Setting prices for your service business may appear straightforward from the outside, simply listing your services higher than your expenses on the job to make a profit. However, it’s not nearly as simple as that, and your prices are more than just numbers. How you price your services is critical to your bottom line, as well as reflecting your business’ identity and how you see and treat your competition. Having a well-thought-out pricing strategy is crucial.
Setting the pricing of your services should not be done hastily. It should be a planned, calculated and educated decision that reflects who you are as a business. This article shares ways for choosing the right pricing strategy for your service business.
Factors that affect service pricing
- Service value — how much time and expertise your services demand.
- The costs to your business; both fixed and variables you need to cover.
- Your target market’s purchasing power.
- How much your competitors are charging for the same services.
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Step 1: Determine your business goals
Everything about your business––from marketing to your sales go-to-market (GTM) strategy––is determined by how much money you make. But before you set the prices for your service offering, identify what you’re looking to achieve first. The items below are an outline of business goal considerations you can use to determine the basis for your pricing:
- Increase profits
- Improve cash flow
- Better market penetration
- Increase your market share
- Boost revenue per customer
- Be better than your competition
- Introduce new services
- Reach a new audience
- Increase conversion rates
Depending on the service you’re offering, using automation tools, such as that offered by Jobber tailored specifically for lawn care services, is a good way to get started. This smart technology has built in features to help you think about all the considerations when pricing a service down to the cost of materials, labor, business operating costs and the profit margin that you need in order for it to be worth your while.
Step 2: Conduct an in-depth market analysis
The step above is based on your business’ objectives. The purpose of this is to guarantee that your pricing plan respects the market environment in which your service will compete. For example, if you’re looking to price your lawn services, you need to know the range of services other businesses are offering for the same and at what price.
In theory, a low-cost service often has a broad market, while a high-cost provider normally has a smaller target market. If your market and service range is broader with numerous other businesses offering similar services, you’ll almost certainly compete on pricing. That means you’ll need to do everything you can to keep operating costs low to maintain a maximum profit margin.
In contrast, premium pricing may be more appropriate if you have a high-value and exceptional service. It also inclines your marketing strategy to targeted marketing. When you have a superior service offering, you must focus on high-quality marketing and customer service.
Step 3: Analyze your target audience
In developing a pricing strategy, you need to explain the what, why, and how your target customers will utilize your services. Use these questions as your guide:
- What value does my service give to the consumer, both perceived and real?
- What exactly are my audience’s needs and challenges?
- How does the service alleviate customers’ stress?
- Why would a consumer want to use my services?
Your price strategy and marketing efforts should be based on why your target audience would engage your services over your competitors.
Step 4: Profile your competitors
The pricing model and price point of your competitors have a crucial influence on your pricing strategy. Thoroughly research your direct and indirect competitors. You can apply the following strategy:
- Look around and identify at least three competitors. Examine their price structure. Do they, for example, offer per-service pricing and allow for significant discounts? Do they offer their services in a package? Or do they use value-based pricing, in which clients pay a portion of the total expected return on interest?
- Also, consider the alternatives that a consumer may use to solve the same problem as your service. Remember that sometimes your indirect competition is simply the word ‘no.’ This is where a potential customer applies self-solutions over your service offering.
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Step 5: Develop a pricing strategy and how to execute it
By the time you’re getting here, you’ve gathered enough information to create an action plan. Based on your market, consumer, and competition studies, here are strategies you should consider:
- Penetration pricing: This is when you set a price that’s intentionally low to break into a market.
- Premium pricing: This is basing your price on the higher value of your service offering.
- Price skimming: Enter the market with a high price, but as soon as your competitors raise their prices, you lower yours.
- Competitive pricing: This is where you set your service price to match your competitors and win customers with high-quality services.
- Value-based pricing: Know what your customers are worth and how much they’re willing to pay for your services.
- Discounted prices: You offer discounts for some time as a one-time deal
- Psychological pricing: This is when you price to encourage customers to take action. For instance, instead of charging a full lawn care package at USD$200, indicate the price as USD$199.
- Versioning: Make your services available in a hierarchy: good, better, and best.
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Takeaway
By the time you complete these five steps, you’ll have a clear understanding of the pricing strategy that makes the most sense to your service business. This will guarantee that your pricing strategy will give you the best chance to compete effectively in your target market segments and grow your market share and revenue.
References:
- “What Should You Consider When Making Pricing Decisions?”, Source: https://www.thebalancesmb.com/what-to-consider-when-making-pricing-decisions-4083152
- “Sizing Up the Competition: How to Conduct Competitive Research”, Source: https://www.uschamber.com/co/start/strategy/how-to-conduct-competitive-research
- “Definition of Pricing Strategy”, Source: https://smallbusiness.chron.com/definition-pricing-strategy-4686.html