Pricing Tactics That Service-Oriented Businesses Should Use
“What’s the difference between a psychologist that charges $120/hour and one that charges $180/hour? Hard to tell just based on price. But consumers are quick to judge…”
AUTHOR’S NOTE: Pricing, like most things marketing, is an art and a science. There are so many pricing tactics that it can be dizzying to choose one. But the good news is that you’re here. And at least, you’re giving it some thought.
Pricing services is particularly challenging because you need to set prices before you even start offering services. Poor initial pricing decisions often result in very slow startup growth. Some will price too high and don’t have the portfolio or expertise to justify it. Most will significantly underprice the competition thinking that it will lead to short term sales, but they end up attracting bad clients, if any. These are both great pricing tactics, but it’s important to know when to use them. In any case, it is clear that most service providers can use a little bit of help when it comes to setting prices.
But even medium-sized companies that have a proven track record of success should review their prices from time to time. The fact is that some businesses don’t pay enough attention to it. When was the last time you revised your prices? Now might be a good time to rethink them. Because everything from the quality of your offering to the state of the economy should factor into your pricing. And that’s precisely why they’re called “tactics”. Unless you’re Wal-Mart, you can’t rely so heavily on prices to sell your business. But they sure can help:
Pricing tactics for service-oriented companies:
1. Keep it simple
2. The hourly rate-based project fee
A lot of freelancers and consultants know their hourly rate. However, the most successful ones will only ever quote project-based fees - never by the hour. With good reason too! Clients are very sensitive to hourly rates. They quickly become micro-managers to make sure that you’re making extremely efficient use of your time. This will spawn a very unhealthy business relationship, forcing you to work way harder than you should. Not recommended!
But what most clients don’t know is that project-based fees are often estimated using an hourly rate and a projection of how long it will take the consultant to complete the project. You first begin by figuring out your hourly rate. There are many ways to do this.
One way is extrapolate from the ideal full-time salary you, as a freelance worker, would like to earn. For example, John, a very accomplished graphic designer, would be comfortable making $90,000 if he were working 40 hours every week. After he factors in his professional insurance, overhead expenses, the graphic design program he’s required to license, a week of paid vacation/sick days (that he would otherwise get for free, working for an established agency), the salary increases to $120,000. Divide that by 51 and he’d (ideally) be making around $2350/week. John’s full-time hourly rate would therefore be $60 per hour.
Now, how does John estimate how long it will take him to complete a project? Quite simply, based on past experience for similar projects. He’ll estimate how long it will take him to do the initial design, 2 major design revisions and to complete the job. John will also factor in the time he’s spent in correspondence through meetings, phone calls and e-mails from winning over the client, discussing project details and revisions, to collecting the final payment. To be on the safe side, he might even add a few hours as a buffer. Oh, and he’ll round up to the nearest hundred to keep his pricing simple (see what I did there? ;). Meanwhile, the $2000 quote will come across as a project-based fee. The client will never know the extent to which the quote has been so meticulously broken down to ensure that John is profitable and his time is accounted for.
3. Value-based pricing
Value-based pricing is a tactic that can be used when it’s suitable to price according to the perceived value that your services will add to your client’s business. Whether it adds value by reducing costs, increasing sales, improving efficiency, etc. What do you think this is worth?
Let’s say a restaurant has dedicated a hostess to deal with the heavy number of calls they receive for reservations. I’d say: Your customers are visiting your website to find your number and make a reservation. Why don’t we integrate a one-click reservation function on your website? Your customers will love that - it’s much faster and more convenient than calling to reserve a table. Automating your reservations will save you an average of 1.5 hours in wages every day, which equates to $6500 every year. So, i’ll charge you half of that to implement it. Understand the value that your service adds to a business and charge accordingly.
4. Tiered pricing
You know what I’m referring to: Bronze, Silver, Gold pricing; Basic, Deluxe, Ultimate packages. This is tiered pricing and it’s great! It empowers consumers with the belief that they have options to chose from. And they do. But the 3 choices are from the same service provider!
"Tiered pricing increases your immunity from competition by killing your prospects’ desire to shop around."
5. Productized service pricing
If you can standardize a service, then you should consider “productizing” it by giving it a fixed price. The fact is that most service providers don’t openly disclose how much their services cost on their websites, with the hopes that prospects will call to find out. Us marketers have learned that this practice doesn’t produce the desired outcome. They don’t call. Why? Customers appreciate it when service providers are open about their pricing.
For one, it helps them to qualify whether or not your services are within their budget. It also reassures them (to a certain extent) that you won’t overcharge for your services. We’ve recently added an online quote feature on our site. This way, our clients can build their own quotes for website design, social media (and more) based on standardized service prices. We offer customized marketing solutions, but we’ve standardized our services into products whenever possible. For example, our beautifully designed websites start at $2499. You need for it to be multilingual? Add $499 per language. You want custom website photography add a $250 business photoshoot. These are examples of productized services.
6. Price skimming/Premium pricing
What’s the difference between a psychologist that charges $120/hour and one that charges $180/hour? Hard to tell just based on price. But consumers are quick to judge. They’ll naturally equate higher prices to higher quality service, more experience, higher customer satisfaction, etc. That’s the logic behind price skimming or premium pricing. You charge more to attract less price-sensitive clients, increase profit and build premium brand equity.
Here are the 6 pricing strategies one more time:
- Keep it simple
- The hourly rate-based project fee
- Value-based pricing
- Tiered pricing
- Productized service pricing
- Price skimming/premium pricing
One last word of advice for all of you service providers out there… Always qualify your prospects. Don’t be afraid to ask about their budget. If you don’t, you will inevitably spend valuable time trying to win over clients that can’t afford you to begin with. Also, be ready to respectfully deny business if your prospect can’t afford you. Believe me, it’s very hard to do, but your prospect will respect you for it and you’ll save yourself from devaluing your time, ability and dignity!
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