Providing a service is very dissimilar to selling a product that can be held, felt and manually used by clients. Often, the value from the use of products is instantaneous and clients gauge its usefulness by the product’s ability to help them perform tasks in an effective and efficient manner. However, the effect of service is often linked to emotions because it is an act rather than something physical. This is the reason why one would often find that a similar service might have a difference range of prices for clients. Fixing a price for a product normally depends on market rate, current demand and of course taking into consideration costs incurred when manufacturing the product. Fixing a price on a supply, though, entirely depends on the service provider.
Most accounting service providers make the mistake of undervaluing their services. This is prevalent especially at the beginning of their business cycle.
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Solo practitioners particularly regard this as a “safe” option simply because they want to draw in their clients. This is definitely an erroneous price fixing method as it does not take into consideration future growth. Offering extremely low prices at the beginning only means that there will be a steep increase in price for the same service at some point in the future. This would be entirely due to the fact that better business means that there would be a definite extension of operations which leads to higher overhead costs. It would be difficult for clients to remain loyal if they were given notification of a 50% increase in price for exactly the same service. Come to think of it, if the client was reeled into the service on the basis of low prices, they would be likely to jump ship to another service provider who offers cheap prices too. In the long run, this is a bad idea because service providers run the risk of losing clients i.e. absolutely no client loyalty; AND they’d be losing out on profits simply because they have been offering low profits right from the beginning.
It is a true and sad fact that most service providers still cling on to the past when it comes to appropriate pricing strategies for their businesses. Many providers use the old fashioned and defunct way of billing according to hours worked. So from the offset, providers would charge clients based on the hours that they have put into a particular project. On paper, this looks like a relatively simple procedure but in reality can often end in disastrous results. Again, this happens only because the service provider has no forward thinking and no planning for the future. Billing according to hours worked does not imply that there is anything of value from the service that would be useful to the client. Clients can very well look for the same service elsewhere. It is a pricing strategy that leads to a painful conclusion and really should never be utilised ever again!
If billing by hours is deemed old fashioned and obsolete, what is the best pricing strategy for service providers?