Pricing services: the role of competitors
Setting the right price for your service is a complex task. If you charge too little, you'll lose out on profit or might even make a loss, but if you charge too much, you can price yourself out of the marketi. This is mainly because of two factors:
1. If you ask for a price higher than the amount the customer is willing to pay, no one will buy your service. Price sensitivity can vary by product or service, channel, geography, and customer segment over timeii.
2. If your price is higher than your competitors' price, the customer is very likely to buy from your competitor instead of you.
What you need to know to price your service
The price of the service you offer has to cover costs and make a profit. It's vital therefore to understand all the costs to provide a serviceiii. These costs may include utilities, tools and supplies, administrative costs, travel expenses, rent, wages, and insurance.
Services are generally time-based, charging often by the hour, or with hours built into a fixed price. Based on the maximum hours you can work, your costs and the profit you would like to earn, you can calculate the required charge per houriv. Online tools such as the "Charge per hour" calculator (page 4) provided by the Business and Industry Portal Queensland can help you with this. Just keep in mind that these calculations don't include taxes.
Research your competitors
After you work out how much you should charge, it is essential to factor in how much the customer is willing to pay, and how much your competitors charge. Also, the fewer competing service providers there are in a market (i.e. the less options customers have), the higher the price each is able to chargeiii.
Check your competitors' websites, look at reports provided by industry associations and ask around in order to get a good understanding of how much competitors charge for similar services. Make sure to analyse what are your competitors' strengthsiii: Is it their convenient location? Speed of delivery? Availability? Prices below the average? Good service? Having a clear picture of your competition's strengths and weaknesses helps you set a competitive price for your offering.
A competitive price is "a price lower than that offered by the competitors, or a price made more attractive because of added incentives"v. The pricing strategy you choose for your service mainly depends on your capabilities, skills and resources - factors that impact on the quality of your service.
Offering the lowest price: In order to offer a lower price than your rivals and remain profitable, you need to find a way to keep your costs lower than others. With this approach, it's not the quality of your service that sets you apart from your competition, but it's the price you charge per hour or per service provided. Although this strategy can work to win price-driven customers, it has the risk of that competitors could still undercut your price, taking away your competitive advantage. Moreover, this approach may require you to adjust your prices regularly due to rising costsii. If your research found that some of your competitors already offer very low prices that seem hard for you to meet or undercut, an incentive-based approach may be the better choice for you.
Offering additional incentives: When you follow an incentive-based strategy, you price your service similar to or slightly higher than your competitors, but you have a unique selling proposition that adds extra value, i.e. an incentive that is unique to your offering. Unique selling propositions can be a higher level of expertise, a unique technique, unique tools, or anything else that customers demand and valuevi.
Once you have chosen a pricing strategy, make sure to display your prices correctlyvii. Pricing standards may vary among states, so it is best to visit local government websites, such as Fair Trading NSW, Consumer Affairs Victoria or the Department of Commerce (Western Australia).
Monitor market changes
Your costs, the prices of competitors and market demands can change over time, so you have to monitor trends constantly and adjust your prices if necessary. However, be aware that if you increase your price you will probably need to justify the change in order not to lose price-sensitive customersviii.