Choosing the right pricing strategy in business strengthens your chance of achieving turnover and profit in line with your objectives, and is crucial for business success.

There’s no one-size-fits-all ‘best’ pricing strategy, and while this gives you flexibility in price-setting, it can also create serious issues for your business’ sustainability if you get it wrong.

How to price your services: not too high, not too low

Whether you price too high or too low, getting it wrong can create problems. If your prices are too high, it can generate incorrect perceptions of the quality and/or value of your service, deterring your target customer and impacting sales. In fact, you may price yourself out of the market.

If your prices are low, you can lose money on the sales you make because you haven’t properly covered your costs.

The challenge: how do you best determine the price to charge customers?

If you don’t know exactly how much the other party is prepared to pay, do you look at the competition and price the same as they do? Perhaps undercut them a little? What if the customer still demands further discounts?

There are some critical factors you need to take into account when considering your pricing strategy. Pricing is just that: strategic. Pricing is about the long-term sustainability of your company. And it’s about creating and providing value.

You need to understand what your customers value in order to set the correct price. The price your customers consider fair and are willing to pay, must cover costs and make you a profit.

Value-based pricing

How do you best approach this challenge? Firstly, you must clearly understand the value is the customer’s perception of your service’s worth. Your price should be as closely aligned to value as possible.

If too low, you’re not getting what you should from the transaction, and if too high, you’ll likely struggle to attract and retain customers.

Research your price position. Do you know the true cost of delivering your service? Who are your competitors? What do they charge? How do you compare on quality and service?

Now identify your target customers. What do they expect from your service?

Consider your market positioning and competitive advantage – are you operating from a position of strength or weakness relative to your competitors?

You are now ready to set your pricing strategies and tactics. While all the traditional pricing strategies and tactics used for products apply to services, there’s a greater opportunity to price based on value.

Value-based pricing is determining the value you’re bringing to your customers and relating the price to that value. If you have the courage, charge what your IP is worth. Consider unbundling your services – you can charge more in total when each service is priced separately.

Another option is to price jobs upfront as fixed-rate services – a transition from hourly rate charging.

Time-based billing is based on the fact you can buy anything you want as long as it’s at $150 an hour. However, this doesn’t reflect the fact the value of each hour won’t be the same for every customer, or each type of service provided.

If you sell IP and knowledge on a client-by-client, transaction-by-transaction basis – not time – you will generate better results.

Strategic pricing: the success differentiator

It’s important to monitor pricing and profitability, not just in holistic terms, but by service. What‘s selling and what’s not, and at what prices? Which are making you money, or hitting your GP targets, and which aren’t?

Some triggers to review your pricing strategy include:

  • there’s a shift in the value you are providing
  • the service is not selling
  • you’re introducing a new service
  • your costs change
  • competitors change prices or introduce a new service
  • changes to industry or economy.

Test new prices on a regular basis, but when changing prices, make sure you analyse what the impact will be on sales volumes and profitability.

Every year, it seems more difficult to justify the broad ‘annual price increase’, and this becomes even more challenging when there is low growth and low inflation in the economy.

Strategic pricing is the success differentiator, and value extraction and price optimisation are the keys to maximising your margins and attaining target profits.

Profitability is an ongoing challenge for many business owners. For more guidance and tips on maintaining healthy revenue and profits, sign up to the Business Australia newsletter.

By Scott Brooks
Partner, Maxim Accounting and Business Advisor (Business Australia)