In the first post of this series, we discussed the challenges of determining a price for your services. The first and most important part of that process is gathering all the data inputs about your business and the market. Having this information will help you make the most informed decision possible.
Once you have all the inputs, the next step is to figure out how you will structure your fees. Let’s say you have a car service with various types of vehicles (town car, limousine, small bus) for different types of rides (airport transportation, prom night, wine tours).
You’ve calculated your costs for vehicles, fuel, staff, maintenance, and overhead. You understand the value to the customers, and you know the appropriate profit margin for your industry.
How do you take the fee you would charge per service (i.e., prom ride in the limousine) and decide how to you will charge your clients? Consider these questions on how to structure your fees:
Will you charge an hourly rate, a flat fee, or bill clients on retainer? All three have benefits in certain circumstances.
An hourly rate is a good solution when you are selling time - consulting hours, personal training sessions or dance lessons, for example. In the case of the car service, an hourly rate could translate to $75 per hour of use of the limousine.
This rate would give potential customers an idea of how much they might have to pay based on the amount of time they’d like to use the limousine. The customer would like to be picked up at 6 pm for a prom starting at 8 pm, and then leave the prom at 11 pm to be dropped off no later than 12 am. That’s a total of 6 hours at $75/hour, or $450.
Flat fees are great when you deliver a finished product. When having your house cleaned or a website designed, you want to know what you’re paying ahead of time. Having to determine how long it took the cleaning team to clean your house, or waiting on how many hours it takes to build a website makes the cost more variable than many customers are comfortable with.
For the car service, you could also consider a flat fee with specific time blocks. The fee for limousine service to prom, which in this case is the finished product, is $450 for a 6-hour block of time.
Billing clients on retainer works well when clients need to reserve your time in advance for a considerable length of time. For example, a software company may pay a contract developer a 6-month retainer for access to a certain amount of that developer’s working hours for that time period.
The developer will then deduct from the retainer as the software company uses the hours. In the case of the car service, a retainer may not work for a one-time prom ride, but it could work for a business that needs to reserve the car service to give rides to their clients over a year-long period.
Will you charge an up-front payment or have a payment schedule?Requiring some sort of up-front from customers has become an accepted practice for many service industries. If a photographer is going to reserve time for your photoshoot in the next few weeks, or the car service is going to hold a limousine for your prom ride, an up-front payment shows your commitment to follow through with their service.
If you end up canceling at the last minute, the photographer or car service company will keep your deposit for reneging on that commitment. A payment schedule can be a helpful tool when your service has a high cost, needs to be booked far in advance and has a good amount of prep work. Booking a photographer for your wedding is a perfect example.
Photographers are in demand and generally don’t have last-minute availability. They also have high rates for weddings, given how much time they expend and the number of photos involved.
Let’s say you book a photographer a year in advance for your wedding, and the photographer quotes you $8,000 for engagement photos, bridal portraits, and day-of wedding photography. The photographer provides you with a payment schedule that includes an upfront payment and 5 additional payments at specific milestones, with the last one due the day of your wedding.
A payment schedule provides benefits to both parties - it allows the customer to break up the cost into affordable chunks and allows the business to receive a series of payments while work is being done.
Will you have a fixed rate that applies to all customers, or will you allow each customer to negotiate on price? Having a fixed rate or variable price policy is definitely dependent on the market you are in. For many service markets, pricing is readily available online for all to see.
Customers can search for the words “car service” or “wedding photographer” and find various businesses and their associated rates. In those cases, fixed rate pricing is the best option in order to be transparent with all customers.
In other markets like consulting or web design, every project is unique and different. These differences can warrant variable pricing with any given customer.
What are your competitors doing? Take a look at how other businesses in your industry are charging. It may make sense for you to structure your fees the same as your competitors’, in order to make it easy for customers to compare.
There will always be slight differences from one business to another, so remember to differentiate your service if your price is slightly higher. What additional value do you bring to customers that other car services don’t?
Do you include complimentary beverages for your guests, a 15-minute courtesy timeframe if guests are late, or maybe 10% of their next ride if they refer you to a friend? On the other hand, you might decide to structure your fees in a completely different manner to differentiate yourself from the competition.
If all other car services are charging per hour, does it make sense to charge a flat fee instead to reduce the variability of customer cost? Think about examples of price differentiators in your experience as a customer, like Southwest Airlines.
Their tagline has become “Bags Fly Free”, and that differentiates them from other airlines. Bags are not really free - they’ve just accounted for the cost of bags in the cost of your ticket. The way they framed it makes you feel like you are getting something extra.
Congratulations! The answers to all of these questions make up your business's pricing strategy. And remember: this is a process of trial and error for all businesses.
As you experiment with new pricing, keep track of your successes and failures and any feedback you receive from prospects and customers along the way. You can use this data to constantly refine your pricing strategy.
If you’re getting zero pushback on the price you are offering, consider incremental percentage increases for the next few new customers, the next quarter, or on a timeline that’s relevant to you. If you’re being turned down regularly, try to get feedback regarding what your prospects would be willing to pay.
As time goes on and you hone in on the right price for your business, remember to regularly review your financial statements, keep track of your competitors, and ask for feedback from customers. All of these sources can provide you with reasons to increase your price over time.
If your costs have increased, your competitors have hiked their rates, or your customers indicate a new way you are providing additional value, you may consider a price increase. As you plan for price increases, always make sure to keep your customers informed. Customers appreciate advance notice and any details you decide to provide on why fees are increasing.
Creating a pricing strategy for your business may seem overwhelming at first. If you put in the time and research, you’ll learn important information which can help your business grow and thrive.