Service Pricing Strategies: How to Avoid Lowball Offers

Why is it important to have a pricing strategy?

As frustrating as it may sound, making mistakes is part and parcel of running a business. From choosing the wrong domain name for your website to selecting an ineffective service pricing strategy, the learning curve is long. The latter, in particular, can prove harmful to your company in the long run, especially if you don’t take steps to rectify it.

Think about it. You likely put a lot of time into research and development, product creation, service refinement, and generally just ensuring that you’re bringing your customers the best you’ve got to give.

So, it’s important to have a pricing strategy that fairly reflects this. When setting prices, you should consider both consumer demand and perceived value, as these factors influence how much customers are willing to pay and how your product is positioned in the market. If you’re offering a great product or service but are struggling to turn a profit, you may need to rethink the pricing structure of your goods. There are several common pricing strategies businesses can use to set their prices effectively.

Whether your service is call center software or project management tools, you need to learn how to work smarter and price your offerings more competitively, in tune with the current market. A clear value proposition helps differentiate your service from competitors and justifies your pricing to customers.

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The pricing you choose should reflect the labor and material costs, as well as the overall production costs, of making the product, and setting prices also involves understanding consumer demand. This can sometimes dictate the value of the goods in the eyes of your customers, meaning you can charge more while still closing as many or even more deals

The price optimization of products and services can mean significant boosts in revenue. Perceived value plays a key role in how much customers are willing to pay, making it essential to factor this into your pricing decisions. Remember, the pricing decisions you make today could shape your overall profitability in the future. An effective service pricing strategy ensures that your offerings reflect both your value and market conditions.

How to price services

Whether you’re a solo entrepreneur or running a team, adopting the right pricing strategy for your service business is essential for profitability and growth. There are different pricing strategies and pricing methods that businesses can choose from, depending on their goals and market conditions.

Here are six useful steps to follow when pricing your services.

1.   Calculate the cost of goods

The COGS (cost of goods sold) for service-based products refers to the labor and resources it takes to provide those services. It’s a good rule of thumb to start here, as this enables you to work out a price that, at a minimum, covers the expense of producing the product if you were to take it straight to market without adding any other markups.

This includes:

• The cost of raw materials

• The amount spent on labor to make the product

• Variable costs that fluctuate with production volume

• Overhead costs such as rent, insurance, utilities, and taxes

• Any other costs associated with producing the service

The cost price is the baseline amount that covers all these costs before any markup is added.

2.   Evaluate the market

Whatever industry you’re in, the chances are that there’s something particularly “on trend” right now, when it comes to attracting new customers. Some companies choose to go down the witty route of fun domain name hacks, for example, while others are more pragmatic and focus on their pricing strategy.

Far from suggesting that you should copy what your competitors are doing, it’s always good to keep an eye on their tactics, especially if they become popular and successful – and, particularly, when they involve how they price their offering. Monitoring competitor prices and adopting a competitive pricing strategy can help ensure your business stays aligned with market expectations and remains attractive to customers.

Plenty of businesses conduct a competitor analysis to create their pricing structure, because looking at what your competitors are charging for the same sort of service gives you an idea of how the market is doing. A competitive pricing model involves setting your prices based on competitors prices and thorough market research, allowing you to benchmark effectively and respond to changes in the market.

After all, your competitors are in the same industry as you and trying to target the same core customer base, so this gives you an idea of what consumers are prepared to pay, an essential step in any small business pricing strategy. Using market research and regularly reviewing competitors prices helps you maintain a competitive pricing approach and optimize your market position.

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3.   Consider the resources invested

When pricing your services, you also need to consider the resources involved in making the product. This includes costs, time, and any other resources that have contributed to creating and establishing it.

Think about the hours spent on making and refining your service. If your team has spent a considerable amount of time on research and development, you may wish to reflect this in your pricing. Track how long it took you to finalize the project and use this timescale to come up with a price that seems reasonable for the effort and resources invested. Businesses may choose hourly pricing or project based pricing to reflect the resources required for different types of work.

You may also want to consider how long you’ve been in the industry and the experience and expertise you’ve gained throughout, not just while working on the project at hand. In some cases, businesses will charge more if they have more experience and trustworthiness to bring to the table. With project based pricing, it’s common to agree on a set price for the entire project, regardless of the hours worked.

4.   Add a reasonable markup (cost plus pricing)

Now it’s time to add a reasonable markup. This is the amount you’re going to add to each sale to turn a profit. Setting the right markup is crucial to achieve a healthy profit margin and maximizes profit. This profit will go toward paying staff wages, investing in new products, paying your taxes, and various other costs associated with the business. This needs to be greater than your baseline (the price at which you’d break even on the service).

Your markup can be added as a cash amount or a percentage. If you were to opt for the former, this means that each time you sold a subscription, you’d add X amount on top. For instance, an extra $1.5 for every seat sold. The selling price is the final amount customers pay after the markup is applied.

As a percentage, the markup would represent a set figure added to the cost of creating the subscription, such as an extra 15 percent on top. This method may be preferable for businesses with variable prices. When setting your markup, consider your desired profit margin and overall profit margins to ensure your pricing strategy supports your business goals. Some businesses may aim for higher profit margins depending on their market positioning and objectives.

This approach is part of building an effective pricing model that supports long-term success.

5.   Set and test the price

Once you’ve landed on a price you’re happy with, it’s time to release your product into the world and see how it goes down. When you set prices, it’s important to test at different price points to determine which performs best. Testing the price can be done in various ways, but predominantly it’s seeing how well the service sells and gathering customer feedback on what they think of the cost.

Depending on which strategy you’ve used to price your product (e.g. competitive or cost-plus), you may want to switch to another option after a certain amount of time to see which is most effective. Experimenting with different pricing models and different price points can help identify the most effective approach for your business. This allows you to keep testing and find the price point that generates the greatest overall sales and profit. Based on customer feedback and sales data, you should be ready to adjust pricing and keep adjusting prices to optimize results.

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6.   Review and refine your business pricing model

Now you’ve unveiled your service and are selling it to your target audience, it’s time to analyze the success of your pricing strategy and adjust it in line with any issues. For example, let’s imagine that you run a call center.

By using a call center data analytics tool to track data related to your calls, you discover that one of the most common issues that your customers report is your pricing structure. Armed with these insights, you can now get to work to tweak it in order to fulfill your customers’ needs and expectations.

Pricing: Know your worth

Pricing your service correctly is vital, so it’s important to have an effective pricing strategy in place when launching a new offering. Similarly, you need to know when to switch up your existing pricing in line with customer demand.

Most importantly, your strategy must be aligned with your overall business goals and objectives, while also considering market trends and the impact of cost on customer behavior. Finding the right price is essential to maximize revenue and achieve your business objectives.

There are lots of factors at play here, and they can be tricky to juggle, which is why you shouldn’t be afraid to analyze and adjust your pricing where necessary. Selecting the right pricing model is key to implementing an effective pricing strategy and maximizing revenue.

The best pricing strategy is one that adapts to market trends and customer needs. A winning pricing strategy is both effective and sustainable, balancing customer expectations with business objectives and maximizing revenue. By using a strategic service pricing approach, you can remain competitive while also protecting your margins.