Answer: This is a question that every small business has to answer before they make their first sales pitch and get their first contract for services. One axiom of pricing – you can always lower your prices, but increasing them is very difficult. So how much do you charge? Try answering these questions:
How much value does the customer perceive in your services offered? Is it just a dollar per hour valuation or is the expertise that you offer part of the value equation when buying?
Do you need a price schedule? Sometimes it is easier to discuss price when you use a schedule, and the buyer can select the offering or combination of offerings from a menu to satisfy their needs. A schedule also prevents variation from customer to customer. People do talk and if you are not consistent it will come back to you with dissatisfied customers.
What are your payment terms? Cash on delivery? Net 30 days, 50% in advance and the balance upon completion of the services? Decide what you need to generate the flow of cash necessary to support your business. The most prevalent reason for small business failure is running out of cash.
Is it necessary for you to offer any guarantees? If so, what are they specifically? For what reasons? And what are the remedies?
Are you offering any discounts or introductory offers? Discounts may be appropriate if a buyer contracts with you for the entire season vs. one-off services, but you need to be specific about the terms of the discount, so it is not perceived as perpetual.
Developing a pricing strategy is based on the foregoing questions, but also is founded on the type of service, your costs to provide the service, your anticipated gross profit margin and what your competition is charging. Sometimes finding the right level is more art than science. You need to use accurate cost information to develop your pricing schedule. Guessing doesn’t work. It is best to test your pricing before launching your service or selling your product. Test it with friends, family or selected potential customers.
The most common misstep in pricing at the early stages is to price your offerings to low. You might price your services too low in an attempt to attract customers. Going low to attract your initial sales will not always work because the customer expects that pricing forever and they will most likely abandon you if you try to raise the price after an introductory experience. Being in the service business, this is especially dangerous since you only have time to sell, so you cannot make up any shortfall through selling more volume.
Perception is a big determinant in developing your pricing strategy. You want customers to perceive there is a true value when they say “yes.” If you want to be perceived as the premier provider, you want your brand to have high perceived value and your pricing may be higher than your competitors. By understanding where your competitors’ price points are, you can set yours appropriately.
And, pricing is an on-going process that demands your constant attention. If you begin to lose business, question whether pricing was the cause. All businesses are affected by environmental factors, so be aware of what elements impact your business. On the Cape, you need to consider the seasonality of business as the primary determinant. You might have a schedule that segregates services in-season, shoulder season and out of season.
Pricing is a critical element in the business equation. Take the time necessary to develop pricing that will generate the needed cash flow and profit to sustain your business.