Learn how to calculate pricing yourservices factsheet.

1. METHODS TO PRICE
YOUR SERVICES
Factsheet
Faith Tabernacle Business Forum

2. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
The reason you went into business selling services to customers was to make a profit. If
you were giving away your services for less than cost, or just breaking even, you'd be
operating a non-profit business – or a business that's likely to fail.
There are a variety of components that factor into whether or not a business is
profitable, including location, leadership, market demand, competition, and so on.
But one of the most important decisions you need to make to determine whether you
turn a profit or not is how to price your services.
Get your pricing strategy for these services wrong and you will create a problem you
may never overcome. Get it right and you will dramatically increase the likelihood of
creating a business that perseveres and takes care of you financially.
“pricing is extraordinarily important"
This factsheet will outline how to price your services, the benefits and risks of certain
pricing structures, and how to monitor and change the pricing for your services without
alienating customers.
The good news is you have a great deal of flexibility in how you set your prices.
The bad news is there is no surefire, formula-based approach you can pull off the shelf
and apply in your business.
METHODS TO PRICE YOUR SERVICES
FACTSHEET

3. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Pricing services is more difficult than pricing products because you can often pinpoint
the cost of making a physical product but it's more subjective to calculate the worth of
your counsel, your staff's expertise, and the value of your time.
When pricing services, there is a bit more leeway than pricing products.
"
You can, however, use some of the same underlying pricing guidelines to figure out your
costs and operating expenses plus your target profit in setting your price for services.
Here are the factors that experts say you should consider when trying to determine
what price to charge for a service:
The three most common ways of setting the price of your service:
• cost-based pricing
• competition-based pricing
• customer-based pricing
As you review each pricing method, think about your business, the industry you operate
in and your target customer. Although the pricing methods here are detailed separately,
it is acceptable to blend several pricing methods to suit your business and the type of
products you sell. The way you set prices can change over time and for many reasons.
As you learn more about your customers and your competition or if new opportunities
arise in the marketplace, you might decide to change your pricing method.
"The price of a product is more objective. The price of a service is
more subjective so that there is a gray area."
"Pricing is both an art and a science."

4. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Cost-based pricing
Cost-based pricing involves figuring out what it costs you to make your product/service,
then adding a percentage mark-up (profit element) to determine the final price.
This standard method of pricing in business seeks to first determine the cost of making a
product or, in this case, providing a service, and then add an additional amount to
represent the desired profit.
To determine cost, you need to figure out direct costs, indirect costs, and fixed costs.
Those costs include a portion of your rent, utilities, administrative costs, and other
general overhead costs. "If you have to make sure to cover all your costs."
"With the cost-plus approach, the thing to remember is that if you're paying
someone £11 an hour, you may think you should charge £11 an hour for the
service they provide, but you have to factor in all your costs."

5. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Advantages of cost-based
pricing
The advantage of cost-based pricing is
that it ensures you cover all your costs,
and the method is a relatively simple
way of figuring out your profits.
Disadvantages of cost-
based pricing
Cost-based pricing does not take into
consideration customer demand, the
perceived value of your product or how
your product compares to the
competition.
A cost-based system may lock you into
a more moderate profit and may leave
potential revenue on the table.

6. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Competition-based pricing
Competition-based pricing involves using the
price of competing products as a benchmark
to set your product’s price.
This method is used when producing a
product that is similar to your competitors’
products. When using competition-based
pricing, you still need to cover the costs of
producing your product.
You need to be aware of what competitors
are charging for similar services in the
marketplace. This information could come
from competitor websites, phone calls, talking
to friends and associates who have used a
competitor's services, published data, etc.
"I don't think it's a good idea for any
entrepreneur to compete on price if you can
avoid it. Compete on service, ambiance, or other
factors that set you apart."
If you have to compete on price to win a
customer, you may ask yourself whether that
customer will be loyal to you if they find
someone offering a service at a lower price.
To understand more about your competition, you may need to conduct research.
• Ask yourself these questions to
help you assess your competition.
• Which companies would you
consider your direct competition?
• What are the types of
substitutions – or indirect
competition – for your product?
• How many competing companies
operate in your market?
• Are your competitors larger or
smaller than you?
• Are your competitors close by or
far away?
• Is it difficult for new competitors
to enter the industry?
• What types and number of
products do your competitors
sell?
• What pricing method(s) do your
competitors use?
• What are you selling and how
does it compare to your
competitors’ products?
yourself these questions to help
you assess your competition.

7. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Advantages of
competition-based pricing
Pricing the same as your competition
makes calculating your price easier.
Charging a lower price than your
competition may allow you to lure
customers away from your competitors
and differentiate yourself based on
price.
Disadvantages of
competition-based pricing
Pricing that matches your competition
may not be based on your ideal target
profit and may not allow you to cover
your costs.
Other competitors can also easily
mimic the price you set or even set a
lower one, so this approach can have a
negative effect on the industry by
lowering prices over time.
When you price the same as your
competitor, price no longer a factor in
the customer’s decision-making
process, so increased marketing efforts
(and increased costs) ay be needed to
attract sales for your product.

8. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Customer-based pricing
Customer-based pricing (also known as value-
based pricing) involves setting the price based
on customer “demand” and considering
customers’ perceived value of the product.
This is where a lot of the subjectivity comes in
when setting a price for a service. When you
have a product, you may decide to use
keystone pricing, which generally takes the
wholesale cost and doubles it to come up with
a price to charge and account for your profit.
With a service, you can't necessarily do that.
To your customer, the important factor in
determining how much they are willing to pay
for a service may not be how much time you
spent providing the service, but ultimately
what the perceived value of that service and
your expertise is to them. That is where
pricing becomes more of an art form.
Customer-based pricing requires businesses to
have an in-depth knowledge of their
customers’ needs.
To use customer-based pricing, you will need
to take a market focus with your business and
find out more about customer buying habits, purchasing decisions and attitudes towards
various prices.
• Does your customer assume that
price reflects product quality?
• Do customers think they are getting
their money’s worth from your
product?
• Do your customers care more about
product prestige than product
price?
• Do your customers buy solely based
on price?
• At what price do your customers
think your product offers good
value?
• What are target customers
prepared to pay for your product?
If you are just starting out in business
or expanding into a new market, you
may find it hard to answer these
questions yourself.
Talk to potential customers or develop
a formal interview questionnaire.
about your target customer
when you answer the following
questions.

9. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Calculating your costs
Before you set a price for the services your company will provide, you need to
understand your costs of providing these services to customers.
The Small Business Administration advises that the cost of producing any service is made
up of the following three parts:
• Materials cost. These are the costs of goods you use in providing
the service. A cleaning business would need to factor in costs of paper
towels, cleaning solutions, rubber gloves, etc. An auto repair business
would tally up the cost of supplies, such as brake pads or spark plug,
which are being installed by service people. You may want to include the
material list with your estimate in bidding for a job.
• Labor cost. This is the cost of direct labor you hire to provide a
service. This would be the hourly wages of your cleaning crew and/or a
portion of your mechanic's salary and benefits while they were providing
the service for your customer. The SBA recommends using a time card
and clock to keep tabs on the number of hours of labor involved in
providing each service for a customer.
• Overhead costs. These are the indirect costs to your business in
providing services to customers. Examples include labor for other people
who run the firm, whether administrative assistants or human resources
personnel. Other overhead costs include your monthly rent, taxes,
insurance, depreciation, advertising, office supplies, utilities, mileage,
etc.

10. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
The SBA suggests that a reasonable amount of these overhead costs should be billed to
each service performed, whether in an hourly rate or a percentage. One important thing
to note: don't just depend on figures from last year to determine your overhead costs.
You need to charge customers rates that cover your current costs, including higher
salaries to employees, inflation, etc.
Determining a fair profit margin
Once you determine your costs, you need to mark up your services to ensure that you
achieve a profit for your business.
This is a delicate balance.
You want to ensure that you achieve a desirable profit margin, but at the same time,
particularly in a down economy, you want to make sure that your business doesn't get a
reputation for overcharging for services.
Look for resources in your industry, to help you determine whether your profit margin is
on target.
"If net profit margin for your industry is 5 percent, and you’re on 2
percent you need to come up a bit, you need to sell services, give value,
and make sure company runs a fair rate of return."

11. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Different Pricing Models
Now that you understand what it costs you to provide a service, what your competitors
are charging, and how customers perceive the value of your services, it's time to figure
out whether to charge an hourly rate, a per-project rate, or try to negotiate a retainer
for your services.
This may be predetermined by your industry and the type of service pricing that
predominates in your sector. For example, lawyers tend to charge hourly rates for their
services, although those rates can vary.
Many construction firms charge a project fee and require that one third be paid up front,
another third be paid at the half-way point, and the remaining third be paid upon
completion.
Here are some benefits and risks associated with the following pricing models:
• Charging an hourly rate. For many businesses, pricing services on an hourly
rate is preferred. This ensures that you are achieving a rate of return on the
actual time and labor you invest in servicing each customer. Hourly rates are
often used when you are pricing your own consulting services, instead of
pricing a service that uses labor and materials from others. Your rate should be
determined by your amount of expertise and seniority; a more senior
consultant will generally be paid a higher hourly rate than a less experienced
or junior consultant. The SBA recommends that one's travel time be included
as an extra charge. Sometimes even consultants are asked to price a service
on a project or contract basis. That contract needs to factor in clerical support,
computer or other services, and overhead expenses, the SBA advices.

12. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
One thing a business cannot afford to lose is its integrity and respect among customers.
• Charging a flat fee. In tough economic times, many businesses are concerned
about keeping costs down and may agree to hire your business for services
only on a fixed-rate or flat-fee basis. "Customers want a fixed rate”,
“Entrepreneurs want an hourly rate. It's a question of who is going to bear the
risk. If I charge a flat rate, I am bearing the risk." If a project takes longer than
expected to complete, you may risk losing money on the client. If you have a
customer that insists on a flat fee, you may want to see if they are amenable
to putting a cap on the number of hours involved in the project or agree to
pay additional fees if the project runs over that time.
• Variable pricing. In addition to determining a fair price for your services, you
have to determine whether you will practice a fixed-price policy and charge
all your customers the same amount or whether you want to institute variable
pricing, in which bargaining and negotiation help set the price for each
customer. "Should you charge different customers different rates?
"The exception is if someone comes in and says that they will book 1,000
hours of time, you may want to give them a price break for quantity. But in
general, charging different prices to different customers will create ill will.
People will talk about it and they will find out."

13. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Monitoring and Changing Your Price
In a service business, your biggest costs are usually your people costs -- salaries,
benefits, etc. If you are having a hard time selling services at an acceptable profit, the
problem may be that your employee costs are too high rather than the price is too low.
You may want to also re-evaluate your overhead costs to determine whether there are
other cuts you can make to bring your price down and your profit margin up.
Monitor profitability monthly
You need to understand the profitability of your company every month. By the 15th of
every month, you ought to have your financial statements from the previous month.
In some cases, no one has ever shown them how to do that. In addition to understanding
your monthly profitability, you need to understand the profitability (or lack of
profitability) of every service you sell.
Make absolutely sure you know the degree to which every person or project you sell is
contributing to your goal of making money each month.
"Look at your expenses and see where you can cut."
"If there are any mistake I see entrepreneurs make, it's that they
don't spend enough time going over their financial statements."

14. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Test the market for new services and prices
You should always be testing new prices, new offers, and new combinations of benefits
and premiums to help you sell more of your services at a better and better price.
Often the perfect time to do this is when quoting a price to a new customer.
Raise the price and offer a new and unique bonus or special service for the customer.
Measure the increase or decrease in the volume of services you sell and the total gross
profit dollars you generate.
Be wise about raising your prices
It's a fact of life that you will have to raise prices from time to time as part of managing
your business prudently.
If you never raise your prices, you won't in business for long.
You have to constantly monitor your price and your costs so that you are both
competitive in the market and that you make the kind of money you deserve to make in
your business.
But there are risks to raising prices, particularly when your customers are going through
tough financial times.

15. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
The bottom line is: You owe it to yourself and to your business to be relentless in managing
your pricing strategy. Remember, how you set the price of the services you sell could be the
difference between the success -- or failure -- of your business.
Here are some guidelines for when and how to raise prices:
• Do raise prices when your competitors are raising prices. If the
competition has upped the ante, that is a good signal that the
market can and will support a price increase for your services, too.
• Do raise prices if your customers say you're a bargain. If your
customers start commenting about what a great value your
services are, that "may be an indication you're charging too low a
price," Osteryoung says.
• Don't raise prices too much all at once. In a tough economy, a big
jump in prices might be too much of a jolt for your customers.
Instead, raise prices in small increments of two or three price
increases over the course of a year, Osteryoung suggests.
• Don't raise prices across the board. Do be discreet. Customers
may not notice price increases if they are only for certain services
and not for others. Osteryoung recalls speaking with a dentist who
recently raised prices on fillings but not cleanings -- a strategy that
brought no customer complaints. "You need to raise prices in
today's economy where you think your customer can't see there
has been an increase," he says.

16. FACTSHEET
METHODS TO PRICE YOUR PRODUCTS
Tips for successful pricing
Product prices are important to any successful business.
Effective pricing requires creativity, research, good recordkeeping and flexibility.
Follow these tips to ensure greater pricing success.
• Be creative by thinking of new ways to sell more to existing customers or to
attract new customer groups.
• Listen to your customer and keep track of their comments, then review them
periodically to glean new ideas.
• Keep good records of how you arrived at a price and track the performance of
your pricing, so you can adjust your prices (if required) in the future.
• Be flexible by regularly reviewing internal and external factors and
understanding how price changes would affect your business.