If you’re a small business owner, you’ve probably struggled to navigate pricing services. You’ve strived to create the best services you possibly can, are proud of the work you do, and want your business to turn a profit—but you also don’t want to scare potential clients away by setting prices a little too high. How do you strike the right balance between meeting customer needs and paying the bills?
In this article, we’ll cover the best strategies and formulas to fairly and competitively price your services to satisfy your customers while also supporting and rewarding your hard work.
The delicate balance of pricing services
Setting appropriate rates for your services as a small business owner is imperative. Doing so will allow you to generate clientele, establish your name within your industry, and gain the experience and insight needed to develop your skills and offerings. But if you set your rates too low, you’ll undercut the value of your labor.
Unlike pricing products, where you can pretty easily determine the going rate for what you’re selling, it’s far more difficult to compare your services against those another is offering and draw meaningful conclusions. You can’t know the quality of a service or the skill of the service provider just by reviewing their pricing information.
Thankfully, there are a number of strategies to help you confidently take on this task.
Best methods for pricing services
There are many different approaches you can take when pricing services. Each has its own benefits and drawbacks, and only you can decide which will work best for you. In order to gain confidence in the rates you’re setting, you may want to choose a few methods to see how they can help advance your knowledge of the market and your place within it.
Here are the top 6 methods to consider when pricing services for your small business:
- Market penetration method: The strategy with market penetration is essentially to set prices lower than your competition so customers will be inclined to choose you over anyone else. Then, once you’ve established yourself, you can increase rates slowly over time until you’re making the rate you feel comfortable at. The benefit of this strategy is that you may see a lot of business quickly, but the downside is that you may feel overworked, under-compensated, or burnt out faster than you would if you were making higher rates right away.
- Hourly pricing method: In this method, you estimate the price of your materials and time, then multiply that by the number of hours you imagine a given service would take. As you start out in business, this method can be attractive because it doesn’t ask you to put a price on your skills—but be aware of the downfalls. First, as you get more comfortable providing services, you will get faster and therefore make less each time your services are needed. There’s also the possibility of customers accusing you of taking longer than you need to complete a service in order to increase your rates.
- Price skimming method: If the last method doesn’t suit you, this one might be the perfect alternative. It’s essentially the opposite approach to pricing services, and it’s especially effective if you’re entering the market with a new or relatively uncommon service. With price skimming, you set the price high, then incrementally lower it to remain competitive as others begin to offer similar services. This is a good option if you’re confident people are looking for your service, as it ensures you’ll quickly see sizable profits.
- Cost-plus pricing method: With this approach, you aren’t concerning yourself with the rates offered by your competition—you’re simply assessing the total cost to perform a given service and reach your desired profit. First, determine the precise cost to deliver the service you provide, then increase it slightly to achieve your desired profit margin. For example, if your time and materials cost $100 and you want to see a 25% profit from sales, you’d adjust the price to $125. Although this simple approach ensures you increase profit, it’s also possible that your peers are charging far more and you’re missing out on making higher revenue.
- Competitive pricing method: As the name suggests, with a competitive pricing method you simply survey your competition and insert yourself into the mix at a rate you feel is comparable. This is an effective strategy because you ensure you’re offering services for a competitive price. You can also use this method to identify your unique skills or additional features or bonuses to incorporate into your offerings. This can help make your services more desirable to customers than those of the competition.
- Bundle pricing method: This pricing method involves bundling different services together so that you are set apart from the competition. If one of your services is desirable to a customer, depending on your industry, it’s possible that they would benefit from additional services as well. By strategically bundling several of your services, you have the opportunity to diversify your offerings, provide customers with options they may not see elsewhere and perhaps hadn’t yet considered, and increase your revenue at the same time. When bundling your offerings, price them lower than they would be priced individually. This will encourage customers to sign on for the bundle right away, rather than choose to buy one service now and the second later on.
Pricing services is all about striking a balance
As a business owner, it’s important to approach pricing services fairly so that your customers do not feel that they’re being taken advantage of—but it’s also important that you advocate for your time and the value your services add to the lives of your customers.
While you may be tempted to set low rates at first in order to quickly generate business, remember that working for less money than you deserve can be draining regardless of the field in which you work. Moreover, it doesn’t necessarily guarantee that clients will prefer you over your peers who charge more—for some consumers, a higher rate equates to greater skill, something many are willing to pay for.
The bottom line is that you have a number of potential approaches to pricing services. If one of them doesn’t work, shift to a different approach. Just make sure you’re striking a balance between serving your customers and making the money you and your team truly deserve.