Service providing businesses can be ranged from car wash services to academic, technological or legal consultations. Regardless of whatever the service is, the ultimate target of all these service providing companies is making profit. In order to achieve the target profit, many crucial factors including cost of materials, cost of labor, demand and completion in the market and inflation should be meticulously concerned when you price the service.
The entrepreneur can make a profit if he would be able to price the service at a rate which exceeds the total cost of the service. If you do not have a systematic pricing strategy you may face many problems in conducting your business.
Creating a pricing strategy for a service is rather a difficult task in comparison to making a pricing strategy for a product, as it is easy to calculate the cost of materials and labor you utilize for the certain product. But evaluating the cost of service is more complex since it is complicated to estimate the value of consultation of experts, time, and other human resources.
A sole enterprise, shared ,middle sized or large scale business essentially need to consider the following facts when they price their service and these factors certainly cause to obtain a target revenue of the business.
Calculate the cost of the service: The total cost of the service depends on the type of the service and if it is a service of medical or legal consultation, it is very complex to calculate the cost than a cleaning service or transport services, which have fixed parameters. All direct and indirect costs including taxes, rent of the building, advertising, management, insurance, transport, human resources, and other fixed costs should be covered when you price the service. Labors, mechanics and other workers may be paid on daily base or an hourly base and the business management process should accomplish a regular billing procedure to calculate these multiple costs.
Determine the net profit: After calculating the cost of the service, the percentage of the profit should be determined and added to the cost in order to decide the price of the service. The rate of the profit has direct affect on growth and stability of the business. Also, the target profit should be adequate to overcome forthcoming risks, which would be caused by oscillation of the market system and inflation. If you are able to decide the accurate rate of profit, it may also influence the future investments. Overcharging for the service would not cause to reach the target customer but, the regular increase of the profit rate should be reasonable. If you are not fixing the price relevant to the market trends, it conveys that you are not in touch with the current economy and it makes the customers to move to another service provider, as they tend to think that your service is less in quality.
Demand of the market: The price of the service is largely influenced by other external variables including demand of the market, inflation and completion, besides the cost and rate of the profit. The demand of the market is constantly changing by the time, due to many reasons which are beyond the control of the entrepreneurs, and if your service has a less demand, a promotion strategy to increase the demand is essential. If you offer discounts to promote the demand, sometimes you may price the service at a low rate which is less than the cost. If the service has a high demand, you can increase the price while increasing the quality of the service and achieve the target revenue.
Competition: The price rate of the competitors who provide the same service in the market is another crucial factor in pricing a service. Today’s market is extremely controlled by the competition and you should be attentive towards the competitor’s price by searching through their websites and gaining information from associates. Though competition is a considerable factor in the market system, it is not a constructive matter to follow always. If you are able to convince the client that you are providing an excellence quality service and your service includes distinguished features at a reasonable value, you can achieve a stable status in the market, as against competing on the price. While you can raise the price corresponding to your competitors, increasing it too much is not advisable. High competition would make the market instable and it is prudent to avoid the competition wherever is possible.
Value of the customer: The customer’s capability of paying for the service is also a considerable factor in pricing. Your ultimate target is selling the service to the target customers and the customer’s perception of the price of the service indirectly affects the demand as well as the competition in the market. The customers are used to bargaining if the quality is low and the price is high, and you have to ensure that you are providing a high quality service at reasonable prices to the customers.
Select a pricing model: Determining the above mentioned decisive factors, the entrepreneur can select an appropriate pricing mode such as hourly based charge, daily based charge or flat fee and it is based on the type of the service. Instead of fixed billing system, you can use mixed packages, which are flexible to be selected by the client. However, the predetermined pricing model may not be appropriate with every type of services. Huge companies usually charge base on the project and the performed task, whereas the hourly rates are most preferable with consultant services. Also, hourly rates ensure that you can achieve the expected income by providing the service within certain hours, whereas the incomes you obtain through other pricing models exclusively depend on the type of the service.
Pricing is crucial and of paramount importance in achieving the target revenue of the business and upholding the stability. The above mentioned factors enable you to come out with an effective pricing strategy that cause to continuous progress of your service providing business.