The 4 Key Pricing Methods You Need To Know For Service Based Businesses
You got into your business because you love what you do right?
(Not necessarily because you love running a business!)
Well, knowing how to price your services properly is critical for running a healthy, profitable business that you can stay in for the long haul.
But it can also be a bit of a mystery.
Most business owners aren't taught how to price up their services effectively.
It's something people usually learn by trial and error and often involves years of hard work, anxiety and frustration.
In fact the most common pricing method most entrepreneurs use is 'Guessing'.
They take their best guess as to what they should be charging, usually finding a number that "sounds right", which loosely translates to a number that doesn't sound too big so they think people will actually pay it!
Then they keep changing and tweaking it, or "flip-flipping" over what they should be charging in the hope they find the magic number that starts to make them real money - ideally before they burn out or have to give it up.
Alternatively, many business owners simply use the "Market Rate".
They look at what their competitors are charging, try to work out if they are better or worse, and therefore should they be charging more or less.
And this isn't limited to just solopreneurs or small businesses either.
Even established, household name businesses can have a 'finger in the air' approach to pricing.
I recently worked with a multinational media agency on a pitch for a major brand. Their pricing "strategy" was to simply copy & paste what they used on the last pitch.
Even though they weren't actually making enough money from that job either!
But it was quick. It was simple.
And in lieu of an actual pricing system, it was all they had.
So struggling with your pricing is not reserved just for small businesses and solopreneurs!
The difference is, the impact poor pricing has on small businesses takes a much more personal toll.
Burnout or having to give it all up to go get a "real job" being two of the most common.
So what else can you?
Well a number of things actually.
The first one is to realise there's actually 4 Key Pricing Methods you need to know when it comes to service based businesses.
Learning which method is right for you is one of the first steps to creating a healthy, sustainable business, whether you're a solopreneur or running a team of hundreds.
The 4 Key Pricing Methods For Service Based Businesses are:
Each one of these pricing methods is more powerful than the last.
However, most businesses start and stop with Market Based Pricing.
Let's take a closer look...
#1. Market-Based Pricing
Market-based pricing is basically where you use whatever is the ‘going rate’ or 'market rate' for your industry.
Usually without doing any other math or calculations to support it.
You may look at your competitors and try to decide if you're more or less experienced and therefore whether you should be charging more or less.
The problem with Market-Based Pricing is you have no idea if your competitors are making any money!
They could be flat broke and struggling
And even if they are making money, that doesn’t necessarily mean YOU will be able to make the same by charging the same amount
That’s because there are at least 5 Core Areas in business that will impact how much money you make.
Your PRICING is just ONE of them.
It could be that your competitor is prepare to work 40-50 hours a week in order to make enough money to pay themselves a salary.
However If you only have 20 hours available for client work then even basic math says you're going to be making significantly less if you charge the same amount.
Or perhaps your competitor has invested in technology that enables them to get the same work done much quicker – leaving more profit for them.
Or maybe they just have really, really low overhead costs.
The thing is, you have no idea.
So simply saying the Market Rate is say $60 an hour, so therefore you have to charge $60 – without doing the math to work out if $60 is enough for YOU – is pretty much a recipe for burn-out!
So, Market-Based pricing by itself is NOT reliable method for working out what YOU need to charge to pay yourself what your worth.
But what Market-Based Pricing IS useful for is CONTEXT.
Once you’ve worked out what YOU need to be charging either per hour or per job in order to pay yourself a decent salary, you can then use Market Based Pricing to work out where you’re POSITIONED in the market
That helps you figure out if your positioning is:
Down the "cheap & cheerful" end?
Which will mean you need to work how you can deliver higher VOLUME as efficiently as possible.
In middle of the road?
In which case, how do you distinguish yourself in a crowded market place
Or are you at the Premium end?
Which will impact how you position yourself in the market and what type of clients you’ll need to attract.
So Market Based Pricing is really useful for CONTEXT, but as a PRICING STRATEGY its going to let you down.
So what else can you do?
For those of you just starting out or anyone wanting to get a sense for where they need to be positioned (without diving too deeply into the detail) Goal-Based Pricing is a great place to start.
#2. Goal-Based Pricing
Goal-based pricing is where you work out the ballpark of what you need to be charging in order to pay all your bills and the salary you deserve.
It’s basically starting with your goal and working backwards.
Goal based pricing is really useful for
Anyone just starting out and wanting to get to get on the right pricing path as quickly as possible
It’s also Particularly useful for people who have simple business model – only offering a single service or product
Or anyone wanting to do a quick sense-check of where they’re currently sitting
What Goal-Based Pricing doesn’t do:
Is give you detailed costings – so if you offer a range of different services, you’re still going to have to work out what you need to charge for each one individually.
Is support having a Value Ladder pricing proposition where you make it easier for clients to purchase.
Give you a sense of the VALUE of what you do, which is a really powerful component of charging what you’re worth
But it does help you build a foundation for a sustainable business that you can build on when you’re ready – meaning you can get to your goals ever faster.
Ultimately though, the two most powerful methods, and the two I teach my clients use, are Cost-Based Pricing and Value-Based Pricing
These are particularly powerful when used together.
#3. Cost-Based Pricing
Cost-Based Pricing is where you build your pricing from the ground up – based on your vision of what you want to earn and how you want to work.
One of the things that makes Cost-Based Pricing so effective is that there are actually formulas and calculators that tell you what you need to be charging – you just put in your numbers and the calculators does the rest.
Cost-Based pricing becomes the MINIMUM you need to charge In order to pay yourself a salary without burning out.
It gives you confidence that as long as you’re charging 'x' (whether per hour, or per job or per client) you will be generating enough profit to pay yourself a decent salary, without having to kill yourself in the process.
Cost-Based Pricing is particularly useful when you have
Multiple different products or services
Want to create a Value Ladder approach
Offer complex services (lots of moving parts – bespoke etc), or
Have staff or contractors that deliver client work
Where Cost-Based Pricing becomes particularly powerful is with its partnered with Value-Based Pricing.
#4. Value-Based Pricing
Value-Based Pricing is the ultimate pricing goal for service based businesses.
More and more businesses are moving towards a Value-Based Pricing Method rather than the more traditional method of charging purely on a time and material basis.
And that is because Value-Based Pricing is about the CHANGE you enable your clients to make, and how VALUABLE that is to THEM.
Rather than simply how many hours it took, or how much it cost YOU to deliver it.
For this reason Value-Based Pricing is particularly relevant for anyone running Leveraged Services (i.e. group courses, online programmes, membership sites etc) where it’s no longer about the effort it takes you to deliver it, but about the value you provide.
Value-Based Pricing is particularly powerful because:
It takes US out of the equation.
It's no longer about how much YOU are worth (which many of us struggle with), but rather about the CHANGE you help your CLIENTS make, which means…
We no longer have to price out of fear or insecurity
When we base our pricing on what we think other people think we're worth we often end up pricing out of a place of fear and insecurity. And that is not a position of strength to do your pricing from!
Value-Based Pricing helps take that fear out of the equation.
Pricing and sales conversations become less awkward
Going into a conversation and saying "I’m worth 'x'" can be pretty awkward and intimidating for many small business owners. However when you flip it around and its' no longer about you but about the value THEY get it becomes a much easier and powerful conversation to have.
Stop Trading Time For Money
When you start to price your services based on their value and not on your hours you can start to scale your business growth exponentially without having to work more hours because you're no longer tied down to an hourly rate.
So Value-Based Pricing is the MAXIMUM you can charge before your client is no longer getting value for money.
Ultimately, you want to get to a place where you are using a combination of Cost-Based Pricing and Value-Based Pricing.
These two together become your guardrails – the MINIMUM you can charge in order to pay all your bills and a decent salary without burning out; and the MAX you can charge before client is no longer getting value for money.
You then have the flexibility to charge whatever you are confident and comfortable with between those two numbers.
Often people often go on a journey from charging the MINIMUM and slowly increase their prices to charging the MAX as they become more confident.
In fact quite a few of my clients go on a journey from charging below the minimum to charging the minimum and that's okay!
PRICING IS A JOURNEY
What's important is that you know what your destination is so you can make an actionable plan to get you there.
So, where are your currently on your pricing journey?
Which method do you currently use?
Are you getting the results you need?
If you are, that is fantastic! Keep going and nailing it!
If you're not, first let me reassure you, you're not alone.
So many entrepreneurs and business owners struggle to get their pricing right. In a recent study 4 out of the top 5 reasons businesses fail was related to poor pricing.
4 out of 5!
But the good news is, it doesn't have to stay this way.
Pricing well is like all the other skills you've had to master since starting your biz - it's a skill you can learn!
And once you have it, you've got it for life.
Getting your pricing right will change not just your business, but your life and your families life as well.
Is it time to get your pricing sorted so you can pay yourself what you're worth?
Tired of guessing, and stressing and burning-out?
Then let's get it sorted!
And it's the step you need to start earning what you're worth.
Because you ARE worth it!