HOW do you decide what price to charge for your services?

The price of your service will determine what customers you get – who you win, retain and lose. It is probably obvious and rather a general rule but the price you charge will affect demand; the lower the price the greater the demand and vice versa.

Most businesses don’t want to attract everyone. Think about the Pareto rule:

  •  20 per cent of your customers generate 80 per cent of your sales.
  •  20 per cent of your products generate 80 per cent of your sales.
  •  20 per cent of your customers generate 80 per cent of your profits.
  •  20 per cent of your customers generate 80 per cent of your hassle.

So here are a couple of basic ideas to help you decide on the price you are going to charge for your service or product.

The first rule is never to give a discount without reducing something in the offering. This can be a controversial thought, but people subconsciously align perceived value of goods and services with their cost.

This is true when you look at the clothing industry - Prada vs Primark, and the automobile industry - Mercedes vs Ford. Both Prada and Mercedes have a higher perceived value, and charge significantly more; but in principle they are clothing and cars.

Each product does exactly the same thing.

Deciding on your pricing strategy will depend on who your potential customer is, but there are two ways to come to an agreed price.

1. The traditional way of ‘cost plus’. This is where you look at the amount your materials, labour and possibly overheads cost, and add a little profit for you. This is fine if you are selling widgets, but unless you are shifting large volumes of products this is not a very effective way to generate money.

2. Perceived value. This is where you price your intellectual property. You look at your product or service, you compare it to your competitors, and you research your market and charge a price. It has nothing to do with an hourly rate. You charge a premium price for your 20+ years of experience, or you know more about a niche market than your competitors. People pay a premium if the value they receive is mountainous.

Once you have decided on your price you have to believe in it, and not be embarrassed. An example I leave you with is that I recently had my car serviced and they charged £112 an hour for the mechanic. Remember it is all about perceived value. I had to pay this price to get a premium job done. Pay peanuts and you may just get a monkey. Charge peanuts and you may just be seen as a monkey.