Published in The Tennessean February 10, 2014
By Ed Rappuhn – SCORE Nashville
“I’m starting a business. How do I price my services?”
First, determine if your value proposition (product or service) can generate enough revenue to satisfy your needs. Since you are in the service business, start by estimating how many hours per week you can reasonably expect to work on paid jobs. Multiply that answer by 48 weeks, which allows for holidays, illness and maybe a little vacation. Then multiply by the average hourly rate you expect to charge. Now deduct your business costs: taxes, rent, utilities, vehicle costs, etc. Is there enough left over to make this venture worthwhile?
How do you get to your expected hourly rate? Begin by determining the rates charged by competitors. Local competitors might hesitate to give you their rate structure but those in similar markets like Cincinnati, Memphis or St. Louis are likely to share not just billing rates but also their experiences with other pricing structures, collection percentages, and even successful marketing techniques.
Are you going to be a premium priced or low-price provider of the service? As the new guy on the block, you might feel the need to come in with a low price-point, but be careful. You might get more business initially, but at what cost? There are only so many hours you have to sell. Customers attracted only to low price will likely leave as soon as they find a better deal.
If you come in at a premium price with extraordinary service, you can offer “frequent user” discounts to foster repeat business and incentives for referrals. These options might not be available if your price is already rock-bottom. It’s been said that quality remains long after price is forgotten.
To decide which strategy to employ, look carefully at your competition and the market segments you plan to serve. Ask potential customers, “What is the most important factor in your decision-making? Is it promptness, quality, price, or something else? What are you not getting today that might cause you to switch providers?”
Your goal is to differentiate yourself from the competition. Even if your service is unique in the market, if you’re successful, competition will follow. What will make you superior for the market segment you serve? There is a place for the big-box discounter and the high-end boutique; determine which you want or need to be.
By now, you should have a range of prices you might charge. Test your price points starting at the higher end. You can negotiate down if necessary but if you start too low, that’s it.
Once you’ve set your pricing you aren’t done. As the market and competition change continually evaluate your pricing, service offerings, and all aspects of your business.
Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org. Email questions about your business to email@example.com and watch for the answers in future columns.