Setting the right pricing is a challenge for any business. Setting the right pricing for a service business is a real challenge. Unlike tangible products it is not so easy to compare like-with-like and to find out what your competitors are charging.
The Right Pricing
On the whole there is no “typical” pricing your services – this is actually good news for you. You can set your pricing for your services in any way you wish that makes sense for you and your ideal customers.
The first thing to remember is that your services are unlike anyone else’s because they are delivered, or managed, by you for your ideal customers.
Value vs Pricing
The key to pricing is value.
The value you deliver to your ideal customers will be much greater than the price they pay.
One way to convince yourself of this is to revisit the benefits you deliver to your ideal customers.
Estimate the value that those benefits will deliver to your customer and you will find it exceeds the price you are seeking to charge.
Methods of Pricing
There are a number of methods you can use to calculate the pricing of your service. Here are some examples.
Daily Rate Pricing – this takes into account the remuneration you would like to earn, the costs of running your business and the margin you wish to make.
Here is a simplified example for illustrative purposes.
You wish to take a salary of £30,000 a year and it costs you £3000 a year to run your business. This means that you need to generate £33000 a year to break-even i.e. pay yourself and cover your costs.
You then wish to make a margin on your activities – the amount that is available as a reserve and a proportion of which can be reinvested in your business.
Say you wish to make a margin of 30%, therefore your costs account for 70% of your revenue.
Estimate the number of working days available, for example 220 days a year and out of those days the average percentage you are working on revenue generating activities e.g. around 75% of the time, in this case 220 x 75% = 165.
You can calculate your revenue by dividing your breakeven by your revenue-generating days multiplied by your cost percentage.
In this example;
£33000 / 165 x 0.7 = £286, so your daily rate would be £286.
So 165 days at £286 = £47,190
i.e.
Revenue £47,190
less
Salary £30,000
Running Costs £ 3,000
£33,000
Margin £14,190 (which equals 30% of £47,190)
If you have an idea of the average value of the services your deliver then you can calculate the average number of ideal customers you need to attract.
So for example say your average service is delivered in 5 days at your average daily rate calculated above;
Then your average sale value is 5 x £286 = £1,430
Divide your Revenue target by your average sale value to give the number of ideal customers you need to service
i.e. £47,190 / £1,430 = 33
In this example you therefore need 33 customers a year (around 3 a month) paying £1,430 per service to achieve your revenue target.
Going Rate Pricing – you may have a good idea from your market knowledge and positioning what the going rate is for a service such as yours.
For example a health practitioner may judge that the going rate for their services in their area is around £70 for a treatment session.
So, in our simplified example, if you wanted to generate income of say £40,000 a year simply from these treatments then you would need to deliver;
£40,000 / £70 = 571 treatments a year, or an equivalent of around 48 treatments per month.
When considering the going rate, do take into account how you would like to position yourself in the market. You may wish to charge a higher price for a perceived higher quality service.
Choices Pricing – you may wish to price your services according to the Bronze, Silver, Gold approach (or even Platinum!) which offers a bundle of services in each category, with each category offering a higher level of service for a higher price.
For example an IT support business may offer support calls and trouble-shooting across all of its plans with the additional Disaster Recovery planning on both Silver and Gold plans and a level of on-site support included in its Gold service. Each plan would be priced on the level of services provided;
Assuming a revenue target of £72,000, the IT support business could target to sell the following in a year;
15 Bronze packages at £1,200 p.a. each = £18,000
15 Silver packages at £2,400 p.a. each = £36,000
5 Gold packages at £3,600 p.a. each = £18,000
Fixed Package Pricing – you may wish to include a bundle of services in a fixed price package.
For example you may be providing legal services to small and medium sized businesses who do not feel comfortable with an open-ended legal bill. So you may offer an Employment Law package. This may include, aspects such as telephone advice, drafting standard letters for recruitment, a statement of main terms of employment, and disciplinary and grievance procedures.
So if a package price for this service were £1,500 and you wished to generate an income of £45,000 a year simply from this package then you would need to provide 30 of these packages a year to customers or around 2-3 a month.
Retainer / Membership Pricing
Retainer – a customer may wish to retain your services for a set period, say 12 months for which you charge a monthly fee. One way to set the price for a retainer is to set the monthly fee based on a maximum number of hours per month (based on your daily rate) you will be available for that customer.
Membership – this allows your customer to receive additional benefits that only those belonging to the “club” are entitled to. You may wish to have an initial entry level free membership with a view to upgrading to a paid premium membership for additional benefits. Consider offering your clients an option to pay in instalments.
The Magic 99 Pricing?
Should you price using the magic 99 or 97 values or use round numbers?
Customers often associate values such as £99 or £97, £199 or £197 with a deal or special offer. However, round numbers, £100, £200 are often associated with quality.
So for a thriving business focus on pricing the services you wish to deliver to your ideal customer according to the revenue you wish to generate, in line with the message you wish to communicate for the service you are selling.