Service Pricing Strategies: How to Avoid Lowball Offers

While starting a business may be a passion project for some, for most, the need to turn a profit lies at the heart of it. If your venture is flourishing but you aren’t earning what you’d hoped to, maybe it’s time to reconsider your pricing. 

A good pricing strategy will allow you to be fairly compensated for your work in creating the product and will reward your business with enough profit to continue to develop great services.

So, let’s take a look at some service pricing strategies that can help you avoid offers that are way below your asking price – also known as “lowball offers”.

Why is it important to have a pricing strategy?

As frustrating as it may sound, making mistakes is part and parcel of running a business. From choosing the wrong domain name for your website to selecting a completely incorrect pricing strategy, the learning curve is long. The latter, in particular, can prove harmful to your company in the long run, especially if you don’t take steps to rectify it.

Think about it. You likely put a lot of time into research and development, product creation, service refinement, and generally just ensuring that you’re bringing your customers the best you’ve got to give. 

So, it’s important to have a pricing strategy that fairly reflects this. If you’re offering a great product or service but are struggling to turn a profit, you may need to rethink the pricing structure of your goods. 

Whether your service is call center software or project management tools, you need to learn how to work smarter and price your offerings more competitively, in tune with the current market.

The pricing you choose should reflect the labor and material costs of making the product. This can sometimes dictate the value of the goods in the eyes of your customers, meaning you can charge more while still closing as many or even more deals. 

The price optimization of products and services can mean significant boosts in revenue. Remember, the pricing decisions you make today could shape your overall profitability in the future.

What are the five most common pricing strategies?

Let’s take a look at five widely-used approaches to pricing products.

• Competitive pricing. This is where you set a price based on what your competitors are charging. 
• Cost-plus. This involves working out the cost to produce the service and then adding a mark-up.
• Penetration pricing. This is where businesses set a lower price to begin with (usually to help them get a foothold in the market), and then raise it once they’re more established.
• Price skimming. This is where you set a high price and lower it as the market evolves. 
• Value-based pricing i.e. pricing your offerings based on what the customer believes they’re worth.

How to price services

Here are six useful steps to follow when pricing your services.

1.   Calculate the cost of goods

The COGS (cost of goods sold) for service-based products refers to the labor and resources it takes to provide those services. It’s a good rule of thumb to start here, as this enables you to work out a price that, at a minimum, covers the expense of producing the product if you were to take it straight to market without adding any other markups.

This includes:

• The cost of raw materials
• The amount spent on labor to make the product
• Any other costs associated with producing the service
  
  

2.   Evaluate the market

Whatever industry you’re in, the chances are that there’s something particularly “on trend” right now, when it comes to attracting new customers. Some companies choose to go down the witty route of fun domain name hacks, for example, while others are more pragmatic and focus on their pricing strategy.  

Far from suggesting that you should copy what your competitors are doing, it’s always good to keep an eye on their tactics, especially if they become popular and successful – and, particularly, when they involve how they price their offering.  

Plenty of businesses conduct a competitor analysis to create their pricing structure, because looking at what your competitors are charging for the same sort of service gives you an idea of how the market is doing. 

After all, your competitors are in the same industry as you and trying to target the same core customer base, so this will give you an idea of what consumers are prepared to pay for these services. 

3.   Consider the resources invested

When pricing your services, you also need to consider the resources involved in making the product. This includes costs, time, and any other resources that have contributed to creating and establishing it.  

Think about the hours spent on making and refining your service. If your team has spent a considerable amount of time on research and development, you may wish to reflect this in your pricing. Track how long it took you to finalize the project and use this timescale to come up with a price that seems reasonable for the effort and resources invested.  

You may also want to consider how long you’ve been in the industry and the experience and expertise you’ve gained throughout, not just while working on the project at hand. In some cases, businesses will charge more if they have more experience and trustworthiness to bring to the table. 

4.   Add a reasonable markup

Now it’s time to add a reasonable markup. This is the amount you’re going to add to each sale to turn a profit. This profit will go toward paying staff wages, investing in new products, paying your taxes, and various other costs associated with the business. This needs to be greater than your baseline (the price at which you’d break even on the service).  

Your markup can be added as a cash amount or a percentage. If you were to opt for the former, this means that each time you sold a subscription, you’d add X amount on top. For instance, an extra $1.5 for every seat sold. 

As a percentage, the markup would represent a set figure added to the cost of creating the subscription, such as an extra 15 percent on top. This method may be preferable for businesses with variable prices.

5.   Set and test the price

Once you’ve landed on a price you’re happy with, it’s time to release your product into the world and see how it goes down. Testing the price can be done in various ways, but predominantly it’s seeing how well the service sells and gathering customer feedback on what they think of the cost.

Depending on which strategy you’ve used to price your product (e.g. competitive or cost-plus), you may want to switch to another option after a certain amount of time to see which is most effective. This allows you to keep testing and find the price point that generates the greatest overall sales and profit. 

6.   Analyze and adjust where necessary

Now you’ve unveiled your service and are selling it to your target audience, it’s time to analyze the success of your pricing strategy and adjust it in line with any issues. For example, let’s imagine that you run a call center. 

By using a call center data analytics tool to track data related to your calls, you discover that one of the most common issues that your customers report is your pricing structure. Armed with these insights, you can now get to work to tweak it in order to fulfill your customers’ needs and expectations.

Pricing: Know your worth

Pricing your service correctly is vital, so it’s important to have a good strategy in place when launching a new offering. Similarly, you need to know when to switch up your existing pricing in line with customer demand. 

Most importantly, your strategy must be aligned with your overall business goals and objectives, while also considering market trends and the impact of cost on customer behavior. 

There are lots of factors at play here, and they can be tricky to juggle, which is why you shouldn’t be afraid to analyze and adjust your pricing where necessary.