The service pricing model you choose and the actual price you charge for your service can make or break your business. No matter you’re online or off, pricing right is a vital issue. Price too high and you’ll have no customers. Price too low and you’ll make no profits. The problem is to find out the price that will make your customers say: “Yes, that’s a good price. Definitely worth it.”

Let’s start with the A, B, C…

Basically, there are two service pricing models you can use in your business:

Price to penetrate.. This means to set the price as low as possible, for the purpose of making people stand in line at your door. The equation is simple: many customers served, big dollar sales. However, this pricing model has a downside: you’ll have to give up some profits (since your profit margin is tiny). But you gain a strong base of customers (hopefully happy customers) that will use your service again and will recommend it to their friends. It’s far easier to sell to old customers that know and trust you.

Using this service pricing model implies that you are able to handle the large number of customers attracted by your low fees. In most cases, you are limited by a very rare, totally inelastic resource: time. This is true especially for those who offer professional services: accountants, lawyers, consultants of any kind. So if you consider pricing to penetrate ask yourself the next question: how many customers can I attend during a time unit (an hour, a business day, a week)? This figure will set the limit of your business volume. How satisfactory is the income you’re expecting to make at this volume if you price low?

Top pricing.. Use this service pricing model if you have a unique, high valued service and you don’t want to grow a huge business. Obviously, a high price chases many potential customers, but you still make serious money due to the fat profit margin. If serving many customers takes you too much work, the top pricing strategy helps you to select those customers that are willing to pay for value.

This pricing strategy has a downside, too: the big profit margins act like a magnet for the competition. If your service is not highly unique and impossible to imitate, be prepared to announce “special discounts” when competitors show up.

Important warning: even if you choose this pricing model, don’t price too high. The customers with deep pockets have their own “price resistance” points, too. An exaggerated price means very few clients and low profits. The big question that arises here is: how high is too high? How could you know the price that will maximize your profits right from the start?

The only way to find out the answer at this question is: ask the customer. Only she can tell you what service pricing model is fit for you. Without knowing her opinion, all you can do is guesstimate. You won’t be able to price with certainty.

Now, due to the power of the Internet, you can find out the perfect price of your service and avoid the two major pricing mistakes that eat up your profits: pricing too high or pricing too low.
Click here to see how to choose your service pricing model with certainty.