Price your services incorrectly and you stand to lose a lot!!
If you’re starting your own service based business, one of the most important decisions you’ll have to make is how to set your pricing – should you charge what your competitors do, offer an hourly rate, or maybe just enough to keep the lights on?
This question is important for 2 reasons; firstly, it will determine to a large extent your profitability (obvious I know, stay with me here). Secondly, how much you charge will determine your place in the marketplace – do you want to be a high-end marketing consultant that only has 4 clients, or a no frills & small bills operator with a 50 strong client base?
These are some of the more common pricing structures, along with their pros and cons:
1. Fixed Quotes
How it works – You are given a scope on what the project is, the timeframe for completion and possibly the client’s budget. You then quote a fixed price based on what your costs would be to develop the project, as well as how much profit you want to make.
Pros – Fixed quotes are good if you know that the project is not going to throw any surprises at you – there’s no tricky coding to the website or irregular shapes to the house design – just an average project that you can count on making money.
Cons – If something goes wrong and things take more time or resources than you anticipated, you’re going to have to wear the loss. Plenty of things can go wrong – the client could change his mind, the project might require the use of new and untested technology, or you might just have underquoted in the first place.
2. Hourly Rate
How it works – You bill the client for the time you’ve spent working for them, whether it’s half an hour or 50.
Pros – It’s steady, and you won’t ever have to risk working for free, unlike the fixed quoting option.
Cons – There are only so many hours in a day – if you want to make more money, you are either going to have to raise your hourly rate or work more hours, and neither option is particularly scalable.
3. Undercutting Your Competitors
How it works – You look at what your competitors are charging, and charge less than that. Not very creative, but it works.
Pros – It’s an easy point of difference that has at least some appeal to everyone – and if everybody in your market offers a similar service then it might be the only point of difference you have.
Cons – Being the low cost player can be a dangerous game – you’re not making as much money as your competitors, your brand has to be carefully managed to avoid being seen as both “cheap” and “nasty” and a big player with deep pockets could come in and start undercutting YOU – suddenly your point of difference would be gone and your only option would be to lower prices again, lowering your margins even more.
4. Demonstrating Your Value
How it works – You show the client what they will make or save as a result of your services, and then you charge a percentage of that amount.
Pros – There’s quite a few; margins can be large, adding more value to your services doesn’t necessarily have to cost you any extra, it’s scalable and clients will pay you nearly anything if you can adequately demonstrate that they’ll be making or saving more than what you’re charging. Finally, there is an inherent sense of fairness to being paid what you are worth.
Cons – No two bit players allowed here – to charge based on your service’s value, it has to be VALUABLE.
Not every business is going to be able to charge based on value, but if you are in any position to demonstrate exactly how much money your client is going to save or make as a result of your services, then start charging what you’re worth!
Which of these 4 models do you use to price your services?
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