My friend once stormed out of a salon in indignation because the services were overpriced. A little later, the same friend paid four times the amount quoted in the first salon for the same haircut she had initially refused. What kind of voodoo was the second salon using? Is there any explanation as to why my friend would pay so much more for the same hair cut in the second salon than the first one? Turns out there is.
When people refuse to purchase something from you because of price, it could be one of two things: a) they really do not have that money to spare, or b) they simply do not see the value of what you are offering. In many cases, b) applies.
The Blatantly Obvious
With tangible products, because the input cost is known, pricing could simply be a matter of adding the desired markup to the cost. With services however, there is always a danger of over- or under- pricing, both of which cost you potential business. Pointing that out is the easy part; the question driving many service providers insane is “How do I figure out the right price to stay in business?”
If you have ever tried to get a recipe from those people who simply eyeball measurements yet make the perfect meal, then you know what pricing services is like. At first one struggles, but with some practice they are able to look at an engagement and determine a good price. Before you get that intuition right though, here are some tips you can use to give a good estimate:
Count the Cost. Literally
“Tangiblise” your service. Quantify the things that enable you to offer that service in the first place. Are you renting an office? Do you have staff working under you? Be sure to categorise your costs into those that can be spread over many engagements, and those that apply specifically into a certain engagement. With this as an indicator, you have a threshold below which you cannot offer your services. Otherwise, you would be incurring losses.
Don’t Create Your Own Question
In my school days during exams, some students would either read questions and give an answer that was uncalled for, or, some who did not know the answer to the question would invent their own question and answer it. This strategy did not work in school, and it seldom works in the business world.
You must understand your customer’s need and know their budget. Sometimes we outprice ourselves because we quote for a much more complex engagement than what the customer was looking for. Or we price too low and the client wonders whether we really understood the magnitude of what they require. What need does the client really want you to fulfill, and therefore what value will you bring to them with your services? This is what you are communicating with your fee.
Comparison is Not Always the Thief of Joy
Do a little benchmarking exercise. Know what your competitors are charging for similar services. Use that information to determine a ball-park figure for what you could charge. Always bear in mind differentiators that could differentiate your – or their – price. For example, years of experience, strength of the brand etc. When you are starting out you may have to take a lower fee, but as you serve more clients, you can increase your fee because of the wealth of your experience.
You Learn to Price by Pricing
Learn from experience: find out what other bidders – especially the winning bidders – pitched for the job. When you work on an engagement, take note of how long you spend on tasks and put a value on that. You will make mistakes at first, but always take stock after the closeout of an engagement and see what areas you could improve in to operate more profitably.
Last But Not Least…
Last of all, do a reasonability test. Ask yourself (and answer) honestly: would you buy the service you are offering your client at the price you are offering it to them? If your answer is yes, then that’s a winning price.
Red Beryl Consulting helps SMEs assess whether they are operating profitably or they need to cost their revenue-cost structure in order to increase their margins. Call 254 (0) 723 673615 today to discuss possible solutions, or drop us an email at ask@rbconsulting-ltd.com.
