Knowing what to charge for services is really difficult for a lot of small and medium business owners. Overcharging comes with the risk of not getting enough work, while undercharging can lead to overwork and burnout just to make enough income.
Unfortunately there is no golden rule for how to price your services correctly. There are, however, a number of strategies that you can implement to help you get the balance right.
There are many ways to price your services, such as charging according to a fixed amount for a project, an hourly fee or a sales commission. Choosing the right method will depend on your particular service type, industry and market, and of course your pricing strategy should help you move towards your business goals.
Three of the most common ways businesses approach their pricing are:
While a lot of businesses might choose and stick to one method, it’s best to incorporate all three approaches and review your pricing strategy regularly for the optimal outcome. Let’s take a closer look at some of the key factors that should be considered.
Boiled down to basics, pricing should be a combination of covering your expenses plus earning a profit. When considering what to price your services one of the first things you should do is calculate all the expenses involved. Expenses can cover a whole range of things including:
One method of pricing would be to add up all your expenses, including labour and overhead costs, add on the profit you want to earn and then divide the total by how many hours you worked.
Price of services = (total expenses + desired profit) ➗ (hours worked)
When deciding what to price your services, you must consider what your potential customers think they should be paying. Who are your potential customers? Whether they are bargain hunters or people prepared to pay more for quality should play a role in your pricing strategy. Market research is an important step every business should take.
Most customers shop around. That’s why it’s important to understand what your competitors charge and why. This doesn’t mean you need to price match your competitors. If you charge a different price, you need to communicate to customers why your price is different. For example, your services might be more expensive because you offer higher quality and a better service experience. Remember that your competition might also find pricing a struggle, so you should never assume they’ve got it right.
Setting your prices can be a tricky balance to get right, and it can end up making a pretty big impact on business outcomes. If you need some assistance with charging for your services correctly, we can help. At Lawrence Group, we help Perth businesses find the best strategies for strength and success in the long term. Chat with us today to see what we can do for you.