Understanding Your Value In Setting Service Pricing

I was working recently with a professional that went out on their own and was questioning what they should start charging for their services. As a self-employed professional myself, I had to smile and think back a few years when we started our business to when I asked myself the same exact question. Pricing a service is really a similar exercise as pricing a product but there are a few more variables involved in determining the right pricing.

Education, Training, Background and Experience
What level of education/training, background, and experience you have in your area of expertise is important in pricing. If you are right out of school, you cannot charge the same rates as someone who has been performing the same service for years. This is true whether you are a mechanic or a lawyer. Unfortunately for some services, someone with absolutely no training, background or experience in your field can put up a shingle and say they provide the same services. This is something you will have to contend and compete with regularly. This is especially true in the consulting community This is where it is your job to sell yourself and your background to the client. You need to show or provide testimonials from previous/existing clients that shows your experience and makes the prospect aware of the differences out there. Your training , background, and experience should play a large role in your pricing. You should be fully prepared and justified to answer why your price is twice that of someone that just started out doing what you have been doing for 25 years. There will be a difference in the quality of the work and that is part of your price because it will be done right the very first time.

Market Price
What are others charging for similar services will also play a role. This will vary, but I would suggest you do not want to be the highest and over inflate your price. If you do, you better be able to defend your price and deliver to the high expectations you have set with the client. You also do not want to be priced the lowest, as you are leaving money on the table. Just as clients question paying too much, they are also suspect of “too good to be true” when it comes to paying for services.

Competition
Price becomes more of an issue if there is a high saturation of businesses offering the same services. When this happens, you will be have to be able to differentiate yourself from the competition.

Geography
Geography and where you plan to sell your services are part of the calculation as well. For instance, we live in an area that is outside Toronto where businesses expect to pay significantly less than those in Toronto for all services. If this is the case for your business, you will need to make a decision whether you offer a lower price in one geography in order to obtain clients in that area or you stand firm and offer one price across the board for your services. You also have to determine the cost of serving different geographies in the price. For example, if you travel to your client you have to determine the costs for serving that geography. This could include how long you are out of the office , the cost of parking, and numerous other factors depending on your industry and service. If these are not fees you can or do not charge your client, they are costs that you are still incurring and you need to determine if it is cost effective to provide service in or to this area.

Margin and Net Profit
With services, you are helping consumers or businesses, but at the end of the day, you are a business owner and are in business to make money. Though services offer a higher margin than products for the most part, you still need to determine your profit and how well you covered your expenses.

Understanding the Value of Your Time
The price of services is something that will always be questioned by consumers and businesses alike because it is something they cannot touch and feel like a product. Your time and you are your product and do not let anyone make you feel that your time is not valuable. There are not too many people that walk into a Canadian Tire or Walmart and barter with the owner or manager on the price. For some reason this is not the case when it comes to services. Before you consider dropping your price to get that one deal, consider if the shoe was on the other foot would they do the same for you – the answer is no and neither should you.

It is important that you also get an understanding of what the client issue your service solves and what it is costing them today being unresolved. If the problem is costing them $100.00 dollars a day until it is resolved and they are arguing over $50.00, you need to show them the return of resolving the issue now instead of letting it drag on.

All you have is your time in a service business. Once you set you price, stand your ground and do not waiver unless your prices were set arbitrarily or artificially high in the first place. No one really respects you for dropping or discounting. Instead of dropping the price, think of ways to make the price more palatable for the client's budget such as an over time payment plan. For clients that we have for a time period, we provide them the ability to pay over time. We have never had a client miss a payment that we have on this plan and it allows us to retain some great clients that couldn't afford to pay 100% at one time. Another thing we do is once we understand a business, we will fix price the engagement based on deliverables. There are different ways to do this depending on your industry and business.

While your time is valuable, also be sure not to nickel and dime the client .It is important that consumers and businesses understand their costs and do not receive “unexpected bills” for items they were not aware were extra. If they know the costs and rules up front, then they can make the decision to go forward versus finding out after the fact they have a bill they cannot afford to pay for costs they were not expecting.

Summary
Coming up with prices for services is sometimes harder than pricing a product since the value is not realized until the end while the client wants a quote upfront. You need to place a true value on your time based on the variables discussed and stick to your guns and do not barter with a client on your worth. It is better to walk away from that deal than devalue your time and your worth. In the beginning the client you discounted might feel they got a deal, but they really didn't respect you or your time, as they wouldn't have asked. They also will now tell anyone they know that you will lower your price, which will be a problem in the end.