Service Pricing Part 1

January 28, 2004

By: Matt Michel

Get an early start on your New Year's Resolutions!

This is part of a continuing series of Comanche New Year’s Resolutions aimed at helping your company become “fiscally” fit. In this series, we will walk through the marketing mix of product, price, promotion, and placement. This Comanche Marketing tip focuses on service pricing.

PRICE FOR PROFITABILITY
Service pricing should be set at a level where you can pay your bills, yourself, your employees, provide training, invest in the growth of your company, and leave a little left over. Sounds obvious, right? The question then, is why do so few service companies charge what they should?

Your base service price should never be set on what you think your competitors are charging. Setting your service price based on the price of others is like the blind leading the ignorant. When you were a kid, at one time or another you probably told your mother, “But Moooom, all the kids are doing it.”

Your mother likely responded, “If all the kids jumped into the lake, would you follow them?”

She was a wise woman, your mother. Of course, you probably didn’t listen to her then, but listen to what she said now. Don’t jump into the lake of bankruptcy with the rest of your competitors, slowly drowning. Set your prices so that you generate a desired net profit.

If you don’t think your service is worth what you charge, then raise your service to the level needed to match the price you must charge to make money. Later in this series, we’ll discuss how you can do that.

Proper pricing, however, is not enough. Price is part of your marketing mix. Inject some marketing strategy into your pricing.

DISCOUNTS
Some customers should get discounts. Most notably, you should offer a discount to your service agreement customers. You offer this to reward their loyalty and to give them a greater incentive for enrolling in your service agreement program in the first place.

Hey Michel, you might be thinking, doesn’t that screw up your targeted net profit? Yup. It sure does.

Rather than discount your targeted price, make the target price your discounted price. Charge everyone else a premium. For example, if you need to charge X to be profitable, don’t charge your service agreement customers X minus, say, 15%. Charge your service agreement customers X and then bump the rates for everyone else (i.e., X divided by one minus 15%, or X divided by 85%, or X times 1.18).

Remember, your targeted price is what you need to charge, so charge it. If a customer is not going to purchase a service agreement, charge them a little more because it costs you more to service them due to the marketing costs you incur in attracting them.

Why not just call it a premium? Because people get mad if you tell them they are paying a premium. Non-service agreement customers feel like you are punishing them because they do not own a service agreement and service agreement customers do not feel like they are getting special treatment.

So you tell non-service agreement customers they are paying a standard rate and tell service agreement customers they are getting the discounted rate. This way you do not make the non-service agreement customers angry and you make the service agreement customers happy because they get special treatment.

It’s semantics. So what? Much of marketing is semantics. Tell a woman she looks like “the end of a long, hard winter” and you probably will not enjoy her reaction. It’s much better to say she looks like “the first breath of spring.” It’s just semantics.

Speaking of semantics, don’t simply call your discount a discount. Call it “preferred customer pricing” or “value pricing” or something similar. Call it a discount and people will think they deserve the discount whether they own a service agreement or not.


Source: Comanche Marketing. Reprinted by permission.
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Copyright © 2003 Matt Michel

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