Client’s often ask how I determine the prices for my services. Usually this is done in the hope of learning a new pricing method they can apply in their own businesses. Until now I had never really ‘written it down’ or considered displaying it in any sort of structured way.
Recently I read an article that was able to effectively summarise the general approach I take to pricing. It just didn’t sound like ‘me’.
So here it is – My Objectives, Considerations and Decisions (O.C.D) approach to pricing any good or service.
When pricing a product or service it’s important to be clear on what your pricing objectives are. Usually a business has two clear objectives when determining price:
1. To offer their customers a price at which they perceive the good or service to be great ‘value for money’ – we want them to buy it!; and
2. Deliver as much Profit as possible to the business.
The right price for your product or service is usually the sweet spot between those two Objectives. The point at which the business receives an acceptable profit level while ensuring that enough customers see value and make the purchase.
Undoubted the relative importance of each object will vary from time to time. On some occasions your profit-making objective will take the lead and the resulting pricing will be higher – even at the risk of the customer saying No. Other times your desire to win the work will take over and you may reduce the price to guarantee the win. While I don’t necessary advocate ‘discounting’ as a pricing strategy sometimes you want to build a relationship with a business owner and winning their work could be the starting point for a larger plan.
Once you are clear on your pricing objectives its time to gather some data. What should you consider when determining your price?
It’s important examine the costs associated with delivering the product of service. Raw materials, labour inputs, transportation etc. You can’t determine your profit margin until you fully understand your costs.
As part of this process it’s also important to consider capacity. If you need 100 labour hours to complete the job and you only have 50 available can you deliver? Will you need to engage higher priced labour services for the shortfall?
Value, as with beauty, is in the eye of the beholder. You need to get in the head of the customer and understand how important your product or service is to them. If you product is highly important to them they are likely to be far less price sensitive which, in turn, means you can charge more.
The internet has made to easier than ever for your customers to quickly research your competitors and the prices they charge. I’m not suggesting you price match your competitors. Small businesses trying to race each other to the lowest price are all heading for failure. However, understanding who your competitors are, what they offer and how much they charge will help to ensure your pricing is realistic. If your competitors sell widgets for $25 each and you charge $200 each for identical widgets you better have a great sales strategy to demonstrate why you and your business still represent good value at that higher price!
Now that you have clear objectives and you have the relevant data available you can look at putting a dollar value on the product or services. When setting the price you will usually have to make 3 decisions:
In a service-based business will you charge by the hours or a fixed fee? Will you bill in stages or on completion? For businesses delivering physical goods will your sell the individual items or packages containing multiple/assorted items?
There is no perfect pricing structure. Usually it will depend heavily on customer preferences and the relative bargaining power between the parties.
The amount (level) of your pricing within the chosen structure. If you are going to bill by the hour will it be “$50 per hour” or “$500 per hour”? If you are selling individual products then it is “$1,000 per unit”.
This is your system for presenting and discussing prices with your customers. Will you present them with multiple pricing options? Will you list the prices publicly (menu pricing) or make the customer contact you to have the price customised to them? How will you articulate the value of your goods / services so that the customer has the right context with which to consider your price?
For me personally I use fixed priced, 12-month service packages in my business. The package price is billed monthly and clients always have 3 different pricing options when entering into a new service period. After much trial and error, I’ve found that approach best suits most of the clients I work with. Do you want to see how the packages are designed and presented? Why not contact us for a quote on your Accounting, Tax and Profit First needs?..See what i did there?
It’s not an exact science
You will have heard the saying ‘pricing is an art and a science’. For hundreds of years pricing consultants have tried to deliver exact formulas with which business owners can price their products. Ultimately, there are just too may moving part to look at pricing that way. Getting it right takes all the relevant data you can gather, a lot of experimenting and sometimes a little bit of luck!
Just remember to be O.C.D about your pricing. At the end of the day it means the difference between success and failure…