Did you know that there are 30.2 million small businesses in the U.S.?
In America, a small business is defined as such by having fewer than 500 employees and less revenue than the average corporation. Elsewhere in the world, such as Australia defines businesses with fewer than 15 employees as small, and in Europe businesses with fewer than 50 are considered to be small.
Keep reading to discover how to price your small business services to ensure you have a profitable and successful business.
How to Price Business Services
Unfortunately, there’s no definitive guide when it comes to pricing your business services. That’s because every business is different and what works for one might not work for another.
When you are thinking about pricing your business products or services you need to consider:
- The costs of making or providing the product/service
- Your competitor’s and their prices
- Your customer and how they’ll perceive the value of your product/service
- And the different pricing models and which fits your business best.
Remember to spend a considerable amount of time and thought on your pricing strategy. It is imperative that you get it right, otherwise, you might have to pay for your problems in the years that follow, or worse, your business might fail.
1. Calculating Costs of Your Products/Services
Most businesses choose to calculate the cost of their product or service and then mark up this cost to determine a fair profit margin. There’s no point in setting up a business that isn’t bringing in profit because it is likely to fail.
Material Costs
The first step in calculating your costs is to examine the material costs. If your business provides products then the material costs will be the price it costs to make the product. If your business provides services then the material cost will be anything you need to provide that service.
For example, a cleaning business’s material costs would be the price of cleaning solutions, rubber gloves, paper towels, and any other necessary equipment for this service to be carried out. If your employees travel to clean people’s offices then you might also need to price up the cost of their travel and company vehicles.
Labor Costs
After you’ve written down all your material costs, you can then calculate the cost of labor. Labor refers to your employees and their wages. Having these employees is an integral part of your business, so don’t forget to calculate their cost when working out your pricing strategy.
Not only will you want to think about your employee’s wages/salary, but you might also want to factor in their work benefits and perks. The best way to keep track of your employees and their hours of labor is by using a time card and clock, this should help you evaluate your labor costs.
Overhead Costs
Overhead costs cover every other expense of your business. These must be factored into your pricing strategy because the rent and utility bills won’t pay themselves. Taxes, insurance, marketing and advertising, office supplies, mileage, and labor for admin assistants or human resources personnel all need to be taken into account too.
Either an hourly rate or a percentage of your overhead costs should be billed to each service you provide. It is also important to base your overhead costs accurately so that they can cover your current costs – which might change month to month or year on year.
2. Research Your Competitor’s
With easy access to a wealth of information, including competitor’s websites, there has never been a better time to conduct business services online research. To ensure you stay competitively priced, compared to rival businesses, you need to know how much they cost for their services and products.
While your research is important to your pricing strategy decisions, remember not to only price your service or product based on your competitor’s. Instead aim to compete on service, the quality of the product, or something else that sets you apart from your competition. Competing on price might mean that your customers aren’t as loyal and will leave stop buying your product or service when someone cheaper comes along.
3. Understand Your Customers
Understanding your customers is an essential part when it comes to pricing your products or services. Knowing how your customers perceive the value of your products or services will help you set the right price for you and them.
Services differ from the pricing of products when it comes to customer perception. Services might not be priced for how long a service takes, but rather the expertise of that service and the perceived value of it.
So it is very important to think about your customers and how your product or service is helping them. And then to put yourself in their shoes and consider how much you would be willing to pay for the product of service.
4. Evaluate Pricing Models
There are several pricing models you can use when it comes to your pricing strategy. Subscription billing services are a great way to ensure your business receives a steady and predictable cash flow. Learn more about subscription services and their advantages with this subscription billing service.
Other businesses prefer to use the hourly rate pricing model. This model ensures you receive a rate of return for your time and labor. These rates usually depend on the knowledge and expertise of the individual and are commonly used with consulting services.
Charging a flat fee for your services or products is also an option. These work effectively if you’re established and know your business well. However, if projects overrun (time and resources wise) then you might end up losing money. Flat fees are preferred by businesses in tough economic times, to help keep their costs down.
A handful of businesses choose the variable rate pricing model. However, this is better for when a customer buys in bulk and you give them money off for the purchase. This model isn’t encouraged by experts, because always charging different rates to your customers can cause reputation problems.
Find the Right Price for Your Small Business Services
Whether you’re just starting out and looking for some pricing guidance, or you’ve been operating for a while but feel that your pricing strategy might not be working for you, this guide aims to help everyone price their small business services and products better. Finding the right price for your service or product can take time, but remember never to undersell yourself as this might damage your business.
If you found this article to be insightful, be sure to check out our other business, finance, technology, and other articles.
