To put it simply, a financially sustainable business is the one that makes a profit. If you want to run a successful business, make sure that the prices for your services are correct. Incorrect pricing may lead to problems with cash flow and eventually bring the company to bankruptcy. Hence, setting the right price for your what you offer can go as far as saving your business from failure.
You can come across different approaches to pricing in the modern business. However, there is still no general advice on how to price every product or service in the best way. Putting a price on the service depends on a number of factors, but the basic requirement is that the price should cover at least your costs in order for you to be able to reach the break-even point for business sustainability.
Pricing your services is not the same as pricing products.
In fact, there are 2 possible scenarios in which you can make a mistake in pricing your services: you may either underestimate or, in rarer cases, overestimate them. Bear in mind that pricing your services is not the same as pricing products. Establishing a price of a service is a more subjective process. In most situations, you have to consider selling the value of the service to a customer, which is more complicated to calculate in contrast to calculating the cost of a product. Here are 3 methods to set a fair price for your work:
1) Сost-plus basis
It is the most common method to set a price for your service. To define the costs, you need to figure out the direct, indirect and fixed costs. Direct costs include things such as materials used, sales commissions, and transportation. Indirect costs, on the other hand, cover expenses associated with office equipment rental, desktop computers, or cell phones. Examples of fixed costs include amortization, insurance, salaries, rent, etc. It is crucial to classify and manage all the spendings in order to understand the efficiency of your business.
2) Keep an eye on your competitors
You can refer to your competitor’s prices in order to guide pricing politics of your business. This information can be easily accessed online, received from your friends or colleagues, calculated from the available statistics, etc. This method can be both effective and ineffective at the same time. On the one hand, the price is determined by the market and has to meet the eagerness of the buyer to pay the established sum of money for your service. On the other hand, the potential buyer can ignore the price of the service and consider other details when making a choice — the quality of the service, testimonials, customer feedback, unique offers, or something that else more valuable to him. That is why you need to think twice before you decide to adopt this method in your business.
3) Create your values
This one is the most subjective way to evaluate the price of your services. It’s important to understand that providing services is more than just being paid for your time and effort. It is also about the price that a customer is ready to pay for the value your service can give to him in the long run. For example, a consultation from a famous lawyer can cost you up to $750 per hour because of this. Evaluate all the benefits your business can give the customer and set up a fair price for your services.
Setting the price only to get a profit and not taking customer’s needs into account significantly decreases your chances of getting an advantage over your competitors and the opportunity to sell for a price above the average market prices. You should use the value principle to price your services correctly in order to run a successful business.
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