In our last couple of blogs we’ve been talking about the importance of business planning and forecasting. In this blog we’re going to have a look at pricing of a service.
Pricing a service is more difficult than pricing products because you are calculating the value of your time and expertise rather than the cost of a widget.
You should consider the following when determining a price for a service:
– Cost plus pricing
This is the standard method of pricing whereby you determine the cost of providing the service and then add an amount to reach the required profit. To determine cost, you need to know all direct costs, indirect costs and fixed costs. As an example – you employ someone on £15 per hour so to make a profit you need to add an amount which covers all overheads etc and generate a profit.
– Competitors’ pricing
Need to be aware of what your competitors are charging for similar services in the marketplace and price accordingly. But, don’t compete on price! You don’t want to be seen as cheap!
– ¬Perceived value to the customer
This is the Holy Grail of pricing services. A customer will only pay for a service based on what the perceived value of that service, and your expertise, is to them. You need to convince the customer your service is of a better value to them than they would get elsewhere.
You need to calculate the cost of providing the service and this is comprised of 3 parts:
- Materials – cost of goods used in providing your service.
- Labour – cost of the person providing the service – keep an eye on number of hours involved. If this is just you then think about the value of your expertise and skills and the years taken to achieve this, to put a figure on your cost.
- Overhead costs – as mentioned in our previous blog these are also called indirect costs eg rent, advertising, stationery etc.
The next step to ascertaining your price is to add a fair profit margin.
This may not be the final step in setting the price as you will also want to take into account the other pricing strategies mentioned earlier – competitors pricing and the perceived value to the customer – in order to come up with a final price where you will achieve sales of your service.
You can also find your break-even level where the income generated from sales matches all expenses.
I would advise that every business should know where its break-even point is so that you know if the business is viable and will make money. If you’ve been in business a few years then you will probably know what this point is.
If you need help on pricing your service then pick up the phone and speak to Sharron. Here at Westwood Accountancy we speak plain English. We can help you with your business finances leaving you time to get on with what you do best – running your business.