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:

  1. Market-based Pricing

  2. Goal-Based Pricing

  3. Cost-Based Pricing

  4. Value-based Pricing

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