Key takeaways:

• Service providers often struggle with setting prices, afraid that a high price will scare off potential customers, or charge too low a price to create a sustainable business. 
• Small business owners need to set a pricing structure that helps them attract their ideal customer, while meeting their own financial goals. 
• There are a number of pricing strategies that can work, based on the type of service you offer and the value you provide. 
• Research pricing strategies and revisit them periodically to meet your business goals. 

The story goes something like this: A man calls a plumber who comes out to fix a problem with his pipes. He listens for a bit, bangs on a pipe several times, gets things flowing again, and then charges the customer $200 for the brief visit. When the customer protests the price and asks for an explanation, the plumber writes:

Hitting the pipe with a wrench: $2

Knowing to hit the pipe with a wrench: $99

Knowing where to hit the pipe with a wrench: $99

Fact or fiction, this story illustrates a common challenge entrepreneurs face when pricing their service-based business. How much should you charge? 

There are many pricing strategies, and each one has its pros and cons. Here we’ll cover 9 of the most popular pricing strategies to help you find one that works for your business. 

How Do Pricing Strategies Work?

Pricing strategies provide a framework to help you understand common approaches to setting prices. There has been an enormous amount of research into pricing methods. 

As a result, there is a wide range of both service and product pricing strategies, and many can be adapted to either type of business. Before you can choose a pricing strategy, though, you need to think about your objectives. 

“Two different companies that have exactly the same product, exactly the same market, and everything is the same…except they are trying to achieve different things. Their pricing strategy should be completely different,” says James Wilton, managing partner at Monevate, a pricing and monetization consulting firm, in an interview on the Pricing Talk podcast.

Why Consider Pricing Strategies for Your Service Based Business?

A pricing strategy may not seem necessary, but it can help you build your brand. While many might think your brand starts and stops at design and marketing, it is built on the entire experience customers have with your business. 

This means that the price customers pay for your business’ services reinforces or contradicts this image they have of your brand. And that goes on to influence other factors such as their feelings and loyalty to the brand. We’ll share a concrete example of this in a moment. 

Because pricing correctly is so critical, you need a service pricing strategy that is in alignment with your overall business strategy and will help build the image you want for your business in customers’ minds. 

1. Competitive Pricing

A competitive pricing strategy involves setting prices based on what competitors are charging for similar services. This doesn’t necessarily mean you should price your services the same as your competitors, or try to undercut them, but rather you use them as a guide for your own pricing, whether that is having a similar, higher, or lower price. 

For example, you may look at your competitors’ pricing and realize you are offering a more basic service, don’t have as much experience, or that you may be able to grow your customer base quickly with a lower cost service.

2. Value-Based Pricing  

Pricing services based on the perceived value to customers rather than just costs. In order to use value-based pricing you have to be able to assess what value customers feel they are getting from the product. 

Oftentimes there are higher marketing costs associated with this type of pricing strategy because you not only have to discover customer perceptions, but you need to make sure you are constantly reinforcing them as well. For these reasons it isn’t often a good pricing strategy for low cost services but can be very good for higher end and/or unique services.

“Price based on the value of your expertise, not the time spent” suggests Belinda Rosenblum, CPA and profit strategist for Own Your Money, which she says “helps service-based business owners grow a more profitable business that gives them the life they love.”

“If something comes easy to you.” she says, “then it is more likely in your zone of genius so you should be charging more for those services.” 

3. Bundle Pricing

Bundling pricing offers multiple services packaged together at a discounted rate compared to purchasing them individually. This can increase revenue for the business, while also making customers feel like they are saving money even if they are spending more than they otherwise would have. 

Depending on the service, you may also be saving time on your end. For example, a waxing salon may bundle eyebrows and upper lip together, which allows them to use the already warmed wax for another service and also bring in a few extra dollars.

4. Good, Better, Best Pricing 

Providing tiered service options at different price points to appeal to various customer segments. This may not work for all service types, but often can be effective. An example would be car washes where there are several tiers of services that offer something slightly different for each customer. 

The business owner needs to make sure that there is enough value in all the tiers to ensure that customers have a reason to go for the higher tiered pricing when they can.

Rosenblum shares an example of a client who, as an executive coach and speaker, was asked to submit a proposal for a presentation to their leadership team. 

“She proposed two options: $8,000 for just the presentation or $12,000 for the presentation plus two follow up calls to ensure implementation,” says Rosenblum, adding that both packages were priced fairly similarly, which “generally encourages the prospect to choose the higher option if it has a lot more value and items they would specifically want.” 

Rosenblum believes that if her client had only proposed one of the two options, she may have lost the opportunity since the only options were “yes” or “no”. But instead, she was able to sell the higher priced-package.   My client was thrilled because she preferred to do the entire $12,000 package to create an even better transformation for the company,” she explains.

5. Hourly Pricing 

Charging clients based on the time spent providing the service is a popular approach in some industries. However, charging an hourly rate also has challenges. 

First, customers will likely want an estimate/quote and it can be hard to estimate the number of hours a job will require, especially with a new client or a challenging project. You’ll need to make sure you communicate with the customer if you are going to reach the upper limit of the quote or exceed it, so they don’t feel that they are not being ripped off or just surprised with the bill at the end. 

Many service based businesses use forms of hourly-based pricing, including attorneys, electricians, therapists, bookkeepers, etc, but if you are outside fields where this pricing strategy is common you may need to invest more time into your marketing to convince people that not only is your business better than competitors but that your pricing strategy is better as well.

Another trap: just charging for the time spent without taking into account overhead costs. Your business incurs other direct and indirect costs that must be taken into account. 

Loper offers this suggestion: “A recent Side Hustle Show guest gave me his “3x Rule”: you should aim to charge 3x your labor costs. This gives you margin for marketing, overhead, and business profit.”

6. Premium Pricing

Charging higher prices to convey high quality or luxury positioning is known as premium pricing. Oftentimes with premium pricing companies need to spend a lot of money on marketing to really create and maintain this high end image of what this service provides. If successful, it often allows for very high margins.

Here’s an example: 

“I work with a student that provides finely crafted desserts,” says Teresa Quinn, entrepreneurship and innovation program director with the Clark University School of Business Director of Entrepreneurship and Innovation. “Although it is a product, she provides an identifiable service that sets her apart from her competitors.  She delivers and lavishly sets up, which truly compliments her product. When she delivers, she matches the set-up with the higher quality look of the dessert. 

“Her stands are tiered with  exquisite presentation. She takes pride in the presentation. However, she is leery to price higher than comparable competitors as she is afraid she will out-price herself from catering jobs.” 

Quinn has mentored her to remember their customers are looking for a “product/service will impress their guests, thus, the added service of presentation is needed.” This allows her to set her business apart from competitors, but, as Quinn points out, “those extra steps cost (more) in time, labor, and products.”

7. Promotional Pricing

Promotional pricing involves offering temporary discounts or special deals to attract new customers. Promotional pricing may involve lower profit margins or at times even negative profit margins if a company believes it will help with their overall strategy. 

Businesses that pursue this strategy need to be careful as it could hurt the overall image the company is pursuing, or it could attract those not in the ideal target audience.

8. Dynamic Pricing 

Adjusting prices in real-time based on demand, market conditions, or other factors is known as dynamic pricing. Because dynamic pricing is based on several different real-time factors it is often easier to implement for services booked online. You will just need to make sure that you have a system that can keep up with these changes and adjust the prices accordingly. 

You may have experienced this yourself when you’ve looked at pricing for a vacation rental or tour. The price will often go up in a busy season, but discount when demand is low. 

9. Cost-Plus Pricing

Adding a markup to the cost of providing the service to ensure profitability. It is a relatively simple strategy in theory but it can still be challenging for businesses to know how much they should add onto the cost of the service. 

Plus there may be different willingness to pay for different services which can be hard to adjust for with this type of pricing strategy. 

One mistake business owners with service-based businesses commonly make, says Rosenblum, is “including too much. Then you resent the work, overwhelm your buyer, and end up way underpriced.”

“More isn’t always better,” she adds. “Less is actually more as your buyer is likely already overwhelmed.”

Which Pricing Model Is Best for Your Business?

The pricing model that is best for your business is dependent on a lot of factors. The key is to think about it carefully before you launch, rather than just hoping for the best.

“Research!” Quinn advises. “Do your research on your direct and indirect competitors. I have not found a tool that can out do old fashion research.”

Here are some of the factors you’ll want to think about: 

Strategy

Your business plan and strategy helps serve as a guide to the right pricing strategy. If your strategy is to provide affordable lawn mowing service, for example, you are not going to pursue a premium pricing strategy. You may use competitive pricing or a cost-plus pricing strategy. 

But if you are a high-end landscaper, you’re less likely to offer promotional pricing for fear that it could damage your brand and attract those outside of your target market.

Competitors 

No matter what pricing strategy you decide to go with, you should know who your competitors are, what they provide, their target customer, etc. You do not need to price at or below your competitors to be successful though. 

“The most common mistake is probably pricing too low,” warns Nick Loper, founder of Side Hustle Nation, which helps people find legit ways to make extra money. He offers a simple formula for a service-based business owner. “If you’re too far below the competition, customers will start to wonder about the quality of your service.”

He shares this example from the Startup Nation Podcast:  

“Carter Osborne started out charging $75 an hour for his college admissions essay consulting service, but the going rate was actually much higher. Today he’s at $225 an hour and customers are far less skeptical. It’s interesting how powerful an authority signal your price can be!” 

Sector / Industry

The sector your business is in can also have a very significant impact on your business’ pricing strategy. Consumers will have different expectations based on your industry, which in turn can impact all pricing strategies, particularly those such as dynamic pricing and hourly-based pricing. 

Customers for a taxi or rideshare business will already be expecting dynamic pricing, for example, but someone taking an art class would most likely expect to pay a flat fee (though the rate may vary depending on the experience of the instructor and other factors). 

That doesn’t mean you can’t go outside industry norms, but if you do, understand you may have to spend more time explaining why your price is worth it. 

One way to counter potential objections? Niche down, Rosenblum recommends. “When you try to sell to everybody, nobody feels like you’re actually specifically serving them. As you get more specific about who you serve, you also create more value in your service, as it becomes more relevant and supportive of the unique challenges of your clients/ students.”

Value

With a service-based business, you’re often selling results, whether that’s a clean home, a delicious catered lunch, or an accurate tax return that minimizes the amount of tax you’ll pay. You need to be able to understand the true value your business provides. 

Here’s an example of how Rosenblum approached her pricing:

“I do a ‘top down and bottom up’ approach. First, bottom up. I assign value to each item included in the package and then add up all of the value included. 

“Second, top down, based on the price that I want to charge, am I creating at least 10x the amount of value? If not, what else could I include that would be high value for the client and improve their speed to result and increase their level of ease and convenience? 

“Then finally, I did review the price against other programs in my industry for price and value created.” 

For her Cash Flow CEO program she landed on the current price of $1995. She says she can point to “over $25,000 of valuable components for an overall transformation”. Her clients are tapping her expertise to develop a service-based business they love, and she’s doing the same. 

How Nav Can Help

Pricing your service or product is an important key to building a financially healthy business. Cash flow is another. Managing your cash flow can help you sustain your business through the normal ups and downs of running a business. Nav helps you manage your cash flow and credit together, all in one place

Learn how to establish a strong business credit history. And when you need financing, Nav can help you find the right small business loans and business credit cards.