Getting your pricing right
Current Issues | Owner-managed businesses | 21st April 2016
Pricing can play a key role in the success of a business, particularly in the services sector. A recent Deloitte review concluded that pricing has “two to four times the impact on profits compared to the other business levers”.
During the economic downturn many service businesses experienced pressure to cut their prices, and there was a general feeling that customers wanted ‘more for less’. Is this still true or are some suppliers lacking confidence that the economy has moved on?
So how should you go about pricing your services? Here are tips on how to deliver perceived value and get paid fairly for it.
Setting your prices
Pricing strategy should be a key part of your business plan. Know your position in the market and the state of the market. If your charges are in line with market price, be confident about achieving them. Give evidence of your skill, expertise and past performance to justify your prices.
Few customers are prepared to accept an indeterminate cost based on what they perceive to be an unreasonably high hourly rate. Consider offering alternatives to counteract this.
Be careful about discounting
Pulling the discount lever can be dangerous. For a business operating on a 20% profit margin, even a modest 5% discount will trigger a 25% reduction in profits. And isolated action in one service line could hinder the rest of the firm’s efforts to win decent margin work. For services, price is an indicator of perceived quality – it can both attract and repel.
Working out your costs
Be very clear about the scope of the work involved and monitor changes carefully to avoid any surprise costs. Ask yourself: “What’s my cost base compared to my competitors, locally, nationally and globally?”, “Am I using the right people, at the right level with the right skills?”, “What are my real costs and margins?”
Convey value instead of focusing on cost. Have conversations with your client to understand their position, so you can deliver on what’s important both in their personal role and to the organisation. Sometimes clients don’t know the questions to ask or understand what’s involved, so make sure they thoroughly understand what they’ll gain from the work performed.
Discuss the price up front; it’s usually better to know if your prospect perceives the value of your work to be lower than your costs in advance, rather than having to spend time resolving the ensuing dispute over the bill.
Be flexible. If a potential customer doesn’t have the budget for your service in the current period, could part of the work be deferred with a clear agreement on payment at that time? Sending bills promptly when the work has been completed helps customers to remember what was involved and recognise the value.