- March 16, 2019
- Posted by: James White
- Category: Sales
For service providers in the drug testing industry deciding on pricing can be intimidating and confusing, and no one wants to lose money with prices that are too low, but exorbitant pricing can drive customers away. The balance is delicate and how you handle it will significantly affect the profit margin and your business’ overall success.
So, you ask, what is the best way to price my services? There’s not a simple answer, because there isn’t any set-in-stone method or formula for the setting of prices. There are as many ways to set prices right as there are wrong, and there are also many strategies to consider. However, let’s cover some of the basics of developing a smart pricing strategy that should help you start to understand and think about how much you should charge.
What is the profit margin?
The profit margin is the amount that is made in business after the expenses have been paid. To understand this concept, you need to fully grasp the differences between cost, value, and price.
Cost v. Value v. Price
We often use the terms, “price,” “cost,” and “value” interchangeably in our everyday lives but these words do not all have identical meanings. The value can be much higher or lower than the cost, for example. The perceived value of a product or service is often where the profit is made. If it costs $10 to provide a service, but the consumer believes its value is $30, then you can charge the price of $30, and you end up with a $20 profit.
- The cost of your product or service is how much it costs you to produce or provide it.
- The value is what the consumer perceives the product or service is worth to them.
- The price is what you charge for your service.
Understand costs and their influence on pricing
All too often, new and even some established business owners fail to analyze their services’ total cost and, therefore, do not price them profitably. By analyzing the cost of each service, prices can be set to maximize profits through careful analysis of the cost of the services you provide. The first two are pretty self-explanatory, but the third can be a bit trickier.
- Material costs are the costs associated with purchasing the materials you need to carry out your drug and alcohol testing services, like instant drug testing supplies, gloves, and blue dye tablets.
- Labor costs are salaries, benefits, and all other labor-related costs.
- Overhead costs are costs not readily identifiable with a service; things like rent, taxes, marketing, insurance, marketing.
Also, every new drug testing business has fixed costs and variable costs. As you may have guessed, fixed costs never change while variable costs will vary depending on how much business you are doing. For example, if you build a large clientele, the light bill will generally stay about the same, but you may need to hire more staff – raising your labor costs.
It is important to remember that pricing isn’t just about covering your operating expenses and making a profit, although those things are very critical. Ask yourself where you want your brand to sit in the bigger picture of all of the competition? Would you like to be the high-end competitor who offers excellent service but commands a higher price or would you prefer to be a volume-based competitor with low pricing — think Walmart vs. Target and which one you would prefer to be! In the drug testing industry is a mix of both, most small businesses are sensitive to price; however, some will pay for good, reliable and reputable services. So offering a base price, plus, plus is a great way to think about pricing your services. For example, your base drug test price is $50 + Mobile Fee + Afterhour fee, etc.
Your initial goal will be broadening your customer base and offer as many services and the best customer service as possible. Research your competition and do whatever it is that your competitors are not doing with their pricing models, in this business, this is what the big guys are not doing, and the best tip is giving the same service to customers as you would expect to receive.
Here are a few examples of what you should consider offering:
- After-hours drug and alcohol testing for post-accident situations
- Offer mobile service
- Free drug-free workplace policies, but make sure you do not provide legal advice.
- Offer evening and weekend appointments
- On-call anytime service
So, let’s talk about types of pricing:
Examples of pricing
|Cost-based pricing calculates the price based on cost with a standard margin. It’s a constant and straightforward formula that is what is referred to as “prudent” in the business world.|
|Market-based/Competition-based pricing based purely on competitors. It is generally used in commodity markets.|| |
|Value-based pricing prioritizes the consumers’ perceived or believe value. This is the idea that things are worth what people will pay for them.|| |
Pro tip: You also need to consider what sets you apart. Things like customer satisfaction, knowledgeable and friendly staff, a convenient locale or an exclusive deal may all justify higher prices. If you choose to adopt a low-end competitive strategy, you’ll need to focus on dropping your costs. You may want to find an inexpensive location, offer limited services, or concentrate on deals and specials in your ads.
Make sure you know how much you’re making on each service
Though this sounds intuitive, it is more common than you might think that a business owner is not sure of their profits for a specific service. You must understand the nitty-gritty details of where your money is coming from so you can determine if the service is worth offering.
Think of it this way – say you are only selling only 20% of customers on a particular service; that may be a sign that the price is too high. Lowering costs might make sense if you think you could increase the conversion rate a great deal.
MVP – Minimum Viable Product
An MVP is a product (or in your case, drug testing service) with only a basic set of features. The idea is to create something that is just enough to get the interest of early adopters and find ways to make your solution stand out. Companies like Zappos and Uber started with MVPs. You can almost think of it as a “beta phase” in which you do a ton of research and get an excellent grasp on the market.
An MVP is helpful in the following ways:
- It will reduce operating costs.
- You can test the demand for your service
- It will allow you to avoid significant capital losses.
- You can use this service to gain awareness of what works and what doesn’t.
- You can analyze consumer behaviors and preferences.
Upselling is meant to persuade customers to purchase a more expensive, upgraded or premium version of your service, and might be through a membership plan, or after-hours service call. An upsell can help in the following ways:
- Upselling leads to increased Customer Lifetime Value (CLV) – see the next section for more information on the CLV.
- More than ever, consumers want “easy.” You can give them that streamlined experience through the upsell. Now, they have you as their “go-to.”
- The probability of selling to existing customers = 60-70%; the probability of selling to a new prospect = 5-20%. Those numbers clearly illustrate that retaining clients is the best way to go whenever possible.
What is CLV?
You have three main categories of consumers: not profitable, profitable and very profitable. Customer Lifetime Value is the net profit input a patron makes to your business over the “lifetime” of their relationship with you. Higher CLV means more profit because each customer generates more revenue for your company, but you do not have to invest anything more.
DO NOT FORGET: Prices can always be altered
Assuming that the way you are pricing things is working and should stay the same will almost always result in reduced profits. If you could have profited, but you didn’t, you lost. No one wants to be a business loser. So, always be flexible about your pricing strategies and be willing to change them when necessary.
Reducing prices can be a very delicate situation. Often, lower rates may be associated with poor customer service or other bad imagery for customers. It is best to focus on building profits rather than cutting prices when possible.
Increasing prices can improve your profitability even if your sales volume drops. It is vital, however, that you explain to your customers why you are doing it. You can use the price change as an opportunity to re-emphasize the benefits you offer which can strengthen a relationship and increase CLV.
You can also hide price increases by introducing newer, higher-priced services while making the old ones obsolete or maintaining the same price to the customer while lowering your costs. (In this way you are not so much increasing the amount but increasing profitability.)
But hiding or disguising price changes can tick off customers who catch on. It’s not good to be seen as deceitful or underhanded. So, be aware of your public image when making these decisions.
Here are a few ways you can change prices:
- Discounting is just what it sounds like – offering reduced rates for services and can be an annual deal or a discount for loyal patrons. Your profit for such discounts may be related to your CLV so do not forget that. When thinking about profit, it is essential to look at the big picture. Over the long term, will the discount increase the profit margin? However, on the flip side, too much of a discount or discounts too often may give customers an impression that you are the “cheap option” or that your regular prices are too high. If somebody asks, “Why was it $10 more last week?” you need to be ready with an answer.
- Odd value pricing means NOT rounding off to the nearest dollar. You have been in stores and seen things marked for $1.99, right? You are essentially paying $2, but consumers find the price more attractive just because of the one at the beginning.
- Being a loss leader involves selling your service at an incredibly low, possibly at a loss to attract customers. However, this strategy comes with risks that are obvious but can also be a great way to get people interested in what you have to offer.
There is no doubt about the fact that deciding on prices is very important and can also be a tough decision. The fear of losing money is genuine, but the truth is that overpricing your services is not wise either. There are many strategies to consider and factors to keep in mind. If there were a straightforward way to do it, then everyone would do it the same way.
Remember, what sets you apart as a business owner is how you make these big decisions and how adept you are rolling with the punches when things don’t go as planned. Will you be ready to change prices or try a new approach or develop an upsell strategy?