The Service Business Pricing Formula
When opening a service business that doesn't rely on materials such as a home care service, cleaning service, staffing, coach or consulting service, it can be difficult to price. For some newer business owners, this could even be a point of anxiety.
When we have a material good that we are trying to sell, it becomes easy to calculate a price. We would go with the traditional formula of P(rice) = M(aterials) + L(abor) +DM (Desired Margin which is usually 20%). The reason this is easy to apply to most retail and trade businesses is that it assigns value to tangible items, making it much easier to conceptualize.
When we are offering a service it becomes more difficult because the client walks away with an, often, intangible result instead of a finished product. While services are the backbone of our economy, many new owners just lack the understanding needed to set a pricing structure that will give them both the ability to compete in their market and earn a living without having to take on so many clients that they feel overwhelmed.
It all begins with selecting the right pricing strategy. You must first decide which approach best fits your goals and objectives. Do you intend to be a discounter? Compete with the pack? Or be a Premium Brand / Provider? Our video on The 3 Common Approaches and Strategies for pricing goes into more detail.
After years of helping clients through the process, we at the Briones Consulting Group created a simple formula to help our clients create the price that works for their business, and we now share it with you.
P(rice) = MA (Market Average) + DV (Deliverable Value) + C(omfort)
First, we need to do some research and better understand the local market expectation. This will be done by conducting anonymous "mystery shopping" calls to those who compete in your local market, offering LIKE services to a SIMILAR target market.
This really needs to be an apples to apples comparison, you do not want to "shop" someone who is offering services to those far outside of your niche or who operates with a totally different pricing strategy. For example, if you are offering home care services under a non-franchise private pay model, you do not want to "shop" a medicaid / medicare agency for price comparison, you wouldn't compare a seasonal tax preparer with a forensic accountant. When the comparison is poorly handled, the results will be more of a hindrance than a help.
NOTE: We suggest your sampling consists of at least 3 - 5 competitors when possible.
What do I provide for my clients?
Do I need staff?
How much do I pay them?
Do I incur any other expenses?
Once you know the answer to these questions, you will use the following formula:
Materials + Hourly Rate (Time to complete + Prep Time + Delivery Time) + Cost to Deliver
Now that we have determined what our pricing strategy will be, what like competitors are charging and what it actually costs us to be able to deliver, we need to set the price itself. This is the portion of the formula that trips up many service business owners. They know the numbers and they know what they want to earn, but they never become comfortable with the price itself. The price you set is meaningless.
The reality is that the first 2 portions of the formula are there to give you a base and an understanding of your own costs. The actual success you will have when presenting the price to a client have to do with your comfort in the amount of value you are giving in exchange for your fee. If you aren't comfortable with the price you are asking for, you will never find a client that will be comfortable paying.
If the client believes that they are getting their money's worth, your ideal client will find you and, more importantly, find a way to pay you.
To learn more about 1 to 1 coaching, strategy sessions, or to schedule a discovery call to see if we are a good fit for your company, visit us on the web www.thebrionesgroup.com
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