Customers buy services that provide value, yet service pricing is often a struggle to find efficiencies and cost reductions that enable price reductions. Successful service pricing, on the other hand, has very little to do with costs.
Services can be anything from an airfare to consulting to banking, and each service business has its own way to price its offerings. Simple and repetitive services are often priced close to cost. More sophisticated services are often priced based on value – as perceived by customers. But does it have to be that way?
Some industries are ahead of the game.
The travel industry abandoned cost-based pricing many years ago. Everyone has accepted that the price for car rentals, hotels and flights change continuously and dynamically according to the current supply and demand for the services provided. Taxis are a very similar service, yet they use a simple cost plus pricing model.
Pricing for facility management services is rather complex; however, it is most often a pure cost plus exercise based on an ABC analysis (Activity Based Costing). Management consulting services are often priced based on the perceived value of the service.
Why do these different service businesses use such widely different approaches to pricing? What’s the best way for your company to price its services to maximize profitability?
Determine the true value of your services and have the courage to charge based on that value.
Profitable pricing for services is a matter of proving the value provided to your customers and having the courage to set prices accordingly. The most successful pricing models for service businesses are based on an excellent understanding of what customers are willing to pay and how they perceive value.
As costs often are highly variable in a services business, it is of course important to monitor and manage costs. However, cost should not be the primary determinant of price.
PriceGain works with service providers in B2B and B2C markets to create and implement pricing strategies and tactical changes that significantly improve profitability, including:
