How To Set Your Prices And When To Raise Them

How to Set Your Prices and When to Raise Them 1

How To Set Your Prices And When To Raise Them

No matter what type of service you provide, you need to set your prices high enough to make a profit after you account for materials, labor, and other costs of doing business. Unfortunately, many home service providers set their prices way too low, limiting their cash flow and making it tough to turn a profit. This guide explains what you need to know about pricing strategies, factors to consider when setting prices, and the importance of adjusting your prices regularly.

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Strategies For Setting Prices

It's easier to come up with a pricing structure if you understand the market. You need to think about the cost of living in your area, your target audience, and several other factors.

Research The Area

The first step is to research your area. Get to know as much as you can about average home values, average annual income, and other statistics that can help you determine what customers in your area can afford. If every home in your market is worth more than $1 million, for example, you can set your prices much higher than you could in an area with an average home value of $200,000.

Review Competitor Prices

Now, you need to do some competitor research. If everyone else is charging $50 per hour, you probably don't want to charge $100 per hour unless you offer something truly unique. You also don't want to charge $30 per hour. Researching your competitors makes it easier to determine an appropriate price range for your market.

Understand The Target Audience

Next, get to know your target audience. Collect as much information as possible about their shopping habits, financial circumstances, and other factors that are likely to influence how much they're willing to spend. You need this information to figure out how much you can charge to make a profit without driving away potential customers.

Identify The Unique Value Proposition

A unique value proposition is a concise statement about the benefits you offer your customers. It's not a list of services or a company slogan. To identify your UVP, you need to think about your target audience, identify their pain points, and figure out how your services help solve those pain points. Here's an example UVP for someone who operates a residential cleaning business:

"We leave your home looking spotless so you can spend more time with your family when you get home from work."

In this example, the UVP clearly explains the benefits available to customers who pay for cleaning services. They get to spend more time with their families instead of having to come home from work and worry about cleaning.

Cost-Plus Vs. Value-Based Pricing

You also need to think about whether you want to use a cost-plus or value-based pricing strategy. Cost-plus pricing refers to calculating your costs and then applying a markup. For example, you might want to charge a markup of 30%. If your costs add up to $1,000, you'd charge the customer $1,300. This strategy keeps things simple. You don't have to do complex calculations or worry that you won't make a profit after you account for materials and labor. The main disadvantage of cost-plus pricing is that it doesn't account for factors like demand and competitor pricing. Therefore, your prices could be too high or too low based on market conditions.

With value-based pricing, you set prices based on a customer's perception of the value of your service. This is more complex than cost-plus pricing, as you need to research your competitors and figure out what makes your offering better than theirs. Then you need to hope customers are willing to pay the difference. For example, if you charge $100 more than your competitor for a job, you need to offer something of value to justify the $100 difference.

Factors To Consider When Setting Prices

Once you gather some background information about the market, there are a few additional factors to think about. Here's what you need to consider before adopting a new pricing structure.

Business Costs

On March 14, 2023, the Bureau of Labor Statistics announced that the Consumer Price Index had increased by 6% between February 2022 and February 2023. In other words, prices increased by an average of 6% over a 1-year period. If you don't pay close attention to business costs, price increases can eat away at your profit margin, making it more difficult to stay in business.

Target Profit Margins

Your profit margin tells you how much profit you make from every $1 in revenue you collect. For example, a firm with a 20% profit margin makes 20 cents in profit for every $1 it brings in. Profit margins vary by industry, but a margin of 10% is considered average. Because your pricing structure affects your revenue, target profit margin is an important consideration when pricing your services.

Customer Demand

Customer demand also plays an important role in setting prices. If business is slow and you don't have many customers, you might want to lower your prices a little to make your services more attractive. You can always increase them again later. If you have customers lined up around the block, consider increasing your prices to match the increased demand.

Market Competition

Some areas have 10 or 15 companies offering similar services. If you do business in a competitive market, you need to pay close attention to what your competitors are charging and adjust your prices accordingly. You can charge a lot more if you're the only person providing a particular service in your area.

Product Differentiation

Product differentiation helps distinguish your service from the services provided by other companies. The more unique your service is, the more you can charge. For example, if you're the only person in a 100-mile radius who creates custom stained-glass windows, you can charge a premium for your expertise.

Brand Positioning

Brand positioning is a term used to describe how you want your customers to perceive you. For example, Walmart positions itself as the best choice for budget-conscious consumers who want to save money on groceries, household goods, and other products. Your prices should reflect your brand positioning and help potential customers understand what you bring to the table.

How to Set Your Prices and When to Raise Them 2

Signs To Pay Attention To When Raising Prices

Once you set your prices, you need to review them regularly and make adjustments as needed. If you don't revisit your pricing structure from time to time, you could end up losing money instead of turning a profit. Keep these factors in mind if you're thinking about raising prices in the near future.


Inflation makes it more expensive to run a business. If rising costs are cutting into your profit margin, you need to seriously consider raising your prices. You can use the extra money to pay laborers, purchase materials in bulk, or cover other costs without making your business less profitable.

Cost Of Goods

Even when the overall inflation rate is low, you need to keep an eye on the cost of materials. Suppliers may increase prices due to circumstances beyond their control, cutting into your profit margin and making it more difficult to operate your business. If the cost of materials keeps going up, you should consider increasing your prices.

Labor Costs

Subcontractors deserve fair wages, but those wages can cut into your profits. If your usual subcontractors are asking for higher pay, increasing your prices can help you cover the increase without taking a hit to your profitability.

Busy Schedule

If your schedule is packed, that's a sign you should think about raising your prices. When prices are low, more people are willing to pay for your services. As prices increase, you may have fewer customers, but those customers may be willing to pay higher rates. As a result, you can bring in the same amount of revenue with fewer work hours. 

Negative Cash Flow

You need cash to pay laborers, buy supplies, and take care of other business expenses. If your cash flow is negative, you need some way to make it positive. Raising prices is an option, as higher prices increase your revenue and get more cash coming into your business.

Customer Feedback

Listen carefully to your customers, as they often give valuable feedback about service quality and pricing. If several customers mention that you charge a lot less than your competitors, that's something to think about. You should also listen for comments about the price of your service versus the quality provided. If multiple customers comment about how inexpensive your services are compared to their value, consider a price increase.

Tips For Raising Prices Without Losing Customers

No one likes raising prices, but it's something you have to do to run a successful business. If you don't raise prices occasionally, you won't be able to keep up with rising costs or turn a profit. Here are a few tips for raising prices without losing your valuable customers.

Communicate The Price Increase With Transparency And Empathy

Be transparent. Nobody likes to learn about a price increase after they've already placed an order. If you decide to raise prices, be proactive. Send an announcement to all previous customers, or at least make customers aware when they contact you. If you're open about the price increase, customers are less likely to drop your business in favor of another contractor.

Offer Discounts Or Promotions To Loyal Customers

Loyalty is worth its weight in gold. If you have loyal customers who've been with your business for years, consider giving them a discount on their next project. This is a good way to ease them into the price increase without making them feel their loyalty is unearned. If a discount doesn't work for you, consider some other type of promotion, such as a free service with the purchase of a more expensive service.

Highlight The Benefits Of The Product/Service And The Added Value

Some people just need to be educated about the benefits of a product or service to understand why they should pay the higher price. If you need to raise your prices, make sure customers understand what value you bring to the table. Explain how they'll benefit from working with you versus one of your competitors.

Emphasize Quality And Reliability

When you highlight the benefits of your service, be sure to focus on quality and reliability. Companies that charge the lowest prices often skimp on these service attributes. Many customers are willing to pay a little more for high-quality services, so make sure they understand quality is one of your top priorities.

Provide Exceptional Customer Service

Going the extra mile for customers is a great way to overcome price-related objections. You don't have to give away services for free, either. Just contact your customers regularly, show them you understand their needs, and offer to assist them with any problems they have. They'll appreciate your attention to detail, making it more likely they'll happily pay your increased rates.

Offer Flexible Payment Options

Offering flexible payment options is a great way to retain customers even after you increase your prices. If you currently ask customers to pay in full before you start working, consider accepting a 50% deposit and collecting the remaining 50% when you finish the work. Another option is to offer financing, which allows customers to make payments over time. Several companies, including Acorn Finance, specialize in helping contractors offer financing to their customers.

Finding The Right Pricing Strategy

A good pricing strategy helps you maximize your profits, making it easier to stay in business. If you don’t have a strategy in place, use these tips to determine if you’d rather focus on price or value. Then review your prices regularly to make sure what you’re charging always reflects current market conditions. You’ll be able to keep your profit margin high even when inflation makes labor and materials more expensive.