How to Price Business Services
- Charging an hourly rate. For many businesses, pricing services on an hourly rate is preferred. This ensures that you are achieving a rate of return on the actual time and labor you invest in servicing each customer. Hourly rates are often used when you are pricing your own consulting services, instead of pricing a service that uses labor and materials from others. Your rate should be determined by your amount of expertise and seniority; a more senior consultant will generally be paid a higher hourly rate than a less experienced or junior consultant. The SBA recommends that one's travel time be included as an extra charge. Sometimes even consultants are asked to price a service on a project or contract basis. That contract needs to factor in clerical support, computer or other services, and overhead expenses, the SBA advices.
- Charging a flat fee. In tough economic times, many businesses are concerned about keeping costs down and may agree to hire your business for services only on a fixed-rate or flat-fee basis. "Customers want a fixed rate," Osteryoung says. "Entrepreneurs want an hourly rate. It's a question of who is going to bear the risk. If I charge a flat rate, I am bearing the risk." If a project takes longer than expected to complete, you may risk losing money on the client. If you have a customer that insists on a flat fee, you may want to see if they are amenable to putting a cap on the number of hours involved in the project or agree to pay additional fees if the project runs over that time.
- Variable pricing. In addition to determining a fair price for your services, you have to determine whether you will practice a fixed-price policy and charge all your customers the same amount or whether you want to institute variable pricing, in which bargaining and negotiation help set the price for each customer. "Should you charge different customers different rates? I have a hard time with that," Osteryoung says. "The exception is if someone comes in and says that they will book 1,000 hours of time, you may want to give them a price break for quantity. But in general, charging different prices to different customers will create ill will. People will talk about it and they will find out." One thing a business can not afford to lose is its integrity and respect among customers.
Monitoring and Changing Your Price
In a service business, your biggest costs are usually your people costs -- salaries, benefits, etc. If you are having a hard time selling services at an acceptable profit, the problem may be that your employee costs are too high rather than the price is too low. You may want to also re-evaluate your overhead costs to determine whether there are other cuts you can make to bring your price down and your profit margin up. "Look at your expenses and see where you can cut," Toftoy advises.
Monitor profitability monthly
You need to understand the profitability of your company every month. By the 15th of every month, you ought to have your financial statements from the previous month. "If there is any mistake I see entrepreneurs make, it's that they don't spend enough time going over their financial statements," Osteryoung says. "In some cases, no one has ever shown them how to do that. I see their eyes glaze over." In addition to understanding your monthly profitability, you need to understand the profitability (or lack of profitability) of every service you sell. Make absolutely sure you know the degree to which every person or project you sell is contributing to your goal of making money each month.
Test the market for new services and prices
You should always be testing new prices, new offers, and new combinations of benefits and premiums to help you sell more of your services at a better and better price. Often the perfect time to do this is when quoting a price to a new customer. Raise the price and offer a new and unique bonus or special service for the customer. Measure the increase or decrease in the volume of services you sell and the total gross profit dollars you generate.
Be wise about raising your prices
It's a fact of life that you will have to raise prices from time to time as part of managing your business prudently. If you never raise your prices, you won't in business for long. You have to constantly monitor your price and your costs so that you are both competitive in the market and that you make the kind of money you deserve to make in your business. But there are risks to raising prices, particularly when your customers are going through tough financial times.
"You can price too high and sell yourself out," Toftoy says. "People don't forget that they felt like you gouged them for the quality of the service you were selling."
Here are some guidelines for when and how to raise prices:
