How to Price Business Services

Service pricing is about perceived value, far more subjective than setting product prices. Let’s walk through the art and science of pricing a service. After reading, you’ll have a framework for setting and testing prices.

Business terms to know:

– Direct costs: Costs associated with producing goods or services.

– Indirect costs: Costs not tied to production but necessary for operations.

– Profit margin: The percentage of total sales revenue that results in profit after deducting expenses.

Four steps to price your services:

1. Consider your costs

To determine how much to charge, start with your costs. Services require a more expansive analysis than products. Look at direct and indirect costs, including time, materials, equipment, operating expenses, rent, insurance, marketing materials, salaries, and employee benefits. This is your starting point to determine profitability.

2. Look at competitors’ prices

Understand your competitors’ pricing and the effectiveness of their services. Use them as a baseline to set prices and select service options. Also, consider your costs compared to competitors and find opportunities to start with lower costs.

3. Consider profits

After considering costs and competitor pricing, determine how profitable you want or need to be. Review published reports and industry benchmarks to identify the average profit margin for your industry. Use this formula: Price = costs / (1 – profit margin). If your price is higher than competitors, ensure customers view your services as higher value.

4. Select a strategy and adjust to customers

Do not obsess over finding the perfect price. Test a few price points that reflect your value and market position. Choose a pricing model that works with your strategy. Seek out customers and observe their reactions. Adjust prices based on feedback.

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Tips for setting consulting fees:

Check out tips from professional business consultant, Tim Berry, to set better prices.

Why setting the right service price is important:

Your prices directly impact your potential for success and should be tied to your experience, education, and time. Price too high, clients walk away. Price too low, you may not get paid what you’re worth. Start on the higher end, and lower prices if needed. Revisit prices as you gain more customers and experience. Know your worth, what customers want, what competitors are doing, and your market position.

More on pricing products and services:

Need additional guidance? Check out our other pricing resources on pricing strategies, how to price products, and mistakes to avoid when setting prices.

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