How do you best approach this challenge? Firstly, you must clearly understand the value is the customer’s perception of your service’s worth. Your price should be as closely aligned to value as possible.
If too low, you’re not getting what you should from the transaction, and if too high, you’ll likely struggle to attract and retain customers.
Research your price position. Do you know the true cost of delivering your service? Who are your competitors? What do they charge? How do you compare on quality and service?
Now identify your target customers. What do they expect from your service?
Consider your market positioning and competitive advantage – are you operating from a position of strength or weakness relative to your competitors?
You are now ready to set your pricing strategies and tactics. While all the traditional pricing strategies and tactics used for products apply to services, there’s a greater opportunity to price based on value.
Value-based pricing is determining the value you’re bringing to your customers and relating the price to that value. If you have the courage, charge what your IP is worth. Consider unbundling your services – you can charge more in total when each service is priced separately.
Another option is to price jobs upfront as fixed-rate services – a transition from hourly rate charging.
Time-based billing is based on the fact you can buy anything you want as long as it’s at $150 an hour. However, this doesn’t reflect the fact the value of each hour won’t be the same for every customer, or each type of service provided.
If you sell IP and knowledge on a client-by-client, transaction-by-transaction basis – not time – you will generate better results.
Strategic pricing: the success differentiator
It’s important to monitor pricing and profitability, not just in holistic terms, but by service. What‘s selling and what’s not, and at what prices? Which are making you money, or hitting your GP targets, and which aren’t?
Some triggers to review your pricing strategy include:
there’s a shift in the value you are providing
the service is not selling
you’re introducing a new service
your costs change
competitors change prices or introduce a new service
changes to industry or economy.
Test new prices on a regular basis, but when changing prices, make sure you analyse what the impact will be on sales volumes and profitability.
Every year, it seems more difficult to justify the broad ‘annual price increase’, and this becomes even more challenging when there is low growth and low inflation in the economy.
Strategic pricing is the success differentiator, and value extraction and price optimisation are the keys to maximising your margins and attaining target profits.
Profitability is an ongoing challenge for many business owners. For more guidance and tips on maintaining healthy revenue and profits, sign up to the My Business newsletter.