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Tips to Devise the Best Pricing Model for Your Service Business!

Last updated: 28 Nov, 2019 By | 6 Minutes Read

Every business has the sole aim of generating maximum profits, and for this, they incorporate various strategies to streamline their business operations, enhance marketing results, product quality, and more. There is no denying that in order to avail profits, one needs to cut down on the overall business costs.

However, merely doing so without strategic planning and assessment can prove costly for a business. A majority of the service businesses resist structuring a new pricing model owing to the fear of losing out on their potential customers and lagging behind their competitors.

Every business is unique in terms of product or service they offer to their customers, and this is the reason they have a different pricing model. Businesses need to understand that their new service prices must support healthy cash flow. So, let’s get started and figure out the key considerations when looking to devise the best pricing model for your service business.

Top Price Optimization Strategies for Service Business

Time-Driven Activity-Based Costing

Time-Driven Activity-Based Costing (TDABC) helps business owners in understanding the true value of production cost, offered services, and individual tasks. TDABC majorly focuses on time allocation and cost (supplies, materials, overhead, labor, etc.) relationship and let the owners know exactly what their resources are bringing in for them.

In short, job costing helps you calculate the total cost spent on clients and time taken by your employees for doing the same, thereby, giving you insights into how much cost you should allocate to maintain the same quality while bringing down the expenses, and increasing the profit margin.

In practical terms, TDABC is implemented by using a timesheet for recording time, labor costs allocation, and using the general ledger for posting payroll. For example, an ABC service company’s employees spend 40% of their time on the first client, 35% on the second one, and 25% on the next one, adding up to 100% time allocation eventually.

This makes it unclear as to which client needs less time devotion, but with TDABC in place, time allocation and relevant use of the resources can come down, saving on costs eventually.

TDABC helps you with:

  • Identification and repricing of less beneficial customer relationships
  • Service/Product optimization for maximizing revenue
  • Payroll strategy upgrading for lowering overhead expenses
  • Evaluation and improvement of pricing structure
  • Process improvement for elevating profit margins
  • Product design and production cost reduction

Price Optimization

Up-to-Date Pricing

If you recall the pricing of your favorite items in the last ten years, you will get surprised by the amount of change that has taken place. Pricing can never be the same for a lifetime owing to various factors like budget, cashflow, competition, demand for enhanced product/service quality, government regulations, new marketing channels, etc.

So, it is imperative to work on pricing strategies that best keep compliance with such factors without disrupting your product quality and customer base.

Competitor-Based Pricing

This is a contradictory pricing strategy that focuses on using the price of your competitors rather than the evaluation of your own products and services for price determination. The obvious benefit is that you do not need to invest in a pricing strategy as you can simply visit the websites of your competitors or place call to know their price.

However, the downside here is that it is their pricing strategy, which is based on multiple factors related to their business and not yours. Long-term relationships should be the key focus here as you do not want to invest your time and money on the customers who will surpass your brand for a lower service value.

To summarize, competitor-based pricing does lets you play safe when offering a similar type of service quality, but it also restricts you from creating a mark for yourself by enhancing your service quality or charge less and win more customers if you can save on operational costs, unlike your competitors.

Value-Based Pricing

This type of pricing lets you know what your customers have to say about the experience they are having with your services, and whether or not they are willing to pay you more in case, they are highly satisfied. This is largely dependent on merely not providing a product or service to the clients but something additional. This can include anything from a trust in your service or product quality to your overall brand faith.

It is also about how much you are making the life of your customers easier with your products and services; the greater the impact, the more are the chances of them willing to pay more. For example, if some of your customers admire green products and you happen to use the same while providing a service, they will most probably be willing to pay more.

Know Customers’ Opinions

It is a known fact that customers will not directly tell you anything related to your products, services, or your pricing. However, this type of communication always helps in collecting customer behavior data and understanding their market opinions.

One of the best ways to know about the opinions of your customers is through online reviews. These reviews let you know if pricing is the main issue amongst your customers when using your product or service.

Rather than following the competitor lead, listening to your customers will help you in enhancing customer experience and charging what your customers are ready to pay for your services.

Price Skimming

This type of pricing strategy involves the risk of losing a huge amount of money in the initial stage itself, along with the opportunity to bring in maximum revenue. The reason being this strategy involves setting the prices high during the introductory phase of the product or service and then lowering the same when competition arises.

This type of strategy makes the customers believe and pay for a particular brand, thinking it invests in quality products and services and hence, demands a high price.

Collect the Right Data with an Accounting System

Tracking business operations and gaining insights into the financial data is imperative to devise the right pricing model. With important information provided to you by providers of bookkeeping and accounting services, you can know about the essentials that can help you with pricing for profitability.

Price optimization can easily be achieved by learning about the key performance indicators by using integrated technology tools and the right financial systems. This will enable you to eliminate products and service models that bring in zero profitability, identify and locate profitable streams of revenue, and also ensure fair charge against the service quality you provide.

Recommended: An Insight into Key Performance Indicators (KPI) for Finance and Accounting Professionals!

Conclusion

This concludes the fact that service businesses need to devise a new pricing model on a regular basis with respect to changing market scenarios and customer demands. However, effective strategies and careful groundwork need to be put in place for devising a pricing model that not only aids profitability but also keeps the quality of service high, along with satisfying the customers at large.

The above strategies will help you in setting the right pricing model for your service business, and if you lack time and expertise for the same, you can always seek help from the professionals.

Finding it difficult to devise a new pricing model for your business due to poor bookkeeping and accounting records? Relax; Cogneesol is there to support you with its 11 years of experience in providing efficient bookkeeping services and enabling businesses gain insights into their financial data for making the best decisions. Contact us today to get started with your free trial.

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