Price It Right: Driving Success In Your IT Services Company
June 13, 2023
With a keen eye for technology and a burning desire to help businesses thrive, Ajay established a small IT solutions and services company. His team was skilled, his services were top-notch, and his dedication was unwavering. However, there was one puzzle he needed help to crack: pricing his services right.
Ajay initially set low prices to attract customers but struggled with costs and profitability. Learning from competitors and market trends, he revised his pricing strategy. He priced his offerings to reflect the expertise, effort, and positive impact his team provided. In time, his company thrived.
This story proves that pricing your services right is not about undercutting the competition or chasing the lowest price. It's about understanding the value you provide, communicating it to your clients, and ensuring that the price reflects the expertise, effort, and positive impact you bring to their business.
If setting your service’s value is this straightforward, Why is Pricing Difficult?
According to the International Trade Administration, pricing can be the most challenging due to different market forces and pricing structures worldwide. Whether you are in IT or any other industry, finding the right price for your export services is a delicate balancing act.
It is about achieving an equilibrium between profitability, competitiveness, and appeal to international clients while remaining attractive.
There are various strategies to consider with their unique factors.
- The Cost-plus Method: This method determines the production cost and adds a markup to cover overheads and profits.
- Value-based and Comparative pricing: Value-based pricing considers the customer's perceived product or service value. Comparative pricing compares prices with competitors to establish a competitive edge.
- Competition-based pricing strategy: Competitive or competitor-based pricing, focuses on the current market rate, or going rate, for a company's service.
- Geographic pricing strategy: Geographic pricing refers to varying service prices based on a specific geographical location or market.
Pricing strategies must adapt to an ever-shifting economic landscape, considering variations in purchasing power, cultural quirks, and the wild dynamics of local markets.
Understanding Pricing in Export Services Business
Thriving in the global market requires a comprehensive understanding of how pricing can impact the success of your export business. The unique nature of pricing in the export services industry is influenced by several factors.
- International markets: Navigating diverse economic conditions, customer preferences and competitive landscapes across different countries can be challenging for export services businesses. Pricing strategies must adapt to these variations, considering factors like purchasing power and cultural nuances.
- Fluctuating exchange rates: Currency volatility can significantly impact export pricing. You must monitor exchange rate fluctuations closely to ensure your pricing remains competitive and profitable in different markets.
- Legal compliance: Compliance could involve adhering to payment laws, tax regulations, data protection laws, or industry-specific regulations. Complying with these regulations may involve additional expenses or complexities you must factor into the pricing structure.
The Role of Pricing in Competitive Advantage
The best pricing strategy for a particular business includes considering the type of product or service, the target market, the competition, and the company's financial goals.
To calculate value-added pricing, you can use the following formula:
Value-added price = Fixed Cost+ Variable Cost + Profit Amount
This pricing template helps calculate your value-added price. To edit the template, go to File > Make a copy to save a duplicate that’s accessible to you.
For instance, Accenture's pricing strategy is based on the value they bring to their client's businesses. Rather than competing solely on price, they focus on delivering innovative solutions, deep industry expertise, and a track record of successful implementations. By doing so, they position themselves as a premium service provider, enabling them to charge higher prices for their services.
How can you determine the right pricing strategy for your export service business?
Steps for Developing a Pricing Strategy for Your Export Services Business
In continuation with the example of Ajay’s venture above, here are the steps he may have followed while revising his pricing strategy.
#Step 1: Research the market you want to target
Thoroughly research the market you intend to target. Understand local preferences and purchasing power. Identify any unique market characteristics or factors that may impact pricing decisions.
In Ajay’s case, he engaged in open conversations with his existing clients. He asked for their feedback, listening intently to their concerns, needs, and perceived value. This invaluable information helped him refine his pricing, aligning it with the value his clients expected and were willing to pay.
#Step 2: Estimate pricing potential
Start by assessing your costs, including production, distribution, overhead expenses, desired profit margins, and competitive landscape. Determine the price range to attract customers while covering expenses and generating a reasonable profit.
Through the conversation with his customers, Ajay also realised the best way to price his services in a way that seemed value for money. He no longer had to compromise on his team's compensation or cut corners to stay afloat.
#Step 3: Balance value and business goals
Finding the ideal balance between these two elements can lead to significant benefits for your business, such as:
- Increased profitability
- Improved cash flow
- Higher lead conversion rates
- Expanded market penetration and market share
Ajay understood the value his services brought to businesses and the positive impact they could have on their operations. He priced his offerings to reflect that value, considering the time, effort, and expertise invested by his team.
#Step 4: Evaluate your additional cost to the market
It includes local certification or foreign regulations-related expenses and modifying services to meet market requirements. Incorporate these costs into your pricing calculations.
#Step 5: Consider your competitor's price
There are two primary options when confronted with disparate pricing for similar services.
- In cases where a competitor charges a higher price for an identical offering, you can establish a more affordable price point.
- Alternatively, you can beat your competitor's value, also known as value-based pricing. It is viable to price your offering higher than competitors if the value delivered to customers surpasses that of competing alternatives.
Conducting a comprehensive competitive analysis helps understand their strengths and weaknesses, thus formulating an appropriate pricing strategy.
#Step 6: Set your pricing tactics
Determine specific pricing tactics to achieve your objectives, such as penetration pricing, price skimming, psychological pricing, or value-based pricing.
Regarding the pricing tactics, Divyank Jain, Co-founder of The Wise Idiot, explains, “Our method involves calculating the number of hours required for a project, determining the necessary workforce, considering regional taxes, and incorporating a reasonable profit margin. This approach ensures transparency and reliability and fosters long-term partnerships.”
The final price for your tech service should cover costs, achieve profitability, and align with the market's willingness to pay. Regularly review and adjust your pricing strategy based on market feedback, cost changes, and business goals.
Common Pitfalls in Pricing and How to Avoid Them
Price setting is tricky for your global business, often threatening profitability. Here are some common pitfalls in pricing and tips on how to avoid them:
- Avoid underpricing your offering, as it can devalue your brand and leave money on the table. Instead, conduct market research, analyse costs, and consider the value you provide to set a competitive yet profitable price.
- Beware of overpricing, which can deter customers and hinder sales. Understand your target market's willingness to pay and adjust accordingly.
- Avoid inflexibility—regularly review and adjust prices based on market dynamics, customer feedback, and changing costs. Continuous evaluation ensures optimal pricing strategies.
Concerning pricing complexity, Mejo Kuriachan, CEO of Everything Design, explained, "Pricing is a function of demand and supply. With time, as you become an expert in a niche, you will have the leverage (demand for your service will increase) to increase your price and deliver better quality output.
Additionally, your pricing strategy decides the kind of customers you will attract. As a branding and website design agency, we did this successfully, which helped us attract the right kind of clients."
In a Nutshell
In today's highly competitive global market, having a well-defined pricing strategy is not just important—it's the key to unlocking the door to success for your export business. By strategically setting prices, you can navigate the delicate balance between profitability and market penetration, allowing your services to shine internationally.