Income is the lifeblood of any company, and developing a successful revenue stream begins with understanding what — and how — to charge your clients. Charge too much, and your clients won't stick around. Charge too little, and you'll never be able to grow.
In 2023, the global professional services market grew from $6,023.65 billion in 2022 to $6,382.56 billion. The industry can be lucrative, but how do you accurately assess your particular services' value, and how do you set your prices to ensure profitability and growth?
This how-to guide will help you develop a sound pricing strategy to keep you, your clients, and your bottom line happy. It also covers adjusting future pricing to account for market changes like inflation and demand.
Ready to feel confident in your company's pricing? Let's get started.
Step 1: Get to Know the Different Pricing Strategies
Professional services companies aren't a "one-size-fits-all" category. As such, there are several ways they can figure out a pricing strategy that would be successful for their individual needs. Each requires an intimate knowledge of different aspects of your business, including competitor pricing, business costs, and client needs, and they put an extra level of importance on each in terms of the value it adds to your company and the dollars it adds to your bottom line. Get to know the most common ones to decide which would work best for you.
1. Time and materials pricing: Perhaps one of the more simplistic ways to evaluate pricing for your company is to calculate an hourly billing rate that includes the cost of time (or labor) and materials, plus overhead and markup for profit. In this scenario, professionals with more experience often command a higher labor rate and therefore tend to charge more (more on that below).
2. Market pricing: If you go into this pricing model assuming that all your services are equivalent to your competitors, you will set your prices at around the same level as companies offering the same services. Companies starting out may enter the market at a slightly lower price to gain clients. At the same time, those hoping to capitalize on their expertise or reputation may go in the premium (or higher) pricing direction.
3. Value-based pricing: This pricing option requires additional research to determine the extra value your particular services bring to your clients and then factor that added steal into your pricing. An example might be adding a service to your offerings that you noticed either a lag for in the industry or a demand from your clients. In a time and materials pricing strategy, you would add the increase in cost to perform this service to your fees. In the value-based pricing scenario, you would instead assess how much extra value the client perceives this service adds, and you would then adjust your prices according to that client perception. For example, if the client reports seeing a twofold increase in their sales because of an additional service you provide, you would double your fee accordingly.
Step 2: Consider Different Charging Models
It can be difficult for professional services companies to count on a certain income level from month to month since so much of what they provide depends on what clients purchase each month. When determining the right pricing strategy for your company, consider some of the following common ways to charge so that you can factor that into the right pricing model for the type of services you offer.
4. Hourly: The most simplistic of the charging models, this option requires you to set an hourly rate for your services and charge based on how long it takes to complete a task or provide a service.
5. Retainer: Under this model, your company will provide a certain amount of hours or a particular selection of work to the client each month, and the client will be billed the same price each month for those services. A rolling retainer service lets the client carry over unused hours, while a limited model does not. This charging strategy is an excellent way for young companies to build a client base and establish a baseline level of cash flow from month to month.
6. Good, better, best: Depending on your company's services, offering tiered pricing (sometimes called price bracketing) is a good way to draw in clients with multiple spending limits. In this charging model, your basic package might offer one level of service, with upgrades available for a standard package and all the bells and whistles provided for the deluxe option.
7. Bundles: Bundling (or packaging) your services to charge one (usually cheaper than individually purchased) price is also a good way to draw in new clients who haven't tried your product before. It's also a good way to upsell your services and deliver larger-priced items and services throughout the month.
Step 3: Know Your Worth
Depending on which pricing strategy you go with from above, certain aspects of your company will weigh more heavily on your pricing than others. Still, any professional services company needs to have a solid understanding of the value of each of the following:
8. Time/expertise: Professionals in business for 20 years shouldn't charge the same rate as those just starting. Stay informed about what professional services in your field, with your level of experience, are setting by attending networking events, keeping in touch with former colleagues, and researching sites that share the salary details of different jobs.
9. Materials: Keeping proper books is an essential element in pricing your services. If you don't have a solid grasp of what you spend on materials and overhead each month, you won't be able to factor that cost into your fees, and, most likely, your business won't be profitable. Check out this piece about small business bookkeeping basics to ensure you're keeping tabs on the proper details.
10. Value: The value you add to your client's clients and business is a little harder to calculate. To assess this, you'll need to develop a close relationship with your clients where you feel comfortable asking these details. Consider using questionaries and a customer review system (with incentives for answering, like discounted products and services) to determine how your clients determine the value of your work.
Step 4: Factor in flexibility
For as much research as you may do to price your products and services accordingly, little can be done about outside factors like inflation and changing market demands. To avoid struggling during periods of downturn in either, develop an "emergency" scenario ahead of time — with ideas on where you can cut back if necessary to account for a decrease in demand or a need to lower your prices — so that when the time comes, you're prepared.
Step 5: Collect Your Revenue
Once you've decided on your pricing strategy, you can bring in a solid revenue stream. To ensure your clients can make their payments easily and on time, consider accepting different conventional payment options — like cash and check, direct debit, and other card payments — and contactless payment options through services like PNC Pay. Offering a variety of payment options gives clients more opportunities to pay you in a method that works best for them, which may make them more loyal in the long run.
As with most things in business, your pricing strategy shouldn't be static. What works for your company this year might not work in the following. Adjusting your pricing and charging models as necessary shouldn't be considered a sign of weakness … it's just good business.
For more on how to develop the right pricing strategy, check out PNC's small business hub or call 1-877-BUS-BNKG. There you'll find articles, webcasts, and product offers for everything you need to run and grow your business. Whether you're looking for services, ideas, or advice, PNC can help.