Profitability: Getting Your Pricing Right

Choosing the right pricing strategy in business increases your chance at accomplishing turnover and profit in line with your business objective.

There’s no one-size-fits-all ‘best’ pricing strategy and keeping this in mind gives you adaptability in value setting, it can likewise make major issues for your business’ supportability if you miss the point.

How to price your services: not too high, not too low:

Getting it wrong can create problems, whether your price is high or low. If your price is high, it can create wrong perceptions of the quality and/or value of your service.

On the off chance that your price is low, you can lose money on the business you make if you aren’t able to cover your costs.

How would you best decide the cost to charge clients?

If you don’t know exactly how much the other party is prepared to pay, do you look at the competition and price the same as they do? Perhaps undercut them a little? What if the customer still demands further discounts?

There are some strategies you need to consider while setting up your pricing. Pricing is about the long-term sustainability of your business, and it’s about creating and providing value.

You need to understand what your customers value to set the correct price. The price your customers consider fair and are willing to pay, also must cover your costs and make a profit.

Value-based pricing:

Firstly, you must clearly understand the customer’s percetion of your service’s worth. Your price should be as closely aligned to value as possible.

On the off chance that your pricing is excessively low, you’re not getting what you should from the exchange, and if your pricing is excessively high, you’ll probably battle to draw in and hold clients. Research your price position. Do you know the true cost of delivering your service? Who are your competitors? What do they charge? How do you compare on quality and service?

Now identify your target customers. What do they expect from your service?

Consider your market competitive advantage – would you say you are working from a place of strength or weakness, relative to your competitors? You are now ready to set your pricing strategies and tactics. While all the traditional pricing strategies and tactics used for products apply to services, there’s a greater opportunity to price based on value.

Value-based pricing is determining the value you’re bringing to your customers and relating the price to that value.

Another option is to price jobs upfront as fixed-rate services – a transition from hourly rate charging.

Time-based billing is based on the fact you can buy anything you want if it’s at $150 an hour. However, this doesn’t reflect the fact the value of each hour won’t be the same for every customer, or each type of service provided.

Strategic pricing: the success differentiator

It’s important to monitor pricing and profitability, not just in holistic terms, but by service.
What is selling and what’s not, and at what prices? Which are making you money, or hitting your gross profit (GP) targets, and which aren’t?

Some triggers to review your pricing strategy include:

  • there’s a shift in the value you are providing
  • the service is not selling
  • you’re introducing a new service
  • your costs change
  • competitors change prices or introduce a new service
  • changes to industry or economy

Test new costs consistently, however when evolving costs, ensure you investigate what the effect will be on deals volumes and benefit. Every year, it seems more difficult to justify the broad ‘annual price increase’, and this becomes even more challenging when there is low growth and low inflation in the economy. Strategic pricing is the success differentiator, and value extraction and price optimisation are the keys to maximising your margins and attaining target profits. Profitability is an ongoing challenge for many business owners. For more guidance and tips on maintaining healthy revenue and profits, sign up to the Business Australia newsletter.