What are you charging for your services?
Are you charging too much or too little?
More importantly, how do you know!?
Most new entrepreneurs struggle with pricing their services appropriately.
I can’t stress enough how essential it is that you get it right!
Your price is where your customers choose you or a competitor.
Don’t worry; I’m here to help you get it right.
Let’s check all the boxes and ensure you’re pricing your services perfectly.
Key Takeaways
- Understanding the most popular service based business models.
- How to research your competitors pricing the right way.
- The most effective strategies for conducting research.
- How to test your offer on your target customers.
Common Types of Service Pricing Models
In the world of service businesses, your pricing model can significantly impact your business’s profitability and sustainability.
The most common types of service pricing strategies include hourly, project, value-based, and performance pricing.
Each strategy has unique merits and challenges, which we will explore in the following sections.
Hourly Pricing
Most people understand hourly pricing.
You provide a service and charge by the hour to complete it.
Advantages of Hourly Pricing
Hourly pricing is considered “fair” because you’re compensated based on your time on a project.
This strategy also allows for the flexibility to accommodate changes and additions to the project scope.
Disadvantages of Hourly Pricing
However, with hourly pricing, you can run into estimation difficulties, and it’s less predictable from a pricing model perspective (feast or famine).
Moreover, there’s only one hour in one hour. This presents challenges with scaling your business. You’ll always be trading hours for dollars.
Project Pricing
Project pricing is another common pricing model where you charge a set fee for a specific service or project.
Advantages of Project Pricing
Clients see Project pricing as attractive because it offers high predictability regarding cost.
They know exactly what they will pay at the outset, irrespective of the time you spend on the project.
Moreover, it allows you to leverage your efficiency; if you can complete the project faster than estimated, you can increase your effective hourly rate.
Disadvantages of Project Pricing
On the flip side, project pricing can be risky for service providers.
If the project requires more time and resources than initially estimated, it can affect your profitability.
Plus, it may lead to client disagreements if additional work is needed beyond the defined project scope, leading to (dreaded) scope creep.
Value-Based Pricing
Value-based pricing is a strategy where the perceived value of the service drives pricing rather than the actual service cost or market rate.
Advantages of Value-Based Pricing
One of the significant advantages of value-based pricing is its potential for high profitability.
If your service can deliver considerable value to your client, you can charge a premium price for it.
It shifts the focus from cost to the unique value you offer, allowing you to differentiate your services from competitors.
Disadvantages of Value-Based Pricing
However, one of the challenges with this pricing model is determining the value perception of your clients.
It requires a deep understanding of your clients and their willingness to pay for the value you provide.
Furthermore, it may be challenging to quantify the value of your service, especially for intangible benefits, which can lead to pricing disputes.
Performance-Based Pricing
Performance-based pricing is a strategy where your fees are directly linked to the results or performance your services deliver to the client.
Advantages of Performance-Based Pricing
The primary advantage of performance-based pricing is that it aligns the interests of the service provider and the client.
It creates a win-win situation where the provider is incentivized to deliver optimal results, and the client only pays for the achieved outcomes.
Additionally, this model can differentiate your services by demonstrating your confidence in delivering results, making your offer more attractive to potential clients.
Disadvantages of Performance-Based Pricing
However, the performance-based pricing model also comes with its share of challenges.
Firstly, defining what constitutes ‘performance’ can be tricky and can lead to disagreements.
Secondly, external factors beyond your control may impact the results.
Finally, this model can create cash flow instability, especially if payment is only made upon reaching certain performance milestones.
How to Price Your Services
Here’s the dead simple way to price your services.
Step 1: Conduct Market Research
Before setting your prices, you first need a clear understanding of the market you’re operating in.
This means identifying your competitors, understanding what they offer, and at what price.
Moreover, you need a thorough understanding of the customers you’ll provide your services to.
What are their pain points? What is their willingness to pay for you to alleviate that pain?
I’ve found the best way to do this is:
- Google Search: Search for the competitors in your space and research their pricing models.
- Buying Your Competitors Services: Call your competitors and review the sales process. What is their offer? What makes it unique?
- Talk With Customers: Talk directly with customers. Ask them about their paint points, services they have used in the past, etc.
Use this pricing matrix to plot your competitors as you research.
Step 2: Understand Your Costs (COGS & Overhead)
The next step in the process is to look internally.
What are your COGS (costs of goods sold)?
These are the direct costs associated with delivering your service.
You also need to take into account your fixed costs.
These are your overhead expenses, such as rent, utilities, and insurance. Etc.
Add those up to understand the full picture of how much your service costs to provide.
Step 3: Choose a Pricing Model
Choose a pricing model above that aligns with your business goals.
Remember, your chosen pricing model should complement your business strategy and objectives.
This is your chance to be creative!
Don’t be afraid to break the mold and differentiate yourself from the competition.
But also understand your customers and industry norms.
Pro Tip: Don’t worry about perfecting it out of the gate. You can always change things based on how the market reacts.
Step 4: Test Your Pricing Strategy
Now it’s time to get your hands dirty!
It’s time to test your pricing strategy. So get out there and sell!
Remember, your “business model” typically never survives first contact with your customers.
As you’re networking and selling, gather customer feedback.
Is the pricing structure working?
What do your customers value in your services? Are they balking at the price? Are they too willing to pay (you’re priced too low).
The best way to do that is to talk with customers!
You should have a list of questions you’re asking each customer if they buy or if they don’t.
Step 5: Adjust and Iterate
Pricing is a continuous process.
As you gather feedback and data, regularly review and adjust your pricing strategy to better align with your business goals.
Remember, as your business grows, so should your prices!
Don’t be afraid to iterate and experiment with different pricing models to find the best fit for your business.
When I first launched The Guerrilla Agency, we charged $2,500/month for our base SEO package.
When I sold it in 2022, we didn’t take clients for less than $5,000.
Our packages changed, or the model changed…everything changed.
Again, stuff changes, so don’t worry about being perfect.
Final Thoughts on Pricing Your Services
Creating an effective pricing strategy is as much an art as it is a science.
It requires a comprehensive understanding of the market landscape, your clients’ needs and perceived values, and your business’s operational costs.
While it might seem daunting initially, with rigorous market research, strategic thinking, and continuous adjustment, you can develop a pricing model that maximizes profitability while ensuring value for your clients.
I hope you enjoyed this!