How does your service-based organization decide the price of your service?
With a product business, its easier to come up with a price: Take your costs (fixed and variable) add a profit margin , and you're pretty much set. (There are many other factors, but that's the quick and dirty version)
With a service business, it's slightly trickier. What's the best way to determine your price?
- Industry standard?
- Slightly more or less than your competitor?
Today I met with an external management consultant to chat about this topic. One of the tools that he showed me was the Van Westendorp's Price Sensitivity Meter.
The key parts look like this:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Affordable/Good Value)
If you perform the market research, it allows you to understand what pricing model your market will bear. By using a model like this, you can figure out which price will move more units.
There are many other pricing strategies that you can use for your business, depending on seasonality, and other fun factors.
There is no one size fits all pricing strategy, but the model outlined above will give you the best tool to understand what pricing model your market will bear.
A great time to look at how you will maximize your organization's profitability and update your pricing model is during the strategic planning process. Learn more about the value strategic planning can bring to your organization: