Getting the right price for your service is one of the most important elements of your business, regardless you are a freelancer or a small and medium business.
This article aims to provide some guidelines on how to price your services and the benefits and risks of different pricing strategies.
Pricing a service is more complex than pricing a product because it depends on the value you want to give to your time as a professional.
There is some technique that a professional (both a freelancer and an SME) might consider following:
- Cost-plus pricing. This is a standard method that considers the cost of providing a service, and then an additional amount that will represent the expected profit.
- Competitors pricing. You can identify the costs of competition and price similar to the competition. However, you need to make sure that this price covers all your costs, so it is fundamental to determine your full cost to deliver the service. You should also consider that winning a client based on price is not a winning strategy, as this customer might switch to another client if he gets a better price. So it is important to convince the client that you are giving him a better value in terms of service quality.
- Perceived value. This approach does not consider the cost of your service but how much the client is willing to pay for a service. For example, if you have a legal practice, and you can help to address a legal problem that may cost to your client several million of USD in losses, the client will be willing to pay you not for the time spent on the project but the benefits you can procure to him/her. Also, in this case, you need to make sure that our price is higher than your costs, in order to be profitable.
Calculating the costs of providing a service is paramount to set the right price. As explained before, you (freelancer or SME) need to determine your variable costs (those that change with your revenues) and your fixed costs (the costs that do not change whether or not you sell a service):
- The variable costs include manpower and the required material to deliver the service
- The fixed costs are typically a portion of the rent, utilities, marketing, other overhead, depreciation of asset (e.g., cleaning equipment, plastering machine), any bank interests (in case you have a loan).
Once you have defined your costs to deliver the service, you need to determine your expected profit margin. Defining your expected profit margin is complex but you can get some help by looking at market studies related to your sector, getting insights from competition, and defining your expected return.
Service providers can use generally two pricing models: hourly rate, or a project rate (which at the end is an hourly rate multiply by the expected time to complete the project/work).
- The hourly rate is the preferred model for service providers as the rate of return is defined on the actual time invested in serving the customer.
- A projected rate is the preferred model for customers as this requires the professional to define a cap on the number of hours to deliver the service.
Prices are not fixed but they should be changed periodically, and there are several factors that should be considered when changing the price:
- If your business does not deliver the required profitability, maybe there are a pricing and volume issues or a cost issue. If you have a reasonable volume of business, and your price is aligned to competition, maybe you need to relook at your costs. In the service industry, typically labor is one of the major cost items to monitor.
- If competition is raising the price, you should consider raising your price as well.
- If customers highly appreciate the value of your service, maybe you are pricing too low and you should consider increasing your price.
When you change your price, do always in steps as it will be better absorbed by the market.
Setting the right pricing strategy is important for your business, and allows to build credibility with your customers. On serviis.com platform, we would recommend avoiding to use extremely low price to attract the customer and then add additional costs once you were selected, consider that the customers might leave a review which will affect the credibility of your business. Do not price too high until you are not able to demonstrate that you can deliver an outstanding service.
If you need help, you can get a business consultant on serviis.com or contact us to have some market benchmarks to define the right pricing strategy for your business