How Do You Price Your Services?
Before we can dive into pricing packaged services, it helps to look at the strategies for pricing services in general. It’s inherently difficult to price services, so take time to carefully consider why and how you arrive at your rates.
Pricing can be conceptual or formulaic and will typically depend on your industry, competition, and other factors both predictable and random. While consumer product businesses can price goods based on tangible variables like material expenses, marketing costs, and COGS, service-based businesses tend to struggle with pricing as it’s difficult to quantify everything required to execute a service.
For example, a lawyer meets with a client to discuss their case and charges an hourly rate, but the rate isn’t based solely on their literal time—you’re also paying for years of experience, education, and credibility in their field. How does this lawyer price the value of that knowledge and expertise?
General Pricing Tips
We’ll get into some of the more strategic ways to approach pricing your services, but it helps to start with some general tips.
- Know your costs: Even if you’re not calculating material costs, there are expenses you incur when providing a service. You’ll have your fixed costs like rent and utilities as well as opportunity costs such as lost time completing that service. Try to put a value on these costs so you can determine a price that makes sense.
- Research competitors, market, and customers: Before you price yourself, look at what others charge, assess how competitive your market is, and collect feedback from the target audience. You can use all this information to find a price that will make you competitive and valuable.
- Determine a target profit margin: Focusing on profitability is a wise move for any business owner. Before you set prices, consider what profit margin you’d be happy with and use that metric to create a baseline.
- Create a brand identity: Pricing and branding go together, so knowing your identity before you set pricing can help you to avoid any discrepancies. If you want to offer higher-priced services, then you’ll need to build a brand that conveys that messaging with service quality that matches.
What Are the Different Pricing Strategies?
There are many pricing strategies, and businesses can use a combination of pricing techniques for different situations. We’ll cover a few of the most common pricing concepts below.
Premium Pricing Strategy
Your small business could implement a premium pricing strategy that charges more for a service based on some competitive advantage not easily matched in the market. A business that takes this pricing approach would want to start by assessing market competition and consumer interest in the service. If there’s a way to offer desirable services not easily matched by competitors, then you can succeed with a premium pricing strategy.
An example of a premium pricing strategy could be a sports marketing company with access to pro athletes. If clients are looking to market their product with a professional sports star, they would be willing to pay more to use that agency over an alternative that doesn’t have the same connection.
Penetration Pricing Strategy
Penetration pricing is a strategy that involves setting pricing well below competitors’ prices to drive short-term sales and market share. This type of pricing is often used by new businesses entering a competitive market or by small businesses looking to attract new customers and introduce them to your business.
Businesses—especially software as a service (SaaS) companies—have adopted a variation of the penetration pricing strategy known as the freemium business model. Freemium is a free offer or trial of a service that can help you to capture leads in the hopes of converting them to paying customers.
Businesses like Netflix, Slack, and Canva use this strategy to attract and upsell new customers. Statistics show that businesses convert between 2% and 5% of their freemium users into paying clients.
Small businesses can use penetration pricing or a variation of a freemium model to generate buzz for their services. For example, a new laundromat might offer 3 free dry cleanings to all first-time customers. While the laundromat will lose money on the front end, the idea is that after someone has tried their business, they will become a paying customer.
Value-Based Pricing Strategy
The value-based pricing strategy aims to set pricing on the perceived value of your service. While many pricing strategies are focused on business expenses and market position, this approach is consumer-focused—meaning you charge what the customer believes an item is worth.
The value pricing technique is driven by consumer perception. For example: in Florida, Starbucks sells their small (“tall”) hot coffee for $2.95 while McDonald’s sells theirs for $1.29. While the quality of each is subjective, people are willing to pay more for Starbucks’s coffee because it’s perceived as more valuable. Alternatively, McDonald’s would likely struggle if they priced their coffee above Starbucks’s because consumers perceive McDonald’s as a low-cost dining option. Even if both coffees cost the same for each business to produce, they charge different prices based on how customers value them.
The value-based pricing principle is also affected by external factors. For example, many service businesses have had to change their pricing because of the pandemic. Cleaning services are in high demand and can raise their rates, while entertainment businesses like a local comedy club have had to slash ticket prices to drive any business.
Price Skimming Strategy
The price skimming strategy involves setting a high price of a service when it’s new or unmatched in a market, with the expectation that eventually the market will become saturated and you’ll need to lower the price. Often, small businesses can use the price skimming strategy to capitalize on a trend or spike in consumer demand.
For example, a wedding photography company might be one of a few businesses in their area offering a VW bus photo booth service. They could charge a premium for that service now because there aren’t many alternatives. However, if competitors begin offering the same service, their pricing would eventually drive downward.
Bundle Pricing Strategy
The bundle pricing technique, while part of the larger pricing umbrella, is what we’re most interested in diving into with this guide. Before we do, let’s get to know it briefly. Bundling is a technique used by both big and small businesses to turn over inventory and increase perceived value. The concept involves offering multiple goods or services together in a single offering at a price that’s more affordable than each good or service individually.
For example, a florist might sell a single rose for $2 or a dozen for $20. If the customer were to purchase 12 individual roses, it would cost $24, so purchasing the bundled deal is a better value.
Why Are These Pricing Strategies Important?
The pricing strategies mentioned above are most helpful when considering how much you should charge for your services. While you’ll need to have some pricing identity as a business (i.e., premium, cheap, middling), you should also be willing to adapt and test different pricing strategies and techniques.
For example: a few years ago, the TV show “American Ninja Warrior” introduced the world to a new parkour/obstacle fitness competition. Since then, gyms around the country have developed workouts and obstacles mimicking the show—marketing it as such, too. Gym owners who adopted this trend early were able to charge a premium using the price skimming technique. As more gyms began offering the service, the price has come down.
There’s no specific blueprint to how you should price your services, but keeping the strategies above in mind can provide some direction.
What Are Service Packages?
To begin utilizing the bundle pricing strategy, you’ll need to package your services together before you can price them. The idea behind packaging services is to combine multiple services into a single offer with a defined price for all the services included in that package.
Some businesses will even offer multiple service packages with different offerings included at increased rates. The example below from HubSpot showcases a tiered approach to packaging services. Here, the rate increases along with the services included in each package from left to right.
Source: Marketing Software Pricing, Hubspot.
Why Should You Create Pricing Packages for Your Services?
Packaging services may not seem that important—but from a customer’s perspective, bundled packages can simplify and improve the buying experience. While most business owners are familiar with the nuances of their industry and understand the varying scope of different services, your customers may not.
A freelance writer hired to deliver an article to a client can help us to illustrate this point. The tasks involved in this process could include (with time estimates):
- Article idea development (30 minutes): researching relevant topics for that client and determining the best article topic to move forward
- Outline creation (30 minutes): creating an outline of that topic prior to writing the article
- Article writing (5 hours): the physical task of writing the article
- Adding images (15 minutes): adding images to the article
- Feedback and revisions (30 minutes): allowing the client to review and request revisions that the writer completes
- Uploading and optimizing article (30 minutes): taking the approved article and adding it to the client’s website, including formatting and optimization
- Scheduling and publishing (5 minutes): actually publishing the article or scheduling it to publish in the future
Each step in the process above could be isolated into an individual service and priced based on the estimated time needed to complete it, but pricing services this way can be convoluted and difficult to manage—or sometimes impossible to separate out. Instead, the freelancer would likely bundle these services into a single package.
Packaging services and determining a simple pricing strategy will make it easier for you to manage your offerings—and for your customers to understand them.
Below are some other benefits to packaging services as a small business:
- Productizing your services: Selling a service can be difficult because it’s subjective in nature. While product value is pretty cut-and-dry, most customers struggle to attach value to services until they’ve physically tried them. This uncertainty can leave many customers in limbo. When you bundle and price your services, it conceptually turns your services into a product that can be quickly valued—especially if you create tier-based packages. With no other context besides “Beginner Package” and “Expert Package,” your mind is already framing the value of those 2 bundles.
- Communicating clearly to prospects: Communication and selling go together, so you’ll want to implement messaging that makes it easy for prospects to understand your offerings. Studies suggest that people average roughly 96 seconds on a small business’s website before exiting—don’t waste that time making your prospects bounce around from page to page learning about your services. Instead, create digestible service bundles that will help with comprehension and conversions.
- Providing flexibility: Most service-oriented small businesses have varying consumer profiles: some consumers may have larger budgets, while others may be looking for specific solutions. Creating service packages with tiered pricing allows you to be more flexible with your prospects. You can offer specialty packages for premium customers and a sliding scale that offers opportunities for upselling small-budget customers who choose entry-level packages.
How to Bundle Services
Small businesses can choose between many techniques to package their services. The best way to determine how to build your service bundles is to decide why you’re packaging your services in the first place.
Below are some of the common reasons businesses package services and how they differ.
Packaging Services to Streamline a Process
Think back to the freelance writing example above. The process of delivering a finished article involved many steps—and rather than pricing each step individually, the writer packaged them into a single offering.
Many small businesses offer procedural services. Car detailing businesses clean, wash, wax, and buff vehicles. Hairdressers cut, color, wash, and style hair. Rather than breaking out each activity into its own service and pricing them individually, it’s much more convenient for the business and customer alike if businesses bundle these offerings into a single package.
Packaging Services Based on Customer Usage
Another popular technique for creating service packages is based on the customer’s usage or needs.
The screenshot below shows our small business bookkeeping plans for Sunrise. Customers have 3 possible packages that offer the same services within them, but the packages’ pricing is based on how many transactions that business makes monthly. Smaller customers with fewer than 120 transactions can take advantage of the Early package at $149 a month.
As their businesses grow, customers can move up to higher-tiered packages. This approach offers the same services to each customer but changes in pricing based on how much that customer uses the services.
Source: Bookkeeping Solutions to Fit Your Growing Business, Sunrise.
This type of bundling is great for small businesses that don’t have several different services or varying levels of quality.
For example, yoga studios often build packages based on the number of times people attend classes in a month. Someone using a package with only 5 monthly visits would attend the same class and receive the same quality service as another person with unlimited monthly classes—the only difference between these 2 customers is how often they want to use these services.
Bundling Based on Quality of Services Included
The most common way to package services is based on the quality of the services included in each bundle. For example, an hour-long hot stone massage with aromatherapy is a higher-quality service than a 30-minute standard massage. While each constitutes a massage package, the services included in each are different and have their own perceived value.
There are many benefits to bundling services this way. First, it can help with upsells. When customers are deciding between the 30-minute standard massage and others at higher rates, you have an opportunity to communicate the added value of the additional services:
“Acupuncture massages have been shown to improve immune systems and enhance energy.”
Upselling isn’t the only benefit to packaging based on quality—it can also help you to target clients with different budgets. A customer with a smaller budget could utilize your entry-level services while your more custom and labor-intensive services could go to your premium clients. By packaging and pricing your services based on quality, you can attract different types of customers.
Next Steps for Managing Your Pricing Packages
This guide introduced you to pricing your services and to some techniques for bundling and pricing those packages—but to really take this further, you need to actually test those prices. Talk to customers, assess your competition, and reevaluate your services to find opportunities to bundle your current or future offerings.
As a small business owner, it’s important for you to find ways to grow your business and scale important areas such as pricing and customer acquisition. If you need more time to focus on business strategy, consider offloading some of your redundant tasks, like your bookkeeping. At Sunrise, we have automated solutions that can streamline your accounting—giving you more freedom to drive your business forward.