6 Key Factors to Consider When Pricing Services
Is your service company profitable? How profitable? How do you know?
Pricing for service-based businesses is often elusive for many business owners. If you look at the price for consulting or marketing, for example, you will likely find pricing and pricing strategies all over the place. If they are based on hourly fees, some firms will focus on a low price strategy, others will be more “middle of the pack” – basing their pricing on average market rates, and others present themselves as premium service offerings. If they are project-based, they may price based on estimated hours or even based on the future value of the service.
Regardless of the pricing strategy, in order for a company to be profitable, it is essential for the company to have a method for creating it. Below are some key principles to consider when establishing pricing for your service business.
- Profitability: Profitability is always going to be the most important element of your pricing strategy. If you are working on a cost-plus basis, where your pricing strategy is based on covering all of your costs – including a markup for operations, make sure to add in profit margin. Take a look at this article on business profit by thebalance.com
- Cover ALL of the labor: While most business owners are conscious about covering the costs of their staff, sometimes we as business leaders don’t cover the cost of our labor. You can use a cost calculator like this one provided by Tsheets by QuickBooks.
- Operating markup: while many firms will opt to have some type of operating markup, it is important to have a method of determining what that number should be. If you look at your operating costs for the month versus your total revenue for the month and find that you’ve been doing a 10% markup but your operations actually cost your 15%, you’ll need to make an adjustment. Your operating expenses are eating into your profit!
Take a look at the rest of the factors that you should take into consideration while pricing your services here.