As with products in the bricks-and-mortar world, most services price in line with competitors.

(The exception might apply to a service has credentials that do not apply to competitors.

For example, the most high profile, successful lawyer in town may charge a substantially higher hourly rate than competing lawyers because he or she can rely on their brand to justify the premium price.)

Services are typically priced using billable hours.

To calculate a billable hourly rate, a cost model is applied.

To calculate an expected return, the service provider sets a profit objective, deducts their costs and divides the remaining amount by number of units to reach a price point.

For example, let’s say I want to earn $100,000 per annum.

My direct costs are $10,000 and I want to work for 1,000 hours. The formula for reaching my price point is:

$110,000 = $110,000 – $10,000 (costs) = $100,000.
$100,000/1000 (hours) = $100 per hour.

Services can also be charged out for a fixed sum. This is common for consultancy and software development (for example) where the project has tightly defined outcomes. In this instance, a consultant may offer a fixed price (normally with a contingency margin in place).

There are advantages and disadvantages with both models.

Billable Hours:

Fixed Price:

Tips For Choosing Between Models:

• When using fixed pricing, clearly define and document the scope of the service to be provided for the fixed amount. Additional services or changes to original scope can offer you the opportunity to requote the task.
• Use fixed pricing where you are comfortable that you know how much time is required to complete a task.  An hourly rate is better for services where the approximate time to complete the task is not known. (Some services, such as software development, might charge for an assessment of the requirements of the project (a feasibility process) before offering a fixed quote to deliver the final outcome.)
• Set a time limit on quote acceptance. If you don’t want the client to come back two years later and engage you using old pricing, make sure you include an expiry date on the quote.

Customer-Based Pricing Models.

Customer-Based models may also be adapted for the services sector. Customer based models use price to attract customers and to support the positioning of the brand. There are different examples of this technique in the Making Prices Hard to Compare and Making Prices Easy to Compare posts.

EXAMPLES IN ACTION:

Tiered Pricing Structures.

Tiered pricing structures (such as those used by software marketers but can be applied to many products that can be delivered in modular form, such as training) provides for pricing that is based upon what the customer is able to afford.

For example, students may receive educational-version software at a reduced price, or a basic version of software with enhanced features removed may be available to the public free of charge.

The main advantage of this pricing is that it makes the product available to groups that might otherwise be unable to afford to purchase it. It is simple to administer and apply.

The disadvantage is that tiered pricing, when applied in an institutional sense, can become expensive when business customers find themselves bumped into a higher tier. For example, a company that needs licenses for 100 people may incur a substantially lower price than a customer that requires licenses for 101 people.

Tiered pricing also provides an incentive to purchase at the lowest possible tier. While some software manufacturers try to apply governance to who is eligible for student prices, for example, this can be difficult, time consuming and expensive to police in practice.

Segment or Niche Pricing.

Segment or niche pricing may be used to offer different pricing to groups of customers. It is commonly found in membership, reseller and trade pricing offers, all of which typically offer a discounted price to a defined group.

The advantage of this pricing is that it encourages customer loyalty, and allows resellers to apply their own markup to the product. This can be particularly important to the latter groups that incur costs to source the product and need to recover their expense and time.

Single Versus Multiple Payment Option Pricing.

Single versus multiple payment option pricing, which is popular with TV shopping channels, is a technique designed to make a higher price appear low so that the customer believes the product to be more affordable.

The advantage of this method is that sales volume increases because of perception of affordability. The disadvantage of the method is that revenue is not realized upfront and there is a risk of default on payment.

Retailers can use third-party financiers (such as Esanda or GE) to cover the payment plan, but there are additional costs incurred by the provider with this process that need to be recovered through pricing.

Most commonly, a marketer will set up a direct debit or credit card payment plan to manage this type of pricing structure.

Getting Creative on Price

For many services, they can adapt the pricing techniques that are used in the product environment. For ideas about what those techniques are, please refer to both the Making Prices Easy to Compare and Making Prices Difficult to Compare posts.

But, for example, a service can bundle its services together as a package. An example of this might include a bundle of beauty treatments offered for a fixed package price.

Services can be bundled with products. For example, the optometrist that performs eye tests also provides the spectacles a client requires. A hairdresser that cuts your hair will offer you shampoo and treatments to go with it. This enables a service to add to its margin through cross-selling mechanisms.

Tiered pricing structures (such as those described above) can be adapted to the service sector. For example, training programs delivered in modular formats and entry into various levels of membership clubs. Real estate agents charge their services this way (a typical commission structure) where how much you pay depends on how much your house is sold for.

Pricing services in the opposite way to competitors can also be applied here.

In Australia, recruitment agencies are paid using a hybrid commission model that is based upon the salary of the employee recruited. Many smaller businesses hate this pricing model since they don’t know what to budget for. Experienced recruiters know how long this process typically takes. There is no reason why it couldn’t be fixed fee. It just isn’t done that way at the moment.

Again the Value Ledger, also covered off in Making Prices Hard to Compare is a tool that service businesses can use to show value-for-money and justify higher prices.

Getting creative on pricing means looking at the models and techniques that are available to you and seeing how they can be adapted for your own business. Being creative also means breaking free of how competitors price. A departure from what’s normal can be a great story to tell particularly if customers don’t like the industry pricing methodology.

Services can offer discounts – although discounting a service that is dependant upon brand credentials can carry risk relating to the perception of your brand. The customer thinks “if you’re so good, how come you are so cheap?” It is better for a service to offer a customer a voucher to spend on the service as a reward for their business already done. This can be presented as a nice surprise for a customer who is not expecting it, and encourages the customer to return to your business and spend more.

Like this topic? Check out lots of other Pricing posts.

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