Wednesday, May 01, 2013

Pricing strategies for services

How can a services provider (Advanced Services, Technical Services or Professional Services) make sure it has priced its services just right?
There are three ways to do pricing
1)      Cost Plus
2)      EVC (Economic Value to Customer)
3)      Competitive Marketplace

Just going by Cost Plus, you leave money on table. EVC is theoretically best pricing but you cannot price case by case (so you set list price and give discounts to adjust for case by case basis). Competitive Marketplace is what most people do but then you are treating your services as commodity.

I suggest that you follow a more methodical approach about pricing strategies for services.
1)      Creating a pricing model, which takes into account your fixed costs and business strategy.  A baseline formula would let you know what price range is NOT feasible.  Say your prices will not be less than this amount so that you maintain your Gross Margin and survive in the industry.

2)      Break down your costs into buckets (Server, support, manpower, gas, commute, task time, delivery model and expertise) and then have a variable formulae based on weightage to what you have in plenty and what is scarce for you.

Research your industry (business cycle, technology trend)

Research your customers (segment the market, are you their strategic partner, long term potential).

There is a constant pressure on services to invest in new practice areas, either because these investments would help meet business unit sales quotas or because the business units need more people/partners out there, evangelizing new sort of technologies. Evaluate those opportunities so as to keep your costs low.


Brent Stephens said...

Service businesses can range from a sole proprietorship consultancy to mid-sized businesses with several hundred employees, some of whom go out to customers and perform anything from cleaning homes to providing information technology expertise to large corporations.

Arvind Jain said...

Brent, good point. So I would like to clarify that my articles and blog posts are focussed on Hi Tech Services like Plan, Build, Design, Deploy and Operations of IT Applications, Network Infrastructure and Software Services. So that is the context of all my posts. HTH Arvind