The following tips will detail how to meet your business goals in pricing services and what factors to consider when pricing.
One of the secrets to business success is pricing your services properly. Price your services correctly and that can enhance how much you sell, creating the foundation for a business that will prosper. Get your pricing strategy wrong and you may create problems that your business may never be able to overcome.
There are a variety of different types of pricing strategies in business. However, there's no one surefire, formula-based approach that suits all types of products, businesses, or markets. Pricing your product usually involves considering certain key factors, including pinpointing your target customer, tracking how much competitors are charging, and understanding the relationship between quality and price. The good news is you have a great deal of flexibility in how you set your prices. That's also the bad news.
The following tips will detail how to meet your business goals in pricing services, what factors to consider when pricing, and how to determine whether to raise or lower your prices.
1) Get Clear about Making Money
The first step is to get real clear about what you want to achieve with your pricing strategy: You want to make money. That's why you own a business. Making money means generating enough revenue from selling your products so that you can not only cover your costs, but take a profit and perhaps expand your business.
The biggest mistake many businesses make is to believe that price alone drives sales. Your ability to sell is what drives sales and that means hiring the right sales people and adopting the right sales strategy. The first thing you have to understand is the selling price is a function of your ability to sell and nothing else. What's the difference between a $8,000 no sweat slimming course and a $2000 personal gym training course? The personal gym training course is a far healthier and long term solution. The difference is your ability to sell.
2) Avoid under pricing and over pricing
Be aware of the risks that accompany making poor pricing decisions. There are two main pitfalls you can encounter - under pricing and over pricing.
Pricing your products for too low a cost can have a disastrous impact on your bottom line, even though business owners often believe this is what they ought to do in a down economy. Accurately pricing your product is critical at any point in the economic cycle but no more so than in a recession. Many businesses mistakenly under price their products attempting to convince the consumer that their product is the least expensive alternative hoping to drive up volume; but more often than not it is simply perceived as 'cheap'. Remember that consumers want to feel that they are getting their "moneys worth" and most are unwilling to purchase from a seller they believe to have less value. Businesses also need to be very careful that they are fully covering their costs when pricing products. Reducing prices to the point where you are giving away the product will not be in the firm's best interest long term.
On the flip side, overpricing a product can be just as detrimental since the buyer is always going to be looking at your competitors pricing. Pricing beyond the customer's desire to pay can also decrease sales. One pitfall is that business people will be tempted to price too high right out of the gate. They think that they have to cover all the expenses of people who work for them, the lease, etc. and this is what price it takes to do all that. Put yourself in the customer's shoes. What would be a fair price to you? Taking little surveys of customers with two or three questions on an index-card-sized form, asking them whether the pricing was fair would help in perfecting that delicate price point.
3) Understand Your Other Business Priorities
There are other reasons to go into business. Understand what you want out of your business when pricing your services. Aside from maximizing profits, it may be important for you to maximize market share with your product -- that may help you decrease your costs or it may result in what economists call "network effects," i.e. the value of your product increases as more people use it. (A great example of a product having network effect is Microsoft's Windows operating system. When more people began to use Windows over rival products, more software developers made applications to run on that platform.)
You may also want your service to be known for its quality, rather than just being the cheapest on the market. If so, you may want to price your service higher to reflect the quality. During a downturn, you may have other business priorities, such as sheer survival, so you may want to price your services to recoup enough to keep your company in business.
4) Know Your Customer
Undertaking some sort of market research is essential to getting to know your customer. This type of research can range from informal surveys of your existing customer base that you send out in e-mail along with promotions to the more extensive and potentially expensive research projects undertaken by third party consulting firms. Market research firms can explore your market and segment your potential customers very granularly -- by demographics, by what they buy, by whether they are price sensitive, etc.. If you don't have a few thousand dollars to spend on market research, you might just look at consumers in terms of a few distinct groups -- the budget sensitive, the convenience centered, and those for whom status makes a difference. Then figure out which segment you're targeting and price accordingly.
5) Know Your Costs
A fundamental tenet of pricing is that you need to cover your costs and then factor in a profit. That means you have to know how much your service costs. You also have to understand how much you need to mark up the service and how much you need to sell to turn a profit. Remember that the cost of a service is more than the literal cost of the service; it also includes overhead costs. Overhead costs may include fixed costs like rent and variable costs like travel or raw material. You must include these costs in your estimate of the real cost of your service.
Many businesses either don't factor in all their costs and under price or literally factor in all their costs and expect to make a profit with one service and therefore overcharge. A good rule of thumb is to make a spread sheet of all the costs you need to cover every month, which might include the following:
- Your actual product costs, including labor and the costs of marketing and selling those services.
- All of the operating expenses necessary to own and operate the business.
- The costs associated with borrowing money (debt service costs).
- Your salary as the owner and/or manager of the business.
- A return on the capital you and any other owners or shareholders have invested.
- Capital for future expansion and replacement of fixed assets as they age.
List the dollar amount for each on your spreadsheet. The total should give you a good idea of the gross revenues you will need to generate to ensure you cover all those costs.
6) Know Your Revenue Target
You should also have a revenue target for how much of a profit you want your business to make. Take that revenue target, factor in your costs for producing, marketing, and selling your product and you can come up with a price per service that you want to charge. Estimate the number of clients you expect to sell to over the next year. Then divide your revenue target by the number of clients you expect to sell to and you have the price at which you need to sell your service in order to achieve your revenue and profit goals.
7) Know Your Competition
It's also helpful to look at the competition -- after all, your customer most likely will, too. Are the services offered comparable to yours? If so, you can use their pricing as an initial gauge. Then, look to see whether there is additional value in your service; do you, for example offer additional services or is your service of perceived higher quality? If so, you may be able to support a higher price. Be cautious about regional differences and always consider your costs.
It may even be worthwhile to prepare a head-to-head comparison of the price of your services to your competitor's services. The key here is to compare net prices, not just the list (or published) price. This information could come from phone calls, secret shopping, published data, etc. Make notes during this process about how your company and services -- and the competition -- are perceived by the market. Be brutally honest in your evaluation.
8) Know Where the Market Is Headed
Clearly you can't be a soothsayer, but you can keep track of outside factors that will impact the demand for your services in the future. These factors can range from something as simple as long-term weather patterns to laws that may impact future sales of your services. Also take into account your competitors and their actions. Will a competitor respond to your introduction of a new service on the market by engaging your business in a price war?
One size does not fit all. You can only go so far pricing all your services based on a fixed markup from cost. Your service price should vary depending on a number of factors including:
- What the market is willing to pay.
- How your company and services are perceived in the market.
- What your competitors charge.
- Whether the service is "highly visible" and frequently shopped and compared.
- The estimated volume you can sell.
That opens the door to raising and/or lowering prices for your services. In order to make this call one way or the other, you should first understand what's already working. Analyze the profitability of your existing services, so you can do more of what works and stop doing what doesn't work. You want to find out which of your existing services are making money and which are losing money. You may be surprised at how many of your services are losing money -- fix those ASAP.
You should also constantly re-evaluate your costs. To sell it right, you have to buy it right. If you are having a hard time selling a service at an acceptable profit, the problem may be that you are not taking care of your costs right. It may be that your cost is too high rather than your price is too low.
9) Know when to raise prices -- and how
You should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your services at a better price. Test new offers each month. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of the services you sell and the total gross profit dollars you generate.
It is a fact of life in business that you will have to raise prices from time to time as part of managing your business prudently. If you never raise your prices, you won't be in business for long. You have to constantly monitor your price and your cost so that you are both competitive in the market and you make the kind of money you deserve to make.
The best way to determine if the service is being priced correctly is to watch sales volumes immediately after making any change. This can be done by watching cash collections (if the business is cash or credit card based) or credit sales (if accounts receivables are used) for the weeks following. If a price increase is too high, customers will react pretty quickly. Also watching the competition can help - if you've made a positive change in prices; competitors are likely to follow suit.
But there is a right way and a wrong way to raise prices. You don't want to alienate your existing customer base by raising prices too steeply, especially during a recession. Rather than have a sudden increase, have a strategic plan over two to five years during which you gradually increase your price 5 to 10 percent. If the business is in trouble and you say, 'Hey, I'm going to mark everything up", that kind of scares people away. This way you haven't gone from $100 to $200. You've gone to $150 first.
In terms of raising the price -- this is more easily accepted in 'good' economic times. As the underlying cost of delivering the service rises, the customer is prepared to accept the rise in the price to them. If the customer perceives that the firm's costs are going down while their price is going up, this will not be received well and is likely to backfire.
10) Know when to lower prices -- and how
You may realize that you have missed your target audience by pricing your services too high. You can always choose to discount your products or give customers something for free in order to get them to try your services or generate traffic to you. You have to get people in, People like getting something for free or some kind of discount. You can make Wednesday senior citizen day when seniors get a 20 percent discount. Then maybe you can offer a student discount day. Then all you're doing is keeping the price the same, but to those people you're giving them a cut but it's not like you've lowered all prices.
Generally, lowering prices is not a good practice unless you are using this strategically to garner market share and have a price sensitive service or if all of your competitors are lowering their prices. An alternative to lowering price is to offer less for the same price which will effectively reduce your costs without appearing to reduce the value to the customer. Restaurants have found this particularly helpful in terms of portion sizes but this same strategy can be applied to service industries as well.
All in all, monitor your pricing. A key component to pricing your service right is to continuously monitor your prices and your underlying profitability on a monthly basis. It's not enough to look at overall profitability of your company every month. You have to focus on the profitability (or lack of profitability) of every service you sell. You have to make absolutely sure you know the degree to which every service you sell is contributing to your goal of making money each month. Remember: "People respect what you inspect." 3 take away points to always remember:
- Always listen to your customers. Try to do this on a regular basis by getting feedback from customers about your pricing. Let them know you care about what they think.
- Keep an eye on your competitors. If you don't have deep pockets and can't afford to hire a market research team, hire some college students to go out on a regular basis and monitor what your competitors are doing.
- Have a budget action plan in place. Try to have a plan for your pricing that extends out three to six months in the future.
You owe it to yourself and to your business to be relentless in managing your product pricing. Remember, how you set the price of the products could be the difference between the success -- or failure -- of your business.BLOG COMMENTS POWERED BY DISQUS