Nowadays, there are many young entrepreneurs trying their luck in the service industry, such as restaurants and lodgings and personal services (such as beauticians or barbers, pet groomers, and caterers). There are several reasons why people start opening service businesses. The first one is because of the flexible working hours. If you have a business partner or a trusted employee, you can work in shifts or take turns managing the business with them. Second, due to their hectic schedules, as well as the increased incomes and/or living standards, people are more willing to pay to get things done instead of doing things themselves. For example, these days, a lot of women, who used to do their own nails at home, turn to the pros at the beauty salons for manicures and pedicures. The third and probably the most influential reason for the emergence of the service industry is you do NOT have to invest big money or own a large inventory to start and run a service business. Take a delivery business for example. This line of service is currently trending in big cities in Indonesia (such as Jakarta and Bandung), especially among young entrepreneurs because it allows them to start small by simply owning a motorcycle and hiring a staff to do the deliveries for you.
One difficult question that people, especially those lacking in the knowledge of accounting principles, usually ask before starting their own service businesses is how to set the right price for their service. Pricing services is more difficult than pricing goods because how customers value a service is very subjective. In order to answer the question, there are several lists of data and calculations that are required to be prepared. Let’s assume that you are starting with a small and simple service business and you want to charge your customers by the hour. The first thing you should do is list all your annual material, labor, and overhead costs, then calculate the weekly costs by dividing your total annual costs by the number of weeks spent on providing the service in a year. Second, keep a neat and detailed record of the number of hours per week spent on giving the service, which does not include activities, such as cleaning, bookkeeping, and marketing, that are not directly related to providing the service. Third, calculate your hourly rate by dividing your weekly costs by the number of hours spent on providing the service in a week. The fourth and the last step is when setting a price, you need not only to make sure that you can cover the total cost of providing the service (reach the break-even point), but you also have to make profit. The hourly rate that you have already calculated is the cost of providing one hour of service. Therefore, to finalize the service price that will be charged to the customers, the hourly rate must be added with the profit margin that is usually ranging from 15% to 40%, with 20% being considered fair in most markets.
Besides the pricing steps mentioned above, there are several important points that need to be taken into account. First, do not set the price too low or too high. Price that is too low often insinuates that your service might be of a poor quality, whereas price that is too high might make your customers choose to buy from your competitors, especially if you are running a trending business and you have not gained much popularity yet. Instead of increasing the price for more profit, try cutting back on costs that can be reduced without significantly affecting the quality of the service. Second, since services are intangible, purchasing a service is more risky than buying goods that can be seen, touched, or tasted/sampled. Therefore, you have to minimize this risk by giving added values to your customers. One of the most effective added values you can give to your clients is a discount that can come in the form of a bonus, coupon, or voucher. However, do not forget to mark up your price or cut some of your expenses first before giving customers discount so that you will not experience a loss. Besides a price cut, added value might also be achieved by increasing the quality of your service, such as by greeting your customers with a smile or by showing excitement and giving your full attention while serving your clients. The third and probably the most important thing in price-setting is to always remember the basic economy theory of supply and demand. Business owners must not set their prices depending solely on accounting principles and calculations. They should also do both market and competitors research because even if your pricing is done correctly, it will be hard for your company to make huge profit unless your price is competitive compared to that of your competitors (not too far above or below competitors’ prices). Your price must also match with the perceived value of your service to the customers (in other words, how much money customers are willing to spend to purchase your service).
Sources:
Wasserman, E. (2009, November 1). How to Price Business Services. Retrieved March 5, 2013, from http://www.inc.com/guides/price-your-services.html
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