Article by Jeanmarie Tenuto
As a consultant, you may have very specific questions regarding pricing for your services. You want to be fair and reasonable but also strategic. There are two main components behind pricing strategy. The financial side and the marketing perspective. Keeping the two isolated for the first stages of analyses will help but bringing the two together in the final outcome will be most beneficial. Here we briefly discuss three common pricing models and influences. For further assistance, related to pricing, we recommend you contact your local NJSBDC.
Five Influencers to Pricing
Scope of Work
Revenue and Value
Risk and Transparency
Three Common Pricing Models
Cost-based pricing takes into account overhead and variable costs. Identifying your true cost is an essential exercise. It is the amount you pay as a business owner to ‘be in business.’ It includes the costs related to office rent, salary, equipment, accountant and attorney fees and other factors. The total figure is the absolute minimum known as the break even. The total figure can then be extrapolated by the year, month, day or hour. The next step is to calculate the ‘billable rate.’ The price markup, typically a percentage of cost, translates into the profit. It is important to stay grounded in this process because not all ‘work time’ is dedicated to billable time.
The market-based pricing strategy reviews the competition and develops a better understanding of the landscape, overall. Cost-based pricing shows the cost of operating the business. This figure (or its range), once finalized, can be compared and then scaled against the external environment. To understand the external environment, digging in and researching will most likely, take some dedication. The price structure of the competition, particular inside the service sector, may have elements beyond face value. To learn about the competitors and the market’s tolerances as with range and willingness to spend, using critical thinking techniques, asking the right questions and locating reliable information are indispensable.
Value-based pricing is the more sophisticated method for developing a strong pricing strategy. It blends the financial aspects with marketing ultimately linking cost with market validation. Market validation combines perceived (or estimated value), from the customer’s point of view rather than solely on the cost of the services plus the mark up. The psychology of pricing examines trends, marketing practices, different generation’s attitudes towards value, etc. Perceptions of price can also set its success or failure. In some circumstances, the more expensive, the more valued and the less expensive, the less valued. Value based pricing strategy and method should only be used if:
- The scope of the project is clearly defined.
- The solution you are providing has a proven track record of success.
- A strong Return On Investment for services delivered can be demonstrated.
- A direct relationship with the buyer is established on the project.
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