Pricing

What it means

Pricing is the decision about what the price follows: cost plus a mark-up, the competition, or the value the customer receives. Each approach produces a different price for identical work.

Cost-based pricing is safe but caps profit at the mark-up. Value-based pricing requires knowing what you save or earn the customer, so it stands on the value proposition.

Pricing is not the same as costing. Costing tells you what something costs the company, which sets a floor you should not go below. Pricing decides how far above it the company asks, and that depends on the market, the competitive forces and the customer rather than on costs. The same costing can therefore lead to different prices for different segments.

How it works in practice

Without a costing any pricing is guesswork. You need variable cost per unit and the contribution margin to see how many jobs cover fixed costs and where the break-even point lies.

In services the price usually follows a measurable scope rather than an impression. That is why our monthly fee is built from document, transfer and employee counts, not from how large the client feels.

When raising prices for existing clients it works best to announce the change early, in writing, with an explanation of what changed, such as legislation or the scope of work. On long-term contracts and a monthly retainer it helps to have a price review mechanism agreed in the contract, so the price is not renegotiated from scratch every time.

What to watch out for

An across-the-board discount looks like a growth tool, but ten percent off a price at a thirty percent margin is a third of the profit. Change the scope of the service before you change the price.

A sole trader who set consumer prices as a non-payer often cannot add the full tax after compulsory VAT registration, because consumers see the final price. The VAT then comes out of the margin. As turnover grows, it is sensible to build VAT into prices before registration arrives.