When you are starting, one of the biggest concerns that you may have about running a business is identifying at which price point you should offer your services to clients. When you are a product-based business, this situation plays out differently. You can determine your pricing based on the computations you have on raw materials, labour, marketing, and other factors that may have contributed to the creation of the product. When you are dealing services, determining your price point is not as simple.
For one, it’s hard to quantify the value of the materials you use for a service. Time, expertise, effort, skill, and experience are just some of the many factors that are involved in the delivery of a service. These factors are intangible; they do not have a set price. This is what makes pricing a service much more challenging than physical items.
One thing you have to understand, however, is that there is no magic formula for determining the price point of service. All you can do is to deliberate, decide, and test it out.
While there is no guaranteed formula, I do have a few tips for you to make determining your service prices a little less difficult:
1. Pick A Target Market
It’s hard to move forward when you don’t know ‘exactly’ which direction you are headed to. There is always a niche market for every service. Rather than creating a “one size fits all” type of pricing strategy, you have to consider who you are planning to sell to and determine your price point based on their needs specifically. Knowing who your customers are and moving your business towards their direction will become a more effective and profitable approach in the long run.
2. Determine Your Position In The Marketplace
What is your role in the market? What is your purpose? In order to reach the right clients for your business (clients you personally want to work with), you have to position your business somewhere approximate to your target market. I don’t mean this literally, of course. Rather, establishing an identity that is more likely to attract target customers, or pricing your services in a way that it attracts the type of clients you would want to work with are just some of the things that will ultimately decide where your business is situated in the market.
3. Be Elaborate With Your Revenue Goal & How You Plan To Achieve It
When coming up with a price point, aside from knowing your target market and position in the marketplace, you also have to set an elaborate revenue goal for the next 12 months. How much do you plan to earn in a year’s time? How much revenue will you feel most satisfied with by the end of the year? I talk more about this on my YouTube Channel, Annette Fergs TV Episode 36, so be sure to check it out.
Anyway, if you already have a specific number in mind, double it, and you have a general idea of what your revenue goal is for the year. Once you have your goal, divide the amount by 12 months, and that’s your monthly revenue target. Now, all that is left to do is to determine how many people are you willing to service per month, how much resources are you willing to expend for your business (especially time), and how does it all fit with the revenue goal you have in mind?
If you plan to serve just ten people per month as that is what your current manpower allows, then how much should you charge these ten people so that you will be able to meet your revenue target for the month? How many hours would you have to invest in catering to the needs of all these people and how comfortable are you spending all that time in your business? As you can see, you also have to take into consideration your personal goals and limitations when deciding your service’s price point. You have to make sure that what you are willing to offer and how much you are expecting in return blend well together.
This is how you can come up with a price point that you are comfortable and satisfied with. Now, on to the bigger problem, how do you know your clients agree with your pricing?
4. Test, Test, and Test!
That’s right. The final step is the most important one by far. Even if you are 100% comfortable and satisfied with your pricing, all will be for nought if clients don’t take it too well. If they disagree with how you price your services, you will still end up losing business. Thus, to make sure that you are on the same page with your niche market, you have to run tests – a lot of them.
Since you are still in the process of refining your pricing strategy, you should expect to talk to a lot of people. Not just one or two clients – you need to talk to many, many people; most of whom will not even be converted to paying clients. This is a small sacrifice to make in exchange for data. By talking to a lot of people, getting their opinions, observing their reactions, you can determine at which price point your target market will most likely respond to positively.
Data gathering is crucial to the growth of your business in the long run. It’s far better to invest a little more time and effort in the initial phase of your business to enjoy smoother transactions in the future than regret losing customers because you blindly thrust into the business without knowing much about the market you are moving in. Trial and error is a part of determining the price points of your services. Even existing prices that are ‘effective’ can become outdated as new influential factors come into play (e.g. change in competitors’ price points).
Overall, it is best to plan your price points in a way that it complements your profit plan for the year. If you want to delve into more ways to build your business profits, Annette & Co. is just a call or an email away. Get in touch with us today so we can talk about growing your business.
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