All service-based businesses must grapple with a basic question to ensure their survival: how to determine the right pricing structure.
Price your services too low, and you won't make enough money to sustain yourself. Price them too high, and you won't be able to compete. You have to find that sweet spot—the perfect pricing structure to attract customers while also achieving an optimal profit margin.
Finding a balance
Certainly, it's not easy to define how much to charge for certain services. Laura Silver, CEO of Blue Door Communications, a full-service PR and digital marketing agency based in Toronto, admits that finding the right fee structure for her industry is one of the things that keeps her up at night.
Silver's company has carved out a niche within the hospitality sector, counting some of Toronto's top restaurants, bars, hotels and spas among its clientele. In serving this market, Silver and her team stay mindful of the financial and competitive pressures faced by her business' clients. “They operate around a 3% profit margin," she says, “so that doesn't give them much room to invest in marketing."
The key to setting a pricing structure in this instance, Silver explains, is identifying “at what point is it still profitable for us to take them on."
“It's so hard to find a balance between where we make money but we're still affordable to our client base," she acknowledges. “We had to create a pricing model that was going to be palatable for the restaurants and wasn't going to break their bank."
Pricing as an art and science
There is no single “best" formula that prevails in determining a pricing structure. Successful business owners use a variety of methods.
In undertaking the process for yourself, keep these points in mind:
Know your costs. This encompasses direct costs, such as salaries, travel and supplies related to the work at hand, as well as indirect costs like rent, utilities, office equipment, insurance and administrative expenses.
Add in your desired profit, and then calculate an hourly rate for your services. You can charge your clients this hourly rate or use it to determine per-project fees or monthly retainer fees.
Know your market. Conduct some research to determine what comparable businesses in your market are charging for their services. Sometimes this information is available on your competitors' websites or in their advertising. Some industries have trade journals or consultants who compile information about prevailing rates that can likewise be useful.
Use the information you've gathered to create a pricing structure that is compatible with your position in the marketplace. Your fees may be higher than most of your competitors because you provide premium, one-of-a-kind services. Or they may be lower because you work smarter, faster and more efficiently and can pass those savings onto your client base.
Know your value. Some businesses, such as marketing and advertising firms, are able to pinpoint a correlation between their services and the results their clients receive—i.e., “if you pay $1,000 for our services, you will receive a lift in sales of $2,000." If so, testimonials from clients are a great way to provide authentication of such results.
Some businesses, however, such as software developers or website designers, may not have a direct correlation to sales. Instead, the value they provide stems from how well they meet clients' expectations. Doing good work translates into value for which clients are willing to pay.
Know when to negotiate. There is often a push-pull when it comes to pricing. Clients want to receive the lowest possible cost, while business owners are focused on optimizing earnings from their efforts. That's where the art of pricing comes in.
While you never want to undervalue your services, being flexible with your fee structures is sometimes necessary so you can capture more business and avoid potential downtime than can soften your profit margin. Be prepared to make pricing adjustments that will enhance your productivity and profitability.
As Silver phrases it: “When you're in a service-based business, everything's negotiable."
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.