How to Correctly Price Your Services as a New Small Business

HAZEL RAOULT

9 min

·

July 21, 2023

Determining the right pricing strategy for services can take time and effort for any new small business. The right price point is a significant component that can help create the success formula for your business. It can dictate profitability, influence brand perception, articulate value, and position your business within the market. 

If your product or service is consistent and reliable, you need help generating a profit by pricing it right. Making your new small business profitable requires a more intelligent approach which involves critically evaluating your pricing model about your expenditures, your offerings’ value, and the overall worth of your service.

Consider pricing as an element to stand (and even fight) the competition while benefitting your bottom line. Let us first consider key aspects that your small business must consider pricing your services.

Planning to start a business? Don’t miss out! Dive into our article ‘10 Most Profitable small businesses‘ and get a head start on your entrepreneurial journey. Read now!

Key aspects to consider when pricing your services right

Pricing is a strategic compass that guides your business along the correct path, mitigating the uncertainty associated with custom quote determination and ensuring your fair and competitive price point.

A pricing strategy encompassing subjective and objective aspects can facilitate a more holistic perspective. For starters, you first need to understand what an invoice contains and what it looks like. And then understand how the pricing works with your invoicing practices. 

Invoice with

Certain key factors, such as the ease of invoicing, its clarity, and the specifics of your pricing structure, should remain pivotal to devising the fiscal framework for your services. You can also check out what a professional invoice templates look like and consider implementing some of its design and content elements. 

Check out the below factor that needs thorough consideration before pricing your services.

Targeting a revenue

First, consider how much your clients perceive the worth of your services in a commercial space. Knowing the current market rates for similar products or services is crucial. 

Think of asking the following questions.

  • How does your enterprise fare in this competitive landscape? 
  • Do you portray yourself as a high-end provider? 
  • Are you recognized for offering superior value at a reasonable price? 
  • Or do you tread the middle path, emphasizing the quality of your product over its cost?

Grasping the nuances of your financial situation is critical. Should this area seem daunting, always stay willing to leverage the help of financial experts.

Evaluating the market value of your services

An important step in business is to assess how your product or service is perceived in terms of value in the current market. Try familiarizing yourself with the going rates for comparable products or services.

Here, ask the following questions:

  • Does my business model place you as a high-end provider? 
  • Is my business recognized for delivering the best value at the most affordable price?
  • Or do I need to operate in a middle-ground position? 

The answers to these questions will help you understand the market value of your services and how to position your business effectively.

Knowing where you stand can help you identify growth opportunities or improvement areas. If your products or services are priced too high compared to their perceived value, it could be time to reassess your pricing strategy or invest in improving the quality.

Services of business

Managing invoices

Invoice management is critical to maintaining a healthy cash flow for any business. It involves generating, sending, tracking, and processing invoices efficiently. Effective invoice management systems will require leveraging a billing platform to ensure timely payments, reduce manual errors, and provide valuable insights into your business’s financial health.

Invoicing schedule: It’s essential to decide on the terms of your invoicing schedule. You could invoice immediately after providing a service or have a monthly invoicing schedule.

Payment terms: You’ll complete a sale under these conditions. Examples include immediate payment upon receipt of the invoice, net 30 (payment within 30 days of the invoice date), and more.

Detailed descriptions: An organized billing will have services, due dates, and other key details described and mentioned in it. This helps the client understand what they’re paying for and can also help avoid disputes.

Invoice software: Utilizing invoice software can help automate and streamline the process, allowing you to create professional invoices and even automate tasks like recurring payment reminders, tracking expenses, etc. You will also use features like customizable templates and integrations with payment gateways to make the payment process easier for your clients.

Streamline your invoicing
with Billdu!

Invoicing, expense tracking, quotes, automation.
Learn why Billdu is one of the most popular invoicing apps in Australia.

Free 30-day trialNo credit card requiredCancel anytime
Billdu invoice maker and invoicing app

5 key steps to consider when pricing your services

Competitively pricing your products and services is crucial for your business’s success and expansion. It goes beyond the simple goals of covering costs and matching competitor prices. Instead, consider several factors leading you to the best possible pricing.

As you go through this maze, you’ll develop a deeper understanding of your company’s inner workings, your location in the market, and the special value you bring to customers. Therefore, covering some of the steps below is ideal when pricing your services.

#1. Run a cost analysis check

The primary task is determining what it will cost to provide the service. Think about the money spent directly and indirectly to estimate your direct expenditures.

Direct costs are directly attributable to the service you’re providing. For instance, if you are in a manufacturing business, this could include the cost of your raw material, machine setup, depreciation, etc.

Indirect costs, on the other hand, are not directly tied to a specific job but are necessary for you to operate your business. This might include transportation, mortgage payments for your factory shed, utility bills, maintaining equipment, etc.

cost analysis check
(Source)

Once you understand your total costs, you can determine how much you need to charge to cover these costs and generate a profit. This process is crucial because pricing your services too low could lead to losses and business instability while pricing them too high might deter potential customers. 

Therefore, thorough financial data analytics, including costs, should help achieve a competitive and sustainable pricing strategy.

#2. Finalize a service pricing model

After performing a thorough cost analysis and gaining insights into your market’s pricing, the next step is to choose the pricing model that aligns with your business objectives. For products, it is either on a retail or wholesale basis and for services, you can choose an hourly or per-project rate. 

Charging by the project in a SaaS billing model can be particularly effective when you have a reliable estimate of the time and resources needed for a service. This method streamlines the billing process, offering clients a straightforward and predictable cost structure, while aligning the pricing with the value delivered by the software solution.

An hourly rate is the most suitable pricing model if your business primarily revolves around your time, such as a law firm or IT services. Another option, which is less widely used, involves implementing a flexible pricing strategy that takes into account the individual consumer’s needs and budget.

Having a well-thought-out pricing strategy is crucial for the long-term success and profitability of any business.

Here are some of the key pricing strategies to consider:

  • Introductory pricing: This method, or penetration pricing, requires setting the initial price point significantly lower to attract consumers and build a strong customer base. It requires gradually increasing the price once you’ve established a substantial market share.
  • Complementary product pricing: This approach requires enticing customers to spend more by offering upgrades, add-ons, or complementary products. It’s a strategic move often involving upselling and cross-selling, maximizing customer value, and improving the company’s overall revenue.
  • Tiered pricing: Tiered or product line pricing involves setting a range of escalating prices for various products. It allows customers to choose a product that matches their budget, needs, or quality expectations.
  • Value-based pricing: This approach, akin to price skimming, justifies a higher price when you possess a distinctive competitive advantage. Research suggests that customers are willing to pay a premium when they find a quality, superior value using a product or service.
  • Time-based pricing: Rather than setting a flat fee, time-based pricing involves charging clients based on the hours invested in providing a service. This ensures your company is safeguarded from low-profit scenarios, especially when faced with numerous customer change requests.
  • Cost-effective pricing: This strategy, called economy pricing, requires streamlining your costs as much as possible to provide your customers with the most affordable pricing. It appeals to budget-conscious customers who prioritize value for money.
  • Emotion-driven pricing: Psychological pricing is designed to trigger an emotional response from the customer. This can encourage customers to make purchasing decisions driven by emotion rather than rational thought.

#3. Decide a profitable markup

With thorough calculations and an understanding of your Cost of Goods Sold (COGS) and operational costs, you’ll better understand the baseline for starting a pricing strategy. Following this, the essential step is incorporating a profit margin, often called markup.

The markup is a surplus amount you add to each transaction to generate a profit. These profits function in several critical ways. 

New small businesses can use it for debt repayment, as income, and cover the various taxes associated with managing a small business. The aim is to persistently generate a robust profit to achieve business objectives.

profitable markup
(Source)

Opting for a fixed amount refers to a predefined profit you intend to make over and above your product costs. Conversely, a percentage implies a predetermined portion of the difference between the product’s cost and the final selling price. 

This methodology can be beneficial when dealing with fluctuating prices. Therefore, small businesses can finalize a standard markup for one category of products and a different standard markup for other product ranges.

#4. Price it smartly to balance between the high and low

Don’t undervalue yourself, but do not be shy about asking for what you deserve. People might not pay it, but you can always drop your costs or bargain with your customers if that happens. 

While starting a new business, one of the most challenging tasks is establishing a pricing strategy for your services. This is a complex exercise, as pricing too low might result in potential customers questioning the quality of your service. Conversely, too-high pricing could make your services inaccessible to many of your target markets. 

Thus, it’s crucial to strike a balance, a sweet spot that reflects your service’s value and matches your audience’s price sensitivity. Here’s how you can price smartly to balance between the high and low:

Understand the market: Start conducting market research to understand the competitive landscape and what your customers are willing to pay. This involves analyzing your competitors’ pricing strategies and identifying the pricing range for similar services in your market. Utilizing a price monitoring tool can streamline this process, providing you with real-time data on market prices and trends. However, as a small business, you can always offer unique advantages (such as personalized service or local knowledge) that may justify a higher price.

Perceived value pricing: Sometimes, pricing is not about how much a product costs to make or how much other businesses charge for similar services. If your service provides significant customer value, you can price higher than your costs or competition. Perceived value can be enhanced through superior customer service, high-quality materials, branding, and marketing.

Price flexibility: As a new small business, flexibility is one of your greatest strengths. You’re not tied down by larger companies’ extensive price catalogs or bureaucracy. This helps small businesses adjust prices based on feedback (more on it later) and results without causing much disruption. 

Setting the price

#5. Validate whether the price holds

You’ve done the groundwork; now come up with a pricing. The first thing to do is establish a starting point.

Let’s run through an example to illustrate our point ̉by considering the case of running a small artisanal bakery.

Suppose you’re making a batch of whole grain loaves, which costs you $5 for the ingredients (Costs). You’ve decided to mark up the price by 100% (Markup Percentage) to cover your labor and make a profit.

To calculate the markup amount, you’d use the formula:

Costs x Markup Percentage = Markup Amount

So, $5 (Costs) x 1 (100% as a decimal) = $5 (Markup Amount)

Add the costs and the markup amount to get the baseline price:

$5 (Costs) + $5 (Markup Amount) = $10 (Baseline Price)

Next, you must factor in overhead costs, like utilities, rent, and equipment depreciation. Suppose these costs represent 20% of your pricing structure (Overhead Percentage).

You’ll calculate the overhead contribution by multiplying the baseline price by the overhead percentage:

$10 (Baseline Price) x 0.20 (Overhead Percentage) = $2 (Overhead Contribution)

Lastly, add the baseline price and the overhead contribution to reach the final price:

$2 (Overhead Contribution) + $10 (Baseline Price) = $12 (Final Price)

Therefore, to cover your costs, contribute to overheads, and ensure a profit, you should price each whole grain loaf at least $12.

Pricing strategy for bakery

A few of the testing methods include the following: 

Split-testing subscriptions: Think about implementing subscription split-testing by offering the same subscription plans at varied price points to different groups of users and observing their reactions. For instance, employing A/B testing allows you to compare two different prices for the same subscription and gauge user responses to each. This method can help you determine the optimal pricing model to maximize profit.

Early bird discounts: You could offer your services at a discounted rate to early adopters, which can encourage uptake and gather useful feedback. However, it is crucial to emphasize that these are “early bird” discounts so that customers are prepared when prices inevitably rise to their normal levels.

Beta testing: An alternative approach could be beta testing, where you offer your services to a select group of users before the official launch. This lets you gather critical feedback on whether your pricing strategy aligns with market expectations and helps you determine any necessary adjustments before the full-scale launch.

Wrapping Up

A new small firm must understand its costs, market circumstances, value proposition, and pricing strategies to price its services effectively. The price establishment process needs regular revisions to market developments, customer input, and your business’s changing demands.

It’s crucial to remember that pricing is not a one-time event but a dynamic and ongoing process that needs to be revisited and reviewed periodically in light of changing market dynamics. Do not undervalue your services due to fear of overpricing; the value you provide should be reflected in your prices. Simultaneously, ensure your pricing strategy aligns with your brand image and business objectives.

Get ahead in business with Billdu! Fast, accurate billing for your services.

Unlock the future of efficient invoicing with Billdu. Perfect for businesses seeking fast, precise billing solutions. Leverage our platform to ensure your services are billed promptly and accurately. Gain the competitive edge with Billdu!

Free 30-day trialNo credit card requiredCancel anytime
Billdu invoice maker and invoicing app

Looking for Downloadable Invoice Templates?

Wondering what should an invoice look like? Look at our free invoice templates in a number of formats
HAZEL RAOULT

Tech writer at PRmention

Hazel Raoult is a freelance tech writer and works with PRmention. She has more than six years of experience writing about ecommerce, technology, entrepreneurship, and all things SaaS.