Do you need more than this? We have another option!
Subscribe to our newsletter and grab more pricing insights.
I want to know more!
.png)
.png)
The question for the ages. It can literally be a million-dollar question, and it’s always one of the most critical questions any service company should answer.
Where should you start? What approach should you choose? How to find that perfect pricing that will maximize your profits? Are there aliens watching us from space?
Those are all valid questions. Unfortunately, we can help you answer only the first three.
Let’s start with the easiest way. How about we just ask Google for an answer?
…
Okay then, here’s what I discovered. There are basically three types of articles you can find after typing the title of this article in the search bar:
1. Step-by-step guides on how to set the price.
2. Pricing strategies explained (competitor-based pricing, cost-plus pricing, etc.)
3. Tips & tricks for your pricing strategy.
The first option seems fairly reasonable. Theoretically, those articles should ask you all the necessary questions and provide guidance. In the end, you should be enlightened and ready to create much better pricing that maximizes your profits. But is it undoubtedly the best approach for your particular business? How about all the questions that weren’t asked in the article? How about all the aspects that make your business and service unique? How can they be considered in a ~1500-word article?
Now, the second option. Surely if you take a look at a list of pricing strategies, you may find one that's right for you. And then, you can dig some more into that specific approach and try to adjust it to your requirements. That may work out, right?
But what’s in those articles exactly?
One of the highest-ranked posts lists “4 Best ways to price your services” and proceeds to throw us this quote about number one on the list, “Charging by the hour”:
“This isn’t the pricing strategy that I would personally recommend.”
Then why is it considered one of the best ways? And is it really never a good approach?
Needless to say, I didn’t find out from the blog post.
In general, the problem with those kinds of articles is that they’re usually incomplete regarding all the possible strategies and unclear about when to use which approach. They’re valuable if you’re trying to learn about the possible options but probably won’t be too helpful in choosing and implementing the right one (if it’s even covered in the article).
Lastly, tips & tricks. Those can be actually pretty interesting, but mostly if you already have some sort of strategy. They can help you on the margins but probably won’t bring you closer to answering the fundamental question, “How much should I charge for my services?”.
The point I’m trying to make is that setting the perfect pricing for services is very difficult and requires a super complex approach. There’s no golden rule or a guidebook that will work in any business because it’s impossible. And definitely, a Google article won’t guide you through all the necessary steps, not even this one.
However, you don’t need perfect pricing to grow your business.
And to be clear, all those articles can bring you closer to the correct answer. We keep writing them on our blog for a reason. But it’s a long way to go. So, if we really want to answer the question in the title, let’s start with something simple.
There’s a very basic rule, and it was provided by none other than Hippocrates almost 25 centuries ago. Of course, I’m talking about “First do no harm.” And that means making sure that your prices won’t hurt you and will allow you to make money and grow your business. It’s the cheapest and fastest way to create pricing. It’s not great by any means, but it will at least allow you to survive.
Then, in order to come closer and closer to creating the right pricing for your services, you always have to consider ever-present factors, which are:
1. The competition, which we covered in the article about competitor-based pricing.
2. The costs, which we covered in a similar article about cost-plus pricing.
3. And most importantly, the value of your service for clients. That’s the most challenging part, but it brings you most closely to the perfect answer. We covered it in the article about value-based pricing.
It takes vast amounts of work to analyze all those aspects and draw conclusions. We highly recommend all those mentioned articles to find out more.
But is that all? Not entirely.
In addition to the value itself, you have to consider the context when preparing offers for clients and what you’re trying to achieve with that particular offer. Most companies that provide services (except those with a subscription model) can divide what they offer into three categories.
First are the door openers. Their role is to get your foot in the door. In most cases, they’re small projects that allow you to show clients your value and increase your chances of landing a bigger project and establishing a long-term relationship. They’re instrumental from the client acquisition standpoint, and they don’t need to be very profitable.
Then, there are core projects. Those are the type of projects that you do most often, and they should provide most of the revenue.
And finally, additional projects or add-ons, such as training courses, workshops, and other highly profitable but less common types of projects.
So, as you see, the phase of the relationship with a client can play a significant role. It’s not only value, costs, and competition that you have to consider. A company that understands all those factors pays close attention to pricing because they know how important it is in the grand scheme of things. That’s why more and more companies hire pricing consultants and analysts whose only job is ensuring a company is not losing any potential revenue because of bad pricing.
For example, as a service company, you must realize that bad revenue is a thing. It often applies to legacy clients that haven’t had their pricing updated for quite a long time. It might even be a situation where you’re earning some money, but it’s far from what you should be charging for that particular service. Another example can be a client that requires constant attention from your customer service team while bringing very little revenue.
As soon as you start thinking about pricing consciously, you begin to see those problems, and you can make the right changes, which in that example can mean:
- raising prices for legacy customers and those with unfit plans/packages
- adjusting your pricing to prevent such situations in the future
Always bear in mind that service pricing is a game between FTEs utilization (billability) and the price you are charging your customers. There is always an alternative cost to keep into consideration while accepting a low-margin project.
I’m sure you remember that one deal low-margin deal you accepted to maximize utilization, and a week after, a great client with a high willingness to pay appeared, and you had to let him go due to lack of capacity…
So, margin guidelines, deal desk, and deal context will always help you make the right decisions while pricing your services.
As much as I’d love to evangelize about the complexity and potential growth that comes with good pricing analysis and practices, it’s not always worth the hassle. Returning to what I started with, creating perfect pricing is difficult and expensive. It doesn’t always make sense for smaller companies to do all those complex analyses.
However, awareness is always necessary. Sometimes it’s enough just to do the essential groundwork to achieve great results. Our experience shows that every company that never analyzed its pricing can get at least a 10-15% revenue increase by making the right adjustments.
So, if you’re looking for someone to help you get there, arrange a call with me.
Subscribe to our newsletter and grab more pricing insights.
I want to know more!
Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
Schedlue a free consultation
Certified expert in price, revenue and margin management in B2B companies and e-commerce. Member of the prestigious Professional Pricing Society. At Valueships, he is responsible for the implementation of consulting projects and taking care of the profitability of clients. Prior to joining Valueships, he worked at McKinsey & Company in the area of pricing and strategy.
