method.
“Price = Value”
This approach involves calculating the cost of a service based on its value, uniqueness and the invaluable benefit it brings to the customer. Moreover, the value can be both tangible, that is, expressed in tangible profits of the customer, and intangible – at the level of feelings and sensations. In this case, you can justify the inflated cost of the service by its prestige or exclusivity.
Summary – step by step service pricing
Calculate fixed and direct costs related to the process of service provision. These are the costs that you incur on a regular basis and regardless of the number of services provided during that period. To calculate them, you need to make the most complete list of what you spend money on during the month.
Identify your indirect and variable costs. Their amount usually varies depending on the demand for the service and the amount of sales.
Based on the actual demand and your own capabilities determine the optimal amount of service (in hours) you can provide to your customers. Then divide the cost (Step 1 + Step 2) by the number of those hours. This will be the minimum service price that will cover all costs and allow you to work without loss.
Study the supply and demand in the market. Analyze your direct competitors and see what price they declare. The cost of your services may be within the price range set by the market, but depending on other factors you can either decrease or increase the price. In the latter case, a reasonable justification for the higher cost is essential.
main photo: unsplash.com/Guilherme Petri