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How to Price Business Services
Service pricing is all about perceived value, which is far more subjective than setting prices for a product.
Let’s walk through the art and science of pricing a service. After reading, you’ll have a basic framework for setting and testing prices.
Business terms to know
To get the most out of this article, you should know a few business terms.
- Direct costs: Costs directly associated with producing goods or services, such as raw materials and labor.
- Indirect costs: Costs not directly tied to production but are necessary for operations, like administrative expenses and rent.
- Profit margin: The percentage of total sales revenue that results in profit after deducting all expenses.
4 steps to price your services
1. Consider your costs
To determine how much you should charge—start with your costs. Unlike a product, where costs are directly connected to production, services require a more expansive analysis.
You need to look at both direct and indirect costs.
Direct costs cover anything directly related to providing your service. This includes your time, materials for deliverables, and equipment.
Indirect costs may include operating expenses like rent, insurance, marketing materials, salaries, and employee benefits.
This is your starting point. Now you can determine how much you need to charge or how many customers you need to be profitable.
2. Look at what the competition charges
What are your competitors’ prices? What services do they offer at those prices? Are consumers responding positively or negatively?
Understand what their current pricing looks like and how effective they are. Don’t copy them. If you do, you’ll just be seen as the same option but far less recognizable. Use them as a baseline for setting prices and selecting service options.
And if you’re unsure about your costs from the previous step—look at your competitors. What are they spending? Where are there opportunities to start with lower costs?
Use this competitive analysis to refine your initial pricing strategy and decide on your market position. Are you higher quality or a better deal? Do you offer experience or a fresh approach?
3. What about profits?
Between your costs and competitor pricing, you should have a rough pricing range. Now you need to see if these services are worth selling and can be profitable.
Ask yourself, how profitable do you want or need to be? If you’re unsure, identify the average profit margin for your industry by reviewing published reports and industry benchmarks.
Now, convert it to a decimal and apply it to this formula:
Price = costs / (1 – profit margin)
Is that price higher than your competitors? If so, will the services you offer be considered a higher value by customers?
If the answer is no, you may need to decrease your expected profit or find ways to lower costs.
4. Select a strategy and adjust to the customer
Don’t get too hung up on finding the perfect price. You can make assumptions about how customers will react, but you must test it to be certain.
Find a few price points that you believe reflect your value and demonstrate your market position.
Select a pricing model (hourly, per-project, or both) and be sure it works with your pricing strategy.
Now, seek out customers and take note of their reactions.
Are they surprised by your prices? Maybe your prices are too low.
Do they scoff at the price and walk away? You might need to consider lowering your prices.
Are they open to the price but want additional services? You may need to reconsider your pricing strategy.
Why is setting the right service price so important?
Your prices directly impact your potential for success and should be tied to your experience, education, and time.
Price too high—clients will walk away. Price too low—you may be stuck not getting paid what you’re worth. It also may not be sustainable.
To be sure you get this right, pick a strategy and start on the higher end. You can always lower prices if the price point turns too many customers away.
As you gain more customers, more experience, and establish yourself—revisit your prices. You may need to start with lower prices to attract initial clients to get traction. But, you’ll want to find ways to raise your prices over time to ensure you build a profitable business.
It comes down to knowing:
- Your worth
- What customers want
- What the competition is doing
- Your position in the market
Pay attention to these things, and you’ll find the right price point.
More on pricing products and services
Need additional guidance to set your prices? Check out our other pricing resources: