How To Price Your Services Effectively
Figuring out the pricing of services can be overwhelming and challenging for anyone, including bookkeepers. Keep reading to discover the different pricing strategies that may work for your bookkeeping business in this post.
Pricing of Services Made Easy and Simple in 3 Steps
Step 1: Know the Basics of Pricing Strategy
Before we talk about the pricing of services, let’s discuss an important concept — pricing strategy.
What is pricing strategy? Pricing strategy refers to the process of setting the best price for your product or service so you can be competitive in the market. Also known as “pricing strategy marketing,” pricing strategy is one of the essential elements of a marketing mix.
What is the marketing mix? It is a model businesses use to promote and sell a product or service. It has four elements, called 4Ps, which refer to product, price, place, and promotion.
A business’ pricing strategy can change over time, depending on the following factors:
- Market segment
- Present and projected sales
- Kind of service you’re offering
- Market conditions
With these in mind, it’s also possible to implement different kinds of pricing for services. For example, you may charge less for new accounts, and charge a retainer for existing ones.
Regardless of which service pricing strategy you plan to use (and you’ll know more about them later), the goals remain the same:
- You make a profit.
- Your bookkeeping business offers something of value that your clients are willing to pay for.
- Both you and the client are happy with the price.
Step 2: Explore the Different Ways of Pricing for Services
Now you have some idea about pricing strategy marketing, it’s time to delve into your options. Here are some of the most common ways on how to price your services:
- Competition-based pricing
- Cost-based pricing
- Project-based pricing
- Fixed pricing
- Value-based pricing
This type of pricing strategy considers the ongoing market rate. In other words, how much are your competitors charging for their bookkeeping services?
Using a competitive pricing strategy may be helpful when you’re trying to capture more markets. With this strategy, you’ll learn the price point your potential clients are willing to pay.
However, there are downsides to competition-based pricing. One of these is that it can ignore other essential factors in pricing, such as:
- The value of your service
- Costs of running a business
- Training and education you have
It’s also challenging when you’re offering different kinds of accounting or bookkeeping services. Lastly, you run the risk of getting a low profit when you compare your business with the wrong competitors.
Another way of pricing of services is by focusing on the cost, which refers to all expenses you incur in providing bookkeeping, such as:
- Time or labor
- Overhead like electricity, phone, and water
- Rent (if you’re using a home office, you can get tips from the IRS on how to calculate this amount)
- Software (if you’re using any)
- Office equipment and supplies, along with their maintenance
While price formula under cost-based pricing can vary, you cannot use product cost formula, where you add all costs and divide the sum by your output to know the cost for each.
That one works best in manufacturing. Instead, you can use the target cost formula, where you deduct the total costs from your desired profit to come up with a price.
Cost-based pricing is perhaps one of the oldest strategies, but it comes with few limitations:
- It doesn’t consider the overall value of your service.
- It’s possible you’ll arrive at a high cost, an amount your potential clients won’t be willing to pay.
- There are also factors that can affect cost that can change over time.
Some bookkeeping clients are seasonal and only require your services for a particular project or time frame.
For cases like these, you can charge using project-based pricing. You set a flat fee for your entire work for the project.
Since it’s fixed, it helps simplify the pricing of services. It also leaves out possible “surprises” when you end up charging more than the client is willing to pay.
To come up with the best price using this strategy, you have to consider the following:
- Labor and other related costs
- Level of difficulty of the task
- Urgency, deadline, or priority
- Actual kind of work to render
- Nature of your client
Another competitive pricing strategy is fixed pricing. In this strategy, you’ll set a specific amount for your service according to your criteria
Usually, bookkeepers charge an hourly or a fixed rate. Each has its pros and cons:
- An hourly rate may be unfair to you if the job is challenging. It also doesn’t account for the value of your service.
- A fixed rate may not consider the time it takes to actually finish the job.
On top of the fixed price, it’s not uncommon for bookkeepers to charge a retainer fee. This is the amount the client pays upfront to use your services.
Retainer fees can also work in project-based pricing, since you can use a percentage of the total project cost. It can also be a flat rate you charge to the client.
You can also learn how to price a service by focusing on value. In this case, the focus is on the customer’s perceived value of your service.
How much does the customer think you’re worth? This is a good strategy for new products or services that are about to be introduced to the market.
However, for those that aren’t new and already have competitors, the customer’s perceived value may vary because they have something to compare it to.
One thing you have to consider when using the value-based pricing strategy is how much customers are willing to pay for your service. Consumers can set thresholds, and when you set higher prices, they may forego your service and choose another.
Aside from competition, here are other factors to consider when using the value-based pricing strategy:
- Length of experience
- Education and training
- Network or association memberships
- Tools used
- Other intangible assets such as soft skills
Step 3: Determine Your Price Structure
Once you’ve figured out which strategy to use for the pricing of services, it’s time to deal with the price structure. How do you intend to offer this cost to your clients without scaring them away?
Here are some of the well-known methods:
- You can offer discounts to your loyal clients. They help generate repeat transactions or projects.
- Explore the freemium model, where clients pay for only a portion of your service. For example, you may assess a project for free.
- Another is price skimming, where you enter the market at the highest price you think customers can afford, and then taper it over time. This is a good approach when you have excellent value or want to attract high-paying clients.
- You can also provide a scarcity pricing structure. For instance, you may offer your services cheap when clients sign up during a certain period.
- You can also opt for a price difference strategy, where the same services can have various prices according to the market. You can charge less to a startup compared to what you’ll charge a bigger firm.
Bonus: Identify Your Demand Elasticity
This step on the pricing of services is optional, but it may still be vital.
Demand elasticity is the concept that talks about how a market is also sensitive to the movements of prices. The goal is to make your demand inelastic, which means you shouldn’t be losing revenues and clients when you change your price.
In manufacturing, a percentage that’s less than one means your market is inelastic. The formula is simple:
- Know the percentage of change in quantity ordered (previous units sold less present units sold then multiply by 100).
- Determine the percentage of change in price (previous price minus present price divided by the previous price).
- Divide the answer in step one with that of step two.
This concept can help you identify the quality of clients you gain or retain after you’ve changed prices. It may be tricky and risky, but it helps you determine the highest price your clients are more than happy to pay for your services.
When it comes to figuring out the pricing of services, there’s no one price that fits all. At the end of the day, just aim for a win-win situation where both you and the customer are happy with the price.
Use the information above to guide you through the process. For more support, check out bookkeepers.com.
What do you think is the best strategy to determine a service price for bookkeeping? Share your ideas in the comments section below!