One of the toughest decisions facing any small business owner, especially one who provides services rather than tangible products, is determining how to price your services.
If your prices are too high, you risk losing customers with the interest in your services, but not the budget. If your prices are too low, you risk leaving money on the table, or even losing customers who buy into the belief that higher prices equate to a higher value. Either way, you and your business lose money.
Every business owner faces their own unique circumstances and challenges, but there are some general rules for pricing that apply across the board. Here are a few tips that, with maybe a few tweaks, will help you create a basic pricing model that will get your small business off and running.
5 Tips on Pricing Your Services
1. Scrutinize the competition
Do some research and find out what your competition is charging, then decide what makes sense for you. Do you want to go for the higher-end customers, or do you want to be the affordable option? Maybe you’ll decide to find that sweet spot in the middle. Regardless, having a thorough and accurate understanding of your competition is essential to creating a practical game plan for pricing your services.
Start by Googling similar businesses, both in your area and in similar areas. Dig deep. It can be tough to find specifics sometimes, depending on the business you’re in. Even if you can’t find specific prices, you can get an idea of the various services people are offering, packages they may have, and all kinds of other intel.
2. Put a price on your time
Time is money, as they say. Regardless of your business type, you’re investing a whole lot of time into optimizing, marketing, and performing your service. Keep careful track of that time, and price your services accordingly.
Here’s a quick way to ballpark your pricing:
- If you were to give yourself a fair hourly wage, what would it be?*
- Now think about how long it takes to perform your service, from the initial customer inquiry, all the way through to services being rendered, collecting payment, and stressing over the thank-you card you know you should send, but won’t.
- Multiply the two, and there’s a rough estimate. It’s a place to start, at least. There are, of course, other factors to consider, but those generally have easier metrics to calculate. We’ll come back to that.
*A great way to determine this figure is to have a goal for how much you’d like to make annually, then work backward from there. Think about how many hours you hope to work each week, then multiply that by how many weeks you hope to work in a year. Divide your salary goal by the annual hours total, and there you go.
3. Know your expenses
Once you’ve calculated your time value, add up all of your expenses, and average them out by timeframe and hours worked.
If you’re spending an average of $5000 a month on fixed overhead expenses and $3000 on service-related expenses, divide that whole expense by the total number of customers. You’ll arrive at a rough per-service expense figure, which you can then add to the time value from above. That figure should give you a pretty good idea of what your business costs. This is VERY important.
Expenses have a way of creeping up on you. Get a firm handle on them right up front and watch them like a hawk.
Expenses have a way of creeping up on you. Get a firm handle on them right up front and watch them like a hawk. Every dollar counts, especially in the early days. Read more here on how to manage cash flow for your business.
4. Streamline and question everything
The next thing to do is circle back to item #1–competitor analysis. Is your figure within a reasonable range of your competition? If so, great! You’re right where you want to be and can go to market.
More likely though, at least at first, you’re going to realize that the figure you’ve come up with is a lot higher than what the market is likely to bear. That’s because running a small business is hard and often wildly inefficient, and it can take a long time to get to the point where you can actually book the amount of business you need to hit your goal numbers.
Carefully analyze your procedures and expenses, as well as your services themselves. Is there some room to cut costs, increase efficiency, or make adjustments that separate yourself from the competition in a way that allows you to charge more? This process will likely continue, with little tweaks to your business plan here and there, for a while.
Eventually, though, you’ll find that sweet spot where your expenses and market value sync up in a way that allows you to make a profit, which is when you make more money than you spent trying to make it.
5. Hourly vs. fixed pricing
Now that you’ve determined your ideal hourly rate, it’s time to decide how to present that to your customers. You can quote them your hourly rate, then give them an approximate timeframe. Most people prefer a set fee, so they know what to expect.
A great way to go is to come up with basic service packages, based around that hourly rate, with fixed base prices.
For example: Let’s say your hourly rate is $100, and Service X takes you typically 3-5 hours. By offering that package for $500, you give the customer a fixed price, which eases their fears of unexpected inflation, while giving yourself some good padding, in case things take longer than usual.
If you clearly define the parameters and deliverables in a set price, you can always charge an hourly rate for those times when circumstances beyond your control make the project take longer or cost more (i.e. scope creep, client delays, requests that are outside of the agreed-upon deliverables).
Pricing Your Services Is an Art
Remember, pricing your services is an art, not a science. It’ll take time to get it right. You may never stop making little tweaks, here and there.
But if you take the time to look closely at what you’re spending, what you’re trying to make, and how long it takes to make it all happen, you’ll begin to zero in on that sweet spot where effort and reward are happily balanced.
How have you approached pricing your services for your small business? Has your strategy evolved over time, and if so, how? We’d love to know in the comments!