Service Pricing Basics
To understand the basics of service pricing, first consider the three Cs of pricing:
How much does my service cost me to furnish? Once you've established your start-up costs and your monthly operating costs, you'll have a good idea of how much your service will cost you to furnish to your clients.
But there's one more important factor that you need: your amount of available time.
Business consultants typically require about a quarter of their time to market their services and another quarter to keep themselves informed on the latest information in their field (read magazines and books, attend seminars, interview leaders). So they're down to about 80 billable hours per month, unless they continue working after normal hours.
If the operating or overhead costs total $8,000 a month, for example, that amount is divided by 80 billable hours to come up with an hourly fee of $100. Depending on their specialty, demand for their service, and other factors, business consultants charge $80 to $300 or more per hour.
Business consultants who work on larger projects often establish a per-diem fee that covers their costs for a seven-hour to ten-hour day.
Consumer consultants often spend less time marketing and learning than business consultants. Many consumer consultants can bill up to three-quarters of their time, about 120 hours a month. If the operating or overhead costs total $6,000 a month, that amount is divided by 120 billable hours to come up with an hourly fee of $50. Depending on what they do and for whom they do it, consumer consultants charge between $40 and $120 an hour.
However, because the public prefers to pay for results rather than time, consumer consultants often set prices based on an undisclosed hourly rate. A career consultant, for example, will offer a career placement package for $495 that is based on six hours of counseling at $80 an hour and about $15 worth of materials. Service pricing based on costs will be covered in greater detail later in this section.
How much are your competitors charging? A few telephone calls should get you this information. Of course, you must make sure you're comparing apples with apples. Your competitor may not have your level of skill in this area, or she may have more. Your competitor may also include costs for some specialized resources that you don't have.
To determine your competitor's hourly rate rather than product price, ask her, “If I preferred to pay you by the hour, how much would you charge?”
How can you find your competitors?
Find a copy of Consultants and Consulting Organizations Directory published by Gale Research at larger public, college, or business school libraries. It lists more than 26,000 individual and firm consultants by name, location, services, and other factors. If your business is primarily local, check your telephone book first.
Why should you care what your competitors charge? Because your clients will probably get bids from them also. You don't necessarily have to match or beat their bids, but you do need to know what competitors' rates are so that you can help the client make a fair comparison.
Service pricing based on competitors will be covered in greater detail later in this section.
How much do the clients expect to pay? Remember that the question isn't how much will clients pay, it's how much do they expect to pay? The difference is expectations. You may get some clients for your service to pay an excessive fee for a while, but they'll soon move to other sources.
What you want to find out is what they think your service is actually worth to them. Most understand that, if they pay you too little, you will soon be out of business and won't be able to help them in the future. They may not admit to it, but they know it.
How can you know how much the client expects to pay for your skills? Ask a few of them. They may tell you what they're used to paying, what they think is a fair price, or maybe what they wish they were paying. Take them all into consideration. Ask the question of them and let them take a few minutes to explain why they think so. You'll get some valuable insight into what clients expect from you as well as what you should expect from them.
Again, make sure you're comparing similar skills and similar fees. For example, a client may expect more skills than you can offer.