Business is not charity. You exist to make a profit. But, it’s no secret that customers are always looking for a bargain.
So how do you make money without overcharging for your service? Pricing is something that needs to be carefully considered.
9 ways to determine your price
Charging for a service is not quite as straightforward as charging for a product. Your price is your cost added to your profit margin, but there are different ways to go about it. Check out these pricing strategies.
- Pricing based on time and materials. This model will see you charging a flat rate for each person working on the project, or you could charge per hour or service delivered.
You also charge the customer for the cost of materials used to complete the project, and remember to add profit.
This approach certainly covers your costs, but it can become tricky, as most customers want to know in advance how much they will need to pay.
This means you will have to be able to accurately estimate the time the project will take, in order to cover all your costs when billing the customer.
- You can decide to charge a fixed price per project. This eliminates the issue of the customer not knowing in advance exactly what your service will cost them.
However, the risk here is that things don’t go exactly as planned, and that you end up needing to make use of more resources to complete the job.
This will push up the price of the project and likely upset the customer, so it would be a good idea to have a contract in place that states that this might happen.
- Know your market. Knowing what your competitors charge for services similar to yours will put you on the right track to charging accurately.
A competitive pricing strategy will see you matching your competitors’ prices, or pricing slightly below them.
- How much is your service worth to the customer? They won’t normally take into account how long it takes you to complete the project or what your costs are.
They will, however, have a very good idea of what your service is worth to them. Many people are happy to pay well for outstanding customer service.
|How to calculate your costs|
Your service fee has to cover your costs, otherwise doing the work will cost you more than you are making. Typically, production costs can be divided into three parts: Cost of materials.
This includes all the physical materials you will use to finish the product, and it will of course depend on the type of service you offer.
Labour costs. Everyone that works on the project needs to be paid.
Overhead costs. These are the costs of running your business, and aren’t directly linked to providing the service to the customer. Examples include rent, office supplies, marketing and the like.
- Variable pricing is when the business charges different rates for different customers, sometimes based on bargaining and negotiation. Doing this could make it appear that you lack integrity, so be careful.
- You could also offer differential pricing, meaning that you charge different prices for the same service to maximise profit.
This is, for example, when a business offers discounts on days that are usually slow for business, such as Mondays at restaurants.
- Penetration pricing is when you charge low fees in the beginning, in order to gain customers and establish your place in the market.
If you choose to do this, ensure that your customers know it is not permanent and your rates will eventually be higher. So you will, for example, market it as an ‘opening special’.
- It doesn’t matter whether you are just buying bread, or if you are buying property – psychological pricing is seen everywhere.
This is charging, for example, R1999.99 instead of R2000, because it appears less.
- American entrepreneur Marie Forleo came up with the ‘mattress method’. She wanted to buy a mattress, but wasn’t keen on paying $3000 for it.
Then, the salesman informed her that we spent over a third of our lives in bed, and our quality of sleep will affect our health and productivity.
This made the mattress appear to be a worthy investment. In the same way, you can deliberately translate the value of your service into real life currencies like time, money, love or health.
What is a fair profit margin?
You cannot, after calculating your costs, simply add a random amount to your service fees to make up a profit margin.
But, it is impossible to tell you exactly what your profit margin should be, because they vary by industry and business size.
According to Investopedia, a healthy profit margin for a small business ranges between 7 and 10%. Retail or food-related companies may see lower margins, because they tend to have higher overhead costs.
Small companies that are still fairly new will likely have impressive margins, as they don’t have a lot of staff or substantial overheads.
As your business grows, more money comes in but your margins will possibly shrink because now you are hiring people, investing in bigger facilities and expanding your product line.
The price you charge has to do a lot of things for your business. It needs to impress your customers, and along with your service, makes them feel like they are getting value for money.
It also needs to line your pockets with profit, getting you closer to the life you dream of living. It’s a fine balancing act, but getting it right will get you a step closer to the success you have been dreaming of.