Pricing is a crucial aspect of every business. When you get your pricing strategy right, you can be sure to generate enough profits to grow a sustainable business. The wrong pricing strategy can involve overcharging your customers and losing them to competitors or undercharging them and making losses. So, while factors such as demand and location will play a part in your business, it’s the price that will help it break even.
But getting the right pricing strategy can be challenging, especially if you’re a startup and have no clear picture of the market. Businesses that sell products can have a more straightforward pricing strategy based on how much the supplier charges them. However, service businesses have a more complex pricing strategy because it depends on the nature of the job they’re working on.
Thus, the pricing model must be adapted to accommodate this. Service based businesses are increasingly using estimates to quote for jobs. An example might be this free estimate template from Jobber which lists items and final prices. This enables them to agree a right price before any work commences, which is acceptable for both parties – the service provider and the customer.
Additionally, companies may try to identify suitable pricing structures, like the ones discussed below.
Knowing the total overhead costs
Break-even point is the point where the total revenue generated by a service business is equal to the total overhead costs incurred by it. If the business makes more sales past the break-even point, it starts generating profits. However, if the business fails to meet this, it experiences losses. The market price of the services at break-even point should also be equal to the cost of delivering the services.
By identifying the total overhead costs, you can predict where you can start being profitable. As the break-even point indicates how many service jobs you need to complete to generate enough revenue to equal the costs, you can use it to adjust costs and make it more attainable. Alternatively, you can adjust your prices to meet the break-even point faster. Try different prices to see which is more realistic.
As a service business owner, you can calculate your break-even point by dividing the fixed costs by the price minus the variable costs. Fixed costs are expenses that don’t change over time, such as rent and insurance. Variable costs change over time, such as supplies and gas costs. As pricing in service jobs can change depending on the job, you can use the average price over a certain period.
Checking on the competition
Your competition will always play a part in how you’ll price your services. You can go the easier way and determine your pricing strategy based on your competition’s prices on similar services. However, this strategy doesn’t consider costs, and it could work against or for you. But it’s still a good option if you haven’t figured out how best to price your services to breakeven but want to maintain a position in the market.
However, competition-based pricing doesn’t compel a business to copy the prices exactly as they are. Therefore, you can set your prices slightly lower than those of the competition to attract customers or offer the same price. Or you can make them slightly higher depending on the values you offer or if the overhead cost is slightly higher.
Assessing customer-perceived value
Pricing can also be determined by how your customers view your services or how much value you provide to them. Here, pricing is more like an art, based on the level of expertise or perceived value and not by how much money you spend on those services.
Value-centric customers will be willing to pay more for services they believe are valuable to them. So, you can use your customer data to segment your customer base by separating price-centric and value-centric customers. Then use what the value-centric are willing to pay as your price. You can also use their interests to determine how they perceive your services.
Using demand and market conditions
One of the best pricing strategies available for businesses to break even in the market is dynamic pricing. This strategy depends on the time and demand for your services in the market. This makes your pricing flexible and takes advantage of favorable marketing conditions.
By using demand and market conditions, you can combine different other strategies, such as competition-based pricing and cost-based pricing. These combinations can create algorithms that will show how much customers are willing to pay at that moment. Hence, your business can price services higher to break even faster in promising markets.
Your business breaking even is crucial for its stability and growth. The break-even point will determine how much you’re going to price your services to attain it and start making profits or how much you’ll have to cut overhead costs. By directing your price range, it will dictate which pricing strategy you’ll use for your services.