Pricing is Everything!

If you have started a business on your own you will appreciate the time you have to invest in coming out with pricing of your goods or services especially if yours is the first of its kind in the market. According to Afsheen, (2018) pricing, a service can be trickier than pricing a product. Getting it right means valuing your time and expertise and accurately weighing up customer perceptions and market dynamics.

It may come in handy when you’re pricing a good rather than a service. With a product or a good, you can easily calculate your direct and overhead cost and then add your profit margin right away. But. . . . What would you be costing when it comes to service? Your time? Your expertise? Let’s just say you are a barber, a photographer, a plumber, an electrician or a graphic designer. You cannot charge the client for the machines you used in delivering the service. Right. You used those devices to render the services and it is the result you will price not the equipment used.

 

Pricing is a process, with the ultimate goal of defining a strategy that will maximize your revenue. There is more to pricing than picking a number out of thin air. Yes! What your competitors are doing matters but what matters more is that your pricing is sustainable for the growth of your business. If your pricing is too low, you will find yourself in a cash flow crunch, if it is too high you will lose clients. Remember there are competitors with close substitutes.

To have a sustainable pricing strategy, you must get intentional with your prices. This does not involve so much mathematics, you are just ensuring that the tradeoff put more money in your pocket. That’s all. So what is the best way to price your services? What is the best pricing model to use for a service? Take a read!

COST-PLUS MODEL:
The first thing to consider here is your Cost of Sales (COS). The COS is the cost directly incurred in rendering that particular service. Then again, there is a watch-word here; be careful things you consider the cost of sales because they may be overheads. Think of it this way; you are an electrician, you may need your tools to execute a particular job but that does not mean you will buy those tools every time you are rendering a service to a client. That is an overhead and not a direct cost. However, if there are certain expenses you might have incurred of which ordinarily you wouldn’t if you are not doing that job, that becomes a direct cost and you have to translate that to the client. For example;
• If you are an electrician, transportation to and from the project site, bulbs, wiring materials, etc.
• If you are a photographer, hiring a second shooter for the event is a direct cost.
• If you are a bookkeeper, the cost of a licence for your client’s accounting software.
What you should keep in mind is that the cost is traceable directly to the services rendered.

After this, you consider your overhead cost. This is indirect expenses that are not traceable to any specific services rendered. For instance, you can ask yourself these questions. What percentage of my sales goes into operating expenses such as indirect labour, utilities, transportation, etcetera. When all these are done then you determine your rate (Mark-up). The mark-up is just an amount of Cedis you add up to make a profit but sometimes this is where the challenge is. If that rate goes wrong, you may lose one either of two things, viz; money or clients. If it is high, clients will say bye. If it is low, the money will go. Even if it is low clients may still go because they may tend to think your products are not of good quality. And this is why as a service provider it is advisable not to use the cost-plus pricing model as a pricing strategy. It has some underlining weaknesses we will talk about some time.

COMPETITOR-BASED MODEL
This is a pricing method that utilizes competitor prices as a benchmark, rather than setting a price based on company costs or customer value. This strategy seems logically the right way. You want to offer a service, you look for people who are already in the business, find out their prices then you just go along with it. Simple. In this case, you are unlikely to go wrong. By placing yourself in the middle of the pack, you’ll be anchoring yourself for any future customers and they won’t think your product is too cheap or too expensive.

But the problem here is that you don’t have a pricing strategy, you have your competitor’s pricing strategy. Your company exists to offer clients something different from what is already on the market. You are offering more value and a better product, otherwise, you should not be in business. It is therefore prudent to find your own space within the industry, both for your product and your pricing. The ‘take away’ here is that, see what others are doing and be guided by it. Your competitors are not supposed to direct your decisions.

VALUE-BASED PRICING
In the 21st century, there are so many jobs you do not need an office to get it done as long as you have an internet. There are so many careers you can choose that does not need you to be physically present to solve a client’s need. You can perform tasks and get money into your account having your laptop and internet. Let’s say you’re a graphic designer or a web developer, the quality of the services you churn out is what we speak in pricing. When you are offering such a service, you barely will have a direct cost or an overhead. Using the concept and requirement from the clients’ should help you develop a website, logo or poster. Your pricing, therefore, is based on customers’ perception and that is your job. As long as they value your service, they will be willing to pay more.

The Value-based pricing model is where you base the price of your service on how much the target customer feels it is worth. It is worthy to note the benefits that your services will provide. You need to attribute a value to each of those benefits. How much are you worth?

The goal of value-based pricing is to figure out how much your customers are willing to pay for your product so that you can maximize your revenue by charging each customer the exact amount they are willing to pay. At this point, you are at an equilibrium.

To be successful, you need to ask yourself some important questions such as
• What level of experience do I have in this field?
• How different is my service from competitors?
• How much satisfaction will the client receive from this service?
• How much are competitors charging?
• What is the willingness of the client to pay?

When you get answers to all these questions, your pricing problem is solved. However, you must ensure you are offering Value for Money. Your pricing is not just about the number. It is about how you package yourself. How you relate to your clients. Your level of knowledge in the field and how different your services are. The Value-Based Pricing Model will help you understand what your client truly want, and what features should be developed over time. When you start using value-based pricing, amazing things can happen with your profit because you can add a Ghs1.00 at every point of service.

NB:
If you are a start up and your business is not well known, it is advisable to monitor changes in the market with respect to pricing and adjust your pricing accordingly. At a point in the life of your business where you are not well known for the kind of services you render, it is wise to just move with the market price untill you find a niche in the market where you can actually bargain. There are some industries such as recruitment agencies where there is an ‘inviscible’ rate charged. This is a classic reason why you need to study your market.

Also, if you are emerging with a new product or service of which there is no well establish industry, the wise thing to do is to use the cost-base pricing model. This will help you to make a little profit at a time and still be in business. The Value-Based Pricing is the best pricing model to use when you are rendering a service where you have carved a niche for yourself.

One key thing you need not to forget in your pricing is discounts and reduction. In Ghana, clients will always ask for a reduction or discount. Make sure you factor that in when pricing. If you price your service too low but your target market is willing to pay more, you are leaving a lot of money on the table. Setting a very low price can also damage your reputation as customers might think that your products are of low quality. Converesly, if your pricing are high as compared to other market players you will lose clients.
Just be in equilibrium!!

Philemon Ashirifie Ofei
May, 2020

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