Pricing Strategies for Service Businesses: Everything You Need to Know
What are the different pricing strategies for service businesses? How do I choose the one that’s right for me? Read on to learn almost everything you need to know with this comprehensive service pricing strategies guide.
There’s more to pricing strategies than simply offering the lowest price to beat your competitors. In fact, that may be one of the most dangerous pricing strategies for service businesses, as it almost guarantees lost profits.
The right pricing strategy has to align with your business goals, whether these are to maximize profitability, ensure your business’ longevity, or grow your customer base.
The Challenges of Choosing the Right Service Pricing Strategy
Selecting the right pricing strategy for your service business and ultimately pricing your services is notoriously hard for several reasons:
- The sheer number of pricing strategies for service businesses is overwhelming. How do you know which one is right for your business?
- No one job is the same. There are many nuances involved—like the travel distance to clients, job complexities, etc.— which makes it hard to create accurate estimates. As a result, you often only know what to charge as the service unfolds.
- You have to manage your own insecurities, which may cause you to set low prices in the hopes of winning the business
You Can Overcome Your Pricing Fears and Get Comfortable with Service Pricing Strategies
Pricing, like window cleaning, landscaping, or even marketing, is just another skill you can master with time. So, instead of feeling intimidated or overwhelmed, arm yourself with the right information from the start and you’ll soon be a skilled pricing professional.
In this post, we’ll go over everything you need to know about pricing strategies for service businesses, including:
What Are Service Pricing Strategies?
Service pricing strategies refer to the different methods services businesses use to price their services. It’s a broad term that covers areas like market conditions, variable costs, margins, and a customer’s ability and willingness to pay for your services.
Why Are Pricing Strategies Important?
Pricing strategies are crucial for many reasons:
Choosing the right price has a direct impact on your sales and profits. As you’ll see, a good pricing strategy doesn’t necessarily mean offering the lowest price. Instead, it involves setting a price that’s aligned to the value you provide. As Matt, from Logan Tree Experts remarks:
“We don’t anywhere say that we’re the cheapest. That’s not what our goal is. Our goal is to provide value. By the time the client sees a quote, they’re not just looking at the bottom line. They’re looking at how [we] called them a couple of hours after they reached out, how I showed up when I said I would, how we emailed them a quote right away…all of those things show them that there’s more value than what the price is.”
Pricing strategies shape your prospects’ view of service quality. For example, a low price may lead customers to believe that your service quality is poor.
Your pricing strategy is a strategic tool to help you achieve your business’ objectives. The most common objective is maximizing profit, but you may have others such as growing market share quickly, edging out the competition, or building lasting relationships with customers so they’ll continue working with you for years to come. The best pricing strategy for your business is the one that aligns with your business objectives.
11 Pricing Strategies for Service Businesses
There are many different pricing strategies to choose from. Here are 11:
1. Market penetration strategy: Set prices low to grow market share. Then increase your rates over time as your customer base grows. Admittedly, this isn’t a common pricing strategy for service businesses, but it can help you grow your customer base quickly. The big problem with this approach is that some customers may associate the lower price with an inferior level of service. You will also have to work a lot harder to cover your costs.
2. Price skimming: The opposite of a market penetration strategy. Here you set a high price and lower it over time. Again, this isn’t your typical pricing strategy for a service business. But it may work if you have something special to offer. The pros are that you’ll maximize your profits upfront and grow a more sustainable business. The big drawback, however, is that if you can’t justify the price, you’ll struggle to get your business off the ground.
3. Premium pricing: Charge higher prices because you have something that makes you unique. For example, do you offer a warranty or service guarantee that your competitors do not? Do you use exclusive tools or technology that make your business easier to work with and deliver results that stand out?
4. Economy pricing: Set low prices because overheads are low. Your costs may be low for several reasons. Perhaps you use software to organize and manage your business instead of hiring an assistant. Or maybe you have a special arrangement with one of your suppliers which allows you to get inexpensive supplies.
5. Cost-plus pricing: Calculate the cost to deliver your services and add a margin for a profit. For example, if you know your time and materials cost $200, and you want to make a 20% profit margin, simply charge $240. This is a straightforward pricing strategy, but it can cost you money because you may end up setting a lower price than what customers are actually willing to pay.
6. Psychological pricing: Prices based on the psychological impact they have. For example, it’s believed that odd prices like $19.97 are more attractive than round numbers like $20.00.
7. Competitive pricing: Charge according to what the competition charges. While competitors can give you a good idea of where to start, remember that your business is unique. Just because someone is charging a specific price doesn’t mean you should match or undercut them.
8. Bundled pricing: Also known as packaged pricing, this strategy involves bundling various services together and charging one price. Bundled services are usually cheaper than if customers were to purchase each service individually. If done correctly, this technique is a great way to upsell more services and boost your profits—as Dave Moerman of Revive Washing notes:
“Our house washing package is our most requested and most profitable service. This is a full soft wash of siding, windows, and gutters). Homeowners like this package because it takes care of all services with one detailed visit…For our crew to be profitable, we have to do a certain amount of revenue per day. Small jobs are okay to slot in, but we like to have a good-size house wash for each crew for each day. From a profitability perspective, it’s much better.”
9. Tiered pricing: Offer clients the option of choosing between different levels of service or packages. In window cleaning, for example, you can offer a basic package for $99 (outside cleaning only), a standard package for $149 (inside and outside), or a deluxe package for $199 (inside, outside, tracks and sills). Each package offers incrementally more value, and the difference in price gives the consumer a chance to consider what they are willing to spend.
You can also experiment by increasing the lowest tier price to give the two other tiers a higher perceived value.
For example, if you price the starter package at $129, and the standard package is $149, clients may choose the standard package because it’s a small amount of money for considerably more value.
The big advantage of tiered pricing is that customers now compare your packages against each other instead of comparing you against the competition, which improves your chances of selling your services.
10. Value-based pricing: Charge a flat fee based on the value (benefits) your service provides. Value, for example, could mean saving the customer time or giving them peace of mind. Before quoting a client, make sure you’re clear on the benefits your service provides and, in turn, what they’re actually paying for.
For example, parents who use house cleaning services are not really paying for the service itself, but the time it frees up so they can spend with their children. Charging for your services based on value lets you charge a premium and protects you from the all-too-common price haggling that occurs with some customers.
11. Hourly-based pricing: Estimate how long a job will take and multiply it by your hourly rate. Although this pricing strategy may be suitable when starting a business, do use it with caution as it has its downfalls:
- You aren’t rewarded for becoming better and faster at what you do
- Clients may feel you’re purposefully taking your time on a job so you can earn more
- The focus is on the cost of the service rather than the value, which opens you up to price haggling
So, What Pricing Strategy Is Right for Your Service Business?
The many pricing strategies available can make it hard to determine which one is right for you. But, you can make the right decision by considering a few factors.
As you read through the upcoming section, remember that no strategy is better than the other and will depend on your unique business needs.
You can also use many of these strategies simultaneously; you do not have to select one. For example, value and bundled pricing are a perfect compliment to one another because in both cases, you’re showing clients that you understand their needs.
Factors to Help You Choose the Right Service Pricing Strategy
- Your overheads. If you have lower overheads, you can charge more competitive prices. Conversely, if your costs are high, then competing on price isn’t viable. You’re better off charging a premium based on a unique differentiator.
- Your goals. If you’re a new business looking to get customers fast, you may opt for a market penetration strategy to achieve rapid adoption.
- How established you are. If you’ve been operating for a few years and want to grow faster and sustainably, offering packages is a good option. Providing packages helps you sell more by turning the intangible (your service) into something tangible (a product), which makes it easier for customers to buy.
The Bottom Line on Pricing Strategies for Service Businesses
The word “pricing” instills fear into many small service business owners—and with good reason.
Pricing services is generally harder than pricing products as each job is different, and you have to grapple with your own experience, insecurities, and specifics of each job. On top of that, pricing is complex with many different pricing strategies to choose from.
Of course, just because something seems difficult, doesn’t mean it is or that you shouldn’t try. After all, the more jobs you bid for, the more you’ll learn about what works and what doesn’t. It’ll only be a matter of time before you find a pricing strategy that’s right for your business.