Practical pricing for service providers
Question: Although I have been operating my business successfully for several years, I find lately I am missing out on jobs that I believe I've bid competitively. Can SCORE suggest a good system for gauging my pricing?
Answer: Success in small business comes from giving customers what they want. And, according to Steven D. Strauss, a lawyer, author, and the senior USA Today small business columnist, today's customers want bargains.
Pricing products and services is already a challenge for many small business newcomers. Low prices might lure customers early on, but most will simply go elsewhere if they think it's a better deal. And unlike retailers who can more than offset losses through volume and sales of other, higher-priced goods, service businesses have little choice but to stick to a fixed fee schedule.
So how can a small business owner strike a balance between costs and profit, yet still attract customers in these cost-conscious times?
"You have to take into consideration what your competition is charging," Strauss responds. "You can charge more only if what you offer is somehow better, or your brand is better known."
Kim T. Gordon, author of "Maximum Marketing, Minimum Dollars," in an article for www.entrepreneur.com, writes, "Ultimately, your rates will depend on three things: your actual costs plus a reasonable profit margin, the pricing the market will bear and the ways you'll add value to your service offering."
"Start by itemizing the cost of a typical job," Gordon advises, "including a markup on any subcontracted products or services. Consult your industry's national association for rate guidelines, and contact a range of potential vendors to learn what it will cost to purchase their goods and services. Then add overhead items to your pricing, such as the costs for your rent and marketing materials, plus a sufficient profit margin to grow your business."
Pricing your rates lower after surveying your competitors to gain an advantage would be a mistake, as prospective clients are more likely to base their buying decisions on "value" than price when choosing between similar services. Decide how to add value by offering special features that clients will find worth paying a bit extra to obtain.
Finalize your pricing based on your fixed costs, what you've learned about your competitors' pricing and the ways you plan to add value to your service offering. That will give you the right solution to your pricing dilemma.
Match that information against your costs of doing business - time, supplies, salaries, utilities, health insurance, office space equipment rental, etc. Make sure these costs are accurate, and account for seasonal and other fluctuations. And, of course, don't forget your profit margin per item or hour. If there is a huge discrepancy one way or another, more research may be needed to make sure everything is accounted for.
Once you've justified your prices by your projected numbers, justify it by the value you bring. This is what sets you apart from your competition - special expertise, low-cost suppliers, low overhead, location, etc. These attributes should sound familiar because you've been building on them from the earliest stages of your business planning process. They will also form the foundation of your sales and marketing strategy.
By this point, you should have enough information to establish a starting point for your prices. But be ready to adjust them as necessary in response to market and industry trends, customer perceptions, changes in your costs, and the competition to keep your pricing strategy in line with your small business goals. To learn more about who else does what you do, consult trade journals and professional organizations that publish baseline rates and fees for national, regional and local markets. Also be alert to price points for types of products or services.
Contact your SCORE counselor. Your counselor's focus is helping entrepreneurs build solid, successful small businesses.
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