4 Factors to Consider When Pricing Your Small Business Services
One of the most challenging aspects of starting and maintaining a business, regardless of whether you are a freelancer or a conglomerate, is determining the right price to charge for your services. If you are an economist, the ideal price is simply the point at which demand meets supply. If a price is too high the demand for the service will go down thereby resulting in excess supply or capacity by the service provider. If the price is too low then demand will increasing leaving the supplier less availability to meet demand. Of course, pricing can be significantly more complex than this and has become a lot more sophisticated in recent years. Businesses pay thousands of dollars to pricing consultants for strategies that take numerous factors into consideration when determining pricing. One only has to look to airlines as example of a seemingly inscrutable pricing model. Unfortunately, smaller businesses, freelancers and startups don’t usually have the budget for a pricing strategist and have to make do by searching for information available on the internet, discussing it with their business associates or simply using their gut to come up with something that makes sense. As an internet source, I have set out a strategy for determining a price for your services
Calculate Baseline Pricing for Your Services
A good starting point is to determine how much you could earn if you were employed either full time or part time, and translate this to an hourly rate. Below is a calculator to help you determine your hourly rate based on a full time salary:
Annual Salary estimate for an employee doing the same job
Annual Tax Benefits Paid By Employer including Payroll taxes such as CPP, QPIP, QHSF as well as group insurance, automobile allowance, professional development etc. This is usually calculated as 10-15% of your salary.
Annual Estimated Expenses of running the business could include rent, supplies, direct expenses of supplying the service, subcontractors, subscriptions, office supplies etc.
Number of WEEKLY TOTAL hours that you plan to work in your business . This is usually 35-40 hours if you plan to work full time but can also be less if you only plan to work part time.
Number of WEEKLY Hours Spent on Administration represents a variety of administrative tasks such as marketing, accounting, sales, IT, updating your website etc. that can take up a significant amount of time but for which you can’t specifically charge your clients. Instead this is built into your hourly rate.
Number of Weeks Per Year Working on Business can be anywhere up to 52 weeks. If you want to take 4 weeks of vacation per year, this number would be 48 weeks.
HOURLY RATE CALCULATOR FOR BUSINESS SERVICES:
Using the calculator above, if you were to work 40 hours a week, you would need to charge $37.50 an hour to earn an amount that is approximately equivalent to $50,000 a year.
Compare the Baseline Hourly Rate to Competitors and other sources
In order to identify the competition, you should search for similar business with comparable service offerings and determine pricing for their services. You will likely find a wide range of pricing which is influenced by where you are located, how much experience you have, the breadth of services that you are able to offer including complementary services (eg. offering web development along with web hosting). Once you have an idea of what the fees are for their services, you can see how your own baseline compares.
It can also be useful to speak to colleagues, other business owners and post on business related message boards/sub-reddits etc. to try and glean what a reasonable rate is for the services that you are providing. Other sources include UpWork, Fiverr and other freelance websites where people often post their services that will provide more of a range.
Determine how you are going to differentiate your services from your competitors
Since almost every existing service is already being provided by someone else and your competition is no longer only businesses in your area, but anyone who is willing to work remotely, it is essential that you think about what differentiates you and your service offerings from the other businesses in your space. There are numerous ways of differentiating yourself:
Offer a complimentary service to every client that signs up with you,
Personalize the services to meet your clients needs.
Have a unique pricing structure that is based on results (see discussion on pricing below)
Create a loyalty program
Offer a money back guarantee if they are not satisfied
Write articles that highlight your expertise or create an app that is useful to your target market
Once you have honed in on what differentiates your service offerings, you need to be able to communicate this effectively to your potential clients. This will allow them to see the value in your services. Although, many businesses particularly, when they are first starting out, feel that they have to compete on price, this could not be further from the truth. Often potential customers will shy away from the lowest cost option as this might suggest lower quality. Also, they are looking to solve a problem and many business owners know from experience that going with the cheapest provider who ultimately can’t provide them with the service they need, can end up being more costly in the long run.
come up with a pricing strategy for your services
There are essentially two ways you can price your services:
Hourly Based Pricing
Perhaps the most popular method by which business price their services is on an hourly basis. The benefit of hourly pricing is that it is simple to implement and to track. Clients will often expect to pay an hourly rate and therefore it is an easier sell. The downside of pricing on an hourly basis is that clients are often (unpleasantly) surprised by the amount of time a job may take which requires justification and often requires that you reduce your price just to keep them happy. The other significant downside is that, to paraphrase Ronald Baker , you have created a ceiling on how much you can charge. This means that since you only have a limited amount of time, there is a maximum amount that you can earn which is the number of hours worked times X your hourly rate.
Simply speaking, value based pricing is the price that you would charge to a customer based on the value that they perceive. A great example of this would be a painting by Van Gogh. If you were to take the cost of materials and labour (his hourly rate would have been very low in his lifetime), the painting would sell for a few hundred dollars. Using the value pricing model, his painting “The Portrait of Doctor Gachet” sold for more than $80 million, which was the value of the painting to the purchaser. Sadly, most of us cannot charge $80 million for our services. However, it does underline the point that customers might be willing to pay more for our services as long as we can demonstrate their value to them.
Demonstrating value can be done in a variety of ways. One example would be to show a customer how your web development service where you implement an online shopping app will directly increase their revenues. A pricing structure can be created whereby you charge the customer for the percentage of increase in revenues or it can be a hybrid of a fixed price for the project + a percentage of sales. Another example would be to communicate to them on how your accounting service will help them to reduce their interest and penalties by ensuring that tax returns are filed or debt payments are made on a timely basis. A third example would be a collection service that promises to improve the collection of customer receivables by 25% thereby increasing the customer’s cash flow.
All of these are examples of services that could be highly valuable to a client. The goal for the business service provider is to put a value on how much these services are worth and charge that price. The benefits of the value pricing model is that the customer knows exactly how much they are going to pay up front so there are no surprises and the price of the service can be quite a bit higher than simply charging the hourly rate than the number of hours. The downside is that you have to effectively communicate to your client the value of your service. Also, there might be unforeseen issues or it might end up taking much longer than you anticipated.
Using value based pricing requires that you essentially provide a pre-determined price, that you and your client agree on, for a project or ongoing service. An excellent resource on the subject can be in found in Ronald Baker’s book on value pricing. Once you have calculated how much you are going to charge, you can bill your client once certain milestones have been reached, all at once or for ongoing services on a monthly basis. It can also be very useful to provide a client with different options (usually 3 options) to choose from which increases the likelihood that they will choose one of the options. (This is a variation on the Monty Hall problem where simple probability suggests that there is a only a 50% chance of choose one of two options but a 75% chance of choosing one of 4 options)
Although overvaluing your services can be bad for business, undervaluing them can be equally damaging. Clients are often more willing to stick with a business that provides great service, is passionate , possesses superior knowledge and continues to provide value on an ongoing basis rather than one that only offers a lower price.
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