The Price is Right

For businesses that operate in the service sector, pricing for services rendered is something of an art form. It’s not an exact science, but rather a delicate dance between the economy, industry standards, the competition and consumer expectations.

If the dance isn’t properly rehearsed and understood, and a service is priced too high or too low, the business will suffer. So how can business owners accurately price their service so it works for both the business and the customer?

Build a pricing strategy

There are two main types of pricing models out there: cost-plus pricing and value-based pricing.

Cost-plus pricing involves working out labour, material and utilities costs, plus any other business expenses, and placing a profit margin on this. This method is relatively simple and easy to justify to clients.

For example, a tradesman would most likely use cost-plus pricing, as they factor in the set rate of direct labour costs per hour, the cost of materials, overhead rates and profit margin. They also need to consider whether there are peaks and troughs in their schedules and the construction industry at large, and structure rates around this.

Next is value-based pricing, which essentially puts a price on the value a particular service brings to the customer. For this model, as well as understanding how much the business costs to run, the business owner needs to understand who their customers are and what they are willing to pay for their particular service, as well as be able to provide that additional value that sets their service apart from the competitors and thereby justifies its price.

Market research is the key to both models. Business owners need to know their competitors, the demographic their business is reaching for and what customers are prepared to pay for the service, in order to set an accurate and reasonable price. Additionally, businesses should be on top of cash flow and aware of any hidden costs such as taxes and super.

Know your niche

Founder and managing director of Luxe Associates Travel, Amy Doherty, organises and runs tours around Italy. When setting prices for her staff and tours, the Australian-born entrepreneur understands that the success of her company is entwined with the expertise of her guides so pays them accordingly. In turn, Luxe gains a competitive edge.

“Due to the freelance nature of the business and the fact that Luxe clients must have the highest quality experience, we pay staff over the usual rates. Paying staff as ‘little as you can get away with’ is certainly false economy. The same for support staff. While many employee surveys say that salary is not the only factor in an employee’s overall happiness at work, in this type of freelance business it is an important factor as Luxe is competing with other companies who also want the best tour guides for their businesses,” Doherty says.

As part of knowing your niche, you should also recognise whether your service goes through cycles of demand, like tourism and many licensed trades. This can play a large role in setting your price, as you need to price the busy times to offset the slower periods.

Review, review, review

Another important thing Doherty has learnt is to consistently review your prices and pricing strategy in order to remain competitive.

“Initially we had costs such as site tickets and cars priced into the overall per-head cost. As the business grew it became apparent that the clients were, as an overall majority, private clients, not group clients so this per-head model was not sustainable as the private tours were then priced too far over the market rates,” Doherty explains.

“We revised our pricing model in light of this and chose a per-hour model for groups of one to six people, seven to 12, and then bespoke groups of 12 and above. This has been working brilliantly for both us and the clients as it’s transparent and easily customisable.”

Setting the right price for services can take nuancing, but one of the most important factors is remaining flexible and tuned in to the market.

“Don’t be afraid to change your pricing model if it’s not responding to what the market is requiring. The quicker you do this, the quicker your business will grow,” Doherty says.

Words by Nicole Thomas

The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.