How To Price Services For A Business | Set The Right Price [Guide]
Selling a service is wildly different to selling a product. There’s no raw materials or manufacturing process, no branded packaging or shipping costs—just a valuable service that you provide to the consumer before going on your way. So how do you price services for a business in the most accurate way possible, and ensure you’re earning a fair profit for the value provided?
In this article, we provide a step-by-step guide on how to set a reasonable and accurate price for your services. We explore fixed-price services (as opposed to time-based), but the principles work well for either type.
Our price-setting method is loosely based on two models: competition-based pricing (also known as market-oriented pricing), which evaluates your competition, and value-based pricing, which sets pricing based on what the customer is willing to pay. This approach includes a lot of research, but if you put in the work, you’ll end up with an accurate price for your service that produces a justifiable profit to your business.
Let’s jump in!
How to price services for a business
In this guide on how to price services for a business, we cover four areas:
- Calculating your business costs
- Researching your competitors
- Completing customer research
- Setting your price
First, you’ll need to work on your business costs.
1. Calculate your business costs
Every business must turn a profit, or its doors will quickly close. So to set a profitable price for your services, the first thing you need to do is outline your business costs. This can be broken down into two broad areas: how much it costs you to provide the service (known as “cost of sales”) to your customers, and ongoing operating expenses to run the business.
Cost of sales
Cost of sales are the costs of producing and delivering your service to the customer. There’s generally two components that go into cost of sales for a service business: equipment used to deliver the service, and staff costs.
For example, if you run a hairdressing salon, your cost of sales may include scissors, hairdryers, combs, and the hairdresser’s salary. If you run a web design company, your cost of sales may include the designer’s computer, design software that she uses, and her wage.
Calculate your cost of sales for the new service, with as much accuracy as possible.
Operating expenses are the day-to-day costs of running a business. This is a much bigger list, and can include the following:
- Sales and marketing (including your website)
- Accounting fees
- Legal fees
- Property rent
- Office supplies
- Telephone costs
- Computer systems
- Transportation costs
- Professional fees like licenses and permits
These expenses apply to your entire range of services (if you offer more than one), but remain crucial because they affect your overall profit. When you’ve got clear figures for your operating expenses and cost of sales, you’re ready to move onto the next step: competitor research.
2. Research your competitors
In a competition-based pricing model, your service pricing is based on what your competitors are charging. There’s three basic options in this model: below your competitors’ prices, similar to your competitors’ prices, or above your competitors’ prices. The hard part is deciding which to choose, and should be informed by as much competitor research as you have time for. You need to become as intimate as possible with your competitors’ services, and really try to understand where they offer value to their customers. After all, pricing is just one factor in the buyer’s decision-making process.
Here are some effective ways to research your competitors.
Become a customer
If it’s financially feasible for the business, become a customer of your competitors. This can give you a goldmine of information on their business, such as:
- The quality of their service
- The kind of customer service they provide
- Their sales (including discounts) and marketing techniques
- The quality of equipment they use
- Perks they provide
If it’s not possible to do this, spend some time researching their website and pretending to be a customer, to gather as much of this information as possible. The more you know about your competitors’ businesses, the better you’ll perceive the value that they are providing to their customers, and the more accurately you’ll be able to set your own pricing.
Read their reviews
97% of people read reviews before buying a product or service,1 because they can tell you a lot about its quality. This makes reviews a precious resource when setting your own pricing. Spend some time trawling through your competitors’ reviews on Google, Facebook, Yelp, and True Local, to gauge their strengths and weaknesses.
On a side note, if you’re interested, check out our article on how to get more customer reviews for your own business.
Evaluate their branding
Have you ever found a product or service that looks promising, only to be put off by a horrendous company logo that looks straight out of the 80s? Or maybe their pricing and reviews are stellar, but their website has been coloured in a fulgent yellow that strains the eyeballs?
Successful companies tend to have great branding, because they understand its importance. If your competitors’ branding is low quality, this could be an indication that they don’t have the money needed to make it better, and are perhaps aiming for customers on the lower end of the price scale.
Create a comparison matrix
Create a comparison matrix based on all of the information you’ve gathered, to compare the key elements of each business more easily. This may look something like the following:
|Service price||Service quality||Customer service||Customer review||Branding||Perks|
Be sure to include any information/columns that affect the price and value of your service. In our example, “service quality” might be split out into much more detail, depending on your type of business. Once complete, you should have a good estimate of how your competitors score in each key area.
This information alone may be enough for you to set a price for your services, which we explain in step five. But if you want your pricing to be rigorous, and provide you with the highest possible profit margin for the value you’re offering, we strongly recommend completing the next step: customer research.
3. Complete customer research
Value is a hard thing to quantify, which is why setting prices is so damn hard. And the only way to truly understand why customers value a particular service is to ask them. By getting together with people in your target audience, you can identify your customers needs, wants, and ultimately, what they value.
Take tech giant Apple as an example. Many people buy their products because they’re so usable, and Apple’s designers and engineers have designed their products in this way because they know that’s what people want. This knowledge has almost certainly been gained from countless hours of rigorous customer research—one of many reasons why people are willing to pay a week’s salary for an iPhone.
While you’re unlikely to have Apple’s resources, there’s plenty of simple, cheap, and insightful customer research techniques that will help you get more familiar with their wants and needs. Surveys, focus groups, and one-on-one interviews are some of the most common, and can help you to uncover the following gems:
- What people like and dislike about your type of service
- What problems the service solves for people
- How your service fits into people’s lives/workflows
- What improvements can you made to your type of service, to make them love it
- If anything should be removed from your type of service
- How people feel about the typical pricing for your type of service
This list has the potential to be huge. The more you know about your customers’ thoughts and feelings about your type of service, and what they value most about it, the more accurately you’ll be able to price it.
4. Set your service business pricing
At this point, you should have a good understanding of your competitors strengths and weaknesses, and the prices they charge. You know what customers want out of your type of service, and what might convince them to pay a premium. Finally, you have an accurate understanding of your business costs. With this knowledge, you have what you need to set your service business pricing.
Return to the competitor matrix and fill out a row for your own company, giving yourself an honest and achievable score for every column. How do your scores compare to your competitors? Do you excel in areas that customers value highly, like the quality of the service itself? If you’re a new business and you’ve given yourself a 5-star rating for customer service, do you know what this kind of service looks like, and whether you’ll be able to achieve it?
Set the price based on all of the research you’ve accumulated, ensuring that it’s higher than your cost of sales, and enough to cover your operating expenses. At this point you may need to consider how many of the services you’ll have to sell each month to make a profit, and whether this is achievable. If you offer other services, you’ll need to take these into account too. The trick is to charge as much as you can for your service, while also delivering value for your clients. If you can charge a premium price, and it’s a genuinely valuable service, don’t feel guilty! “Consumer surplus” is the difference between what the consumer pays, and what they are willing to pay. You want this to be as narrow as possible, where the sweet spot lies.
You can set your price as a fixed value (like $99.99, using a charm pricing technique), or as a margin on top of your cost of sales, like 15%. Play around with some prices and see how they compare with your competitors, what customers want, and what you can deliver to them. This is also a good time to revisit your buyer personas, because they should tell you whether they would prefer a premium “above market” service, a competitive service that is similarly priced to other companies, or a budget “below market” service.
Setting pricing can be a little intimidating, especially if you get a lot of repeat business, or run a subscription-based service. Set a price that’s too low for the value you’re providing, and when you increase the price after realising your mistake, people may run to a cheaper competitor. It will also be tough to scale your business—you may be able to provide exceptional value to 100 customers for the price you’re charging, but can you do it for 500? Often, the business owner won’t have the money to hire new staff, so the burden falls to them, and they quickly burn out.
On the flip side, set a price that’s too high, and you won’t get much business at all. That’s why this research is so important—it gives you the knowledge you need to set a price that’s fair, and accurately reflects the value you’re providing.
More info on how to price your services
That’s it—a four-step process on how to price your services, based on solid competitor and customer research. If you’d like to find out more about the two techniques used in this article, you can check out this piece on competitor-based pricing, and this one on value-based pricing. There’s plenty of other pricing strategies you can use too, but we find these to be the best because they focus on two key areas: your competitors and customers.
We hope you now have a solid understanding of how to price services for a business. Thanks for reading!