How to Correctly Price Your Services as a New Small Business

5 key steps to consider when pricing your services

Competitively pricing your products and services is crucial for your business’s success and expansion. It goes beyond the simple goals of covering costs and matching competitor prices. Instead, consider several factors leading you to the best possible pricing.

As you go through this maze, you’ll develop a deeper understanding of your company’s inner workings, your location in the market, and the special value you bring to customers. Therefore, covering some of the steps below is ideal when pricing your services.

#1. Run a cost analysis check

The primary task is determining what it will cost to provide the service. Think about the money spent directly and indirectly to estimate your direct expenditures.

Direct costs are directly attributable to the service you’re providing. For instance, if you are in a manufacturing business, this could include the cost of your raw material, machine setup, depreciation, etc.

Indirect costs, on the other hand, are not directly tied to a specific job but are necessary for you to operate your business. This might include transportation, mortgage payments for your factory shed, utility bills, maintaining equipment, etc.

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Once you understand your total costs, you can determine how much you need to charge to cover these costs and generate a profit. This process is crucial because pricing your services too low could lead to losses and business instability while pricing them too high might deter potential customers. 

Therefore, thorough financial data analytics, including costs, should help achieve a competitive and sustainable pricing strategy.

#2. Finalize a service pricing model

After performing a thorough cost analysis and gaining insights into your market’s pricing, the next step is to choose the pricing model that aligns with your business objectives. For products, it is either on a retail or wholesale basis and for services, you can choose an hourly or per-project rate. 

Charging by the project in a SaaS billing model can be particularly effective when you have a reliable estimate of the time and resources needed for a service. This method streamlines the billing process, offering clients a straightforward and predictable cost structure, while aligning the pricing with the value delivered by the software solution.

An hourly rate is the most suitable pricing model if your business primarily revolves around your time, such as a law firm or IT services. Another option, which is less widely used, involves implementing a flexible pricing strategy that takes into account the individual consumer’s needs and budget.

Having a well-thought-out pricing strategy is crucial for the long-term success and profitability of any business.

Here are some of the key pricing strategies to consider:

• Introductory pricing: This method, or penetration pricing, requires setting the initial price point significantly lower to attract consumers and build a strong customer base. It requires gradually increasing the price once you’ve established a substantial market share.
• Complementary product pricing: This approach requires enticing customers to spend more by offering upgrades, add-ons, or complementary products. It’s a strategic move often involving upselling and cross-selling, maximizing customer value, and improving the company’s overall revenue.
• Tiered pricing: Tiered or product line pricing involves setting a range of escalating prices for various products. It allows customers to choose a product that matches their budget, needs, or quality expectations.
• Value-based pricing: This approach, akin to price skimming, justifies a higher price when you possess a distinctive competitive advantage. Research suggests that customers are willing to pay a premium when they find a quality, superior value using a product or service.
• Time-based pricing: Rather than setting a flat fee, time-based pricing involves charging clients based on the hours invested in providing a service. This ensures your company is safeguarded from low-profit scenarios, especially when faced with numerous customer change requests.
• Cost-effective pricing: This strategy, called economy pricing, requires streamlining your costs as much as possible to provide your customers with the most affordable pricing. It appeals to budget-conscious customers who prioritize value for money.
• Emotion-driven pricing: Psychological pricing is designed to trigger an emotional response from the customer. This can encourage customers to make purchasing decisions driven by emotion rather than rational thought.

#3. Decide a profitable markup

With thorough calculations and an understanding of your Cost of Goods Sold (COGS) and operational costs, you’ll better understand the baseline for starting a pricing strategy. Following this, the essential step is incorporating a profit margin, often called markup.

The markup is a surplus amount you add to each transaction to generate a profit. These profits function in several critical ways. 

New small businesses can use it for debt repayment, as income, and cover the various taxes associated with managing a small business. The aim is to persistently generate a robust profit to achieve business objectives.

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Opting for a fixed amount refers to a predefined profit you intend to make over and above your product costs. Conversely, a percentage implies a predetermined portion of the difference between the product’s cost and the final selling price. 

This methodology can be beneficial when dealing with fluctuating prices. Therefore, small businesses can finalize a standard markup for one category of products and a different standard markup for other product ranges.

#4. Price it smartly to balance between the high and low

Don’t undervalue yourself, but do not be shy about asking for what you deserve. People might not pay it, but you can always drop your costs or bargain with your customers if that happens. 

While starting a new business, one of the most challenging tasks is establishing a pricing strategy for your services. This is a complex exercise, as pricing too low might result in potential customers questioning the quality of your service. Conversely, too-high pricing could make your services inaccessible to many of your target markets. 

Thus, it’s crucial to strike a balance, a sweet spot that reflects your service’s value and matches your audience’s price sensitivity. Here’s how you can price smartly to balance between the high and low:

Understand the market: Start conducting market research to understand the competitive landscape and what your customers are willing to pay. This involves analyzing your competitors’ pricing strategies and identifying the pricing range for similar services in your market. Utilizing a price monitoring tool can streamline this process, providing you with real-time data on market prices and trends. However, as a small business, you can always offer unique advantages (such as personalized service or local knowledge) that may justify a higher price.

Perceived value pricing: Sometimes, pricing is not about how much a product costs to make or how much other businesses charge for similar services. If your service provides significant customer value, you can price higher than your costs or competition. Perceived value can be enhanced through superior customer service, high-quality materials, branding, and marketing.

Price flexibility: As a new small business, flexibility is one of your greatest strengths. You’re not tied down by larger companies’ extensive price catalogs or bureaucracy. This helps small businesses adjust prices based on feedback (more on it later) and results without causing much disruption. 

#5. Validate whether the price holds

You’ve done the groundwork; now come up with a pricing. The first thing to do is establish a starting point.

Let’s run through an example to illustrate our point ̉by considering the case of running a small artisanal bakery.

Suppose you’re making a batch of whole grain loaves, which costs you $5 for the ingredients (Costs). You’ve decided to mark up the price by 100% (Markup Percentage) to cover your labor and make a profit.

To calculate the markup amount, you’d use the formula:

Costs x Markup Percentage = Markup Amount

So, $5 (Costs) x 1 (100% as a decimal) = $5 (Markup Amount)

Add the costs and the markup amount to get the baseline price:

$5 (Costs) + $5 (Markup Amount) = $10 (Baseline Price)

Next, you must factor in overhead costs, like utilities, rent, and equipment depreciation. Suppose these costs represent 20% of your pricing structure (Overhead Percentage).

You’ll calculate the overhead contribution by multiplying the baseline price by the overhead percentage:

$10 (Baseline Price) x 0.20 (Overhead Percentage) = $2 (Overhead Contribution)

Lastly, add the baseline price and the overhead contribution to reach the final price:

$2 (Overhead Contribution) + $10 (Baseline Price) = $12 (Final Price)

Therefore, to cover your costs, contribute to overheads, and ensure a profit, you should price each whole grain loaf at least $12.

A few of the testing methods include the following: 

Split-testing subscriptions: Think about implementing subscription split-testing by offering the same subscription plans at varied price points to different groups of users and observing their reactions. For instance, employing A/B testing allows you to compare two different prices for the same subscription and gauge user responses to each. This method can help you determine the optimal pricing model to maximize profit.

Early bird discounts: You could offer your services at a discounted rate to early adopters, which can encourage uptake and gather useful feedback. However, it is crucial to emphasize that these are “early bird” discounts so that customers are prepared when prices inevitably rise to their normal levels.

Beta testing: An alternative approach could be beta testing, where you offer your services to a select group of users before the official launch. This lets you gather critical feedback on whether your pricing strategy aligns with market expectations and helps you determine any necessary adjustments before the full-scale launch.

Advice: A pricing policy is a strategy businesses use to determine the optimal price for their products or services, balancing profitability, market demand, and competitive positioning.

Wrapping Up

A new small firm must understand its costs, market circumstances, value proposition, and pricing strategies to price its services effectively. The price establishment process needs regular revisions to market developments, customer input, and your business’s changing demands.

It’s crucial to remember that pricing is not a one-time event but a dynamic and ongoing process that needs to be revisited and reviewed periodically in light of changing market dynamics. Do not undervalue your services due to fear of overpricing; the value you provide should be reflected in your prices. Simultaneously, ensure your pricing strategy aligns with your brand image and business objectives.

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