Building Margin into Service-Based Pricing
Pricing services in a way that balances profitability and joy.
Pricing services is risky business… especially when you do creative work or when you’re just getting started as an entrepreneur. Should you try to estimate value or just calculate hours and put a dollar amount to them? There are pros and cons to both perspectives. Add to that the idea of margin, and things get really confusing. Before long, any concept of profitability seems well out of reach.
Most of us find joy in our work. But what happens to joy when we focus on pricing? Typically, joy slinks off to the corner to wait until all the numbers disappear and the creative work begins again. Why? Because unless you’re sculpting a masterpiece out of vintage coins, money and creativity don’t fit together. Maybe because we don’t understand the true value of creativity? Oh… that’s a different article.
Service-based pricing is an issue for most of the creatives and professionals I serve. They come to me for marketing strategy and messaging… desperate for more leads, more clients, and more revenue. But very quickly into the process, we nearly always uncover a pricing issue.
Here’s the issue – -> Profitability for these clients means serving more and more clients without any margin left for managing operations, working strategically, or just having a joyful life. These wonderful people don’t actually need more clients. They need profitability with margin.
Let’s talk a bit about margin for a moment.
What is margin? It is true flexibility… and it’s the reward for pricing your work properly and getting your marketing house in order. Here’s a little description of margin in case you’re not sure what it looks like in real life.
- Staying in bed when you’re ill instead of pushing through pain to hit a deadline.
- Shifting your schedule so you can go on the field trip, attend the play, or visit the zoo.
- Saying NO to a project you know you would hate without feeling guilty.
- Investing time and money in professional development.
- Turning off your phone / email / work brain at 8 pm so you can be present at home.
Business owners (myself included) struggle with margin. Professional people, achievers, and talented creatives do too. In fact, I would argue that most people struggle a bit with margin in one way or another. Why? Because we need it and we expect it, but we don’t intentionally order our lives in a way that creates it. We just hope margin happens from time to time.
This is no way to live, my friends. Margin is essential for vibrant health – physically, emotionally, and relationally. We simply can’t be our best without enough margin in our lives. Yet, most of us create service-based pricing structures that virtually eliminate margin. Let’s fix that, shall we?
Shift your service-based pricing mindset.
Money and mindset issues go together like peas and carrots. Our understanding of the value of money has its roots in our childhood experiences. Grow up in a frugal household and you’ll see money quite differently than someone who enjoyed an atmosphere of lavish spending. Middle-class people think differently about money than those who are poor or those who are wealthy.
My grandparents (and maybe yours) grew up during the Great Depression and the economic sacrifices made during World War II. I remember listening as a child to endless discussions on where to find the best value on groceries or how to repurpose something to extend its useful life. My parents were more focused on convenience, and were willing to pay a little more for services that increased their leisure time or ability to rest.
Early in my journey as a business owner, I realized I had a rather frugal money mindset. I found it challenging to invest in my own professional development. I hesitated before hiring team members because I felt guilty paying someone to do work I could easily do myself. This mindset was a limiting factor in pricing, too. I routinely underpriced my services to make them “affordable” to others with a money mindset similar to my own.
Over time, I realized my mindset needed to shift. I learned that price is a reflection of the
Here are some things for YOU to consider…
- What level of service would you provide clients if money wasn’t a factor?
- How much would you need to charge to make service at this level profitable for you?
- What value would clients receive if you were free to deliver your best work without limitation or hesitation?
What would happen if you created a service offering based on your understanding of your ideal clients? Which services would this offering include if you weren’t evaluating the offers of your competition, but instead focused only on client need? How would you price an offer like this?
Discomfort with questions like these is an indication that your pricing mindset needs a little work. Challenge yourself to answer questions like…
- What’s the MOST I feel I could charge for this work and have integrity?
- What is the LEAST I feel I could charge for this work and maintain profitability?
- How can I make the best compromise between the two?
Notice feelings of fear or unease in your mind as you sit with these questions. Now ask yourself, “Will I let these feelings guide my decisions? Or will I take bold action as a leader and move my business in the direction of margin and profitability, regardless of how I feel?”
Deliver services more efficiently before shifting pricing.
The path to profitability involves a combination of two factors – proper pricing and operational efficiency. If you’re struggling to find margin in your business, you likely have a problem with process bloat. Raising prices will allow you to serve fewer clients in a given time period and provide some margin, but pricing alone won’t get you to a place of ease.
Operations – serving existing customers and delivering quality work – is an often ignored area in most businesses. Sure, we produce quality work… but we often do it in a way that is full of extra steps and wasted effort. Yet few of us make time to evaluate our processes, define them, and refine them until they are truly efficient.
I challenge you to block out a few hours in your calendar to review the operational steps associated with your core offer. Haven’t documented these steps? That’s okay. You do the work, right? You can take time to evaluate the process. Here’s how to start…
- Brainstorm at a high level the steps you take to do the work.
- Focus on one of these high-level steps and outline the actions you take to complete it.
- Review those actions and ask yourself these two questions…
- Does this step contribute value to the client?
- Is this step essential for a successful outcome?
- Consider eliminating any actions that don’t have at least one YES answer above.
Here’s an example from my own business – – > The Timeline. During the onboarding process, my team created and shared a project timeline with my clients. This timeline was beautifully formatted and quite detailed, sharing the main topic of each coaching call, the objectives for the call, and describing the homework required both before and after the call. It was truly a thing of beauty… and my team spent a fair bit of time creating it. However, my clients did not value this document and rarely even looked at it. It was (a) not valuable to my clients and (b) not essential to my process. We eliminated it (saving significant time) and no one even noticed. My process became significantly more efficient.
Increase service-based pricing incrementally.
Once you’ve addressed efficiency and you’ve added margin to your work by reducing the effort required for each dollar of revenue you generate, you’re ready to increase your pricing. While I typically recommend a significant pricing increase for my clients, I always suggest implementing this incrementally. Here’s how…
Start by increasing your pricing by 25% for new clients. If your typical service package is $2,000, for example, quote the next one at $2,500 and see how it feels. If your hourly rate is $100 for existing clients, onboard the next client at $125/hr. You will be surprised by the results… typically sales continue at the same rate as before. This is confirmation that your pricing structure has room to grow.
Once you sell a few new clients at this price, consider bumping it up again. I recommend increasing pricing after selling two custom packages or after a specific time period (month, quarter) if your sales are more transactional in nature. How much should you increase? Typically I recommend the same dollar amount as before – so adding $500 or $25 in our two examples above.
Consider this entire process an experiment. Pay attention to the feedback you get from clients and potential clients. Do the objections increase? Does the buying cycle (from lead to contract) lengthen a bit? Do you start getting a few more NO responses? Don’t let this scare you. This is a sign that you are taking the correct actions.
My conversion goal for my clients is typically 70% conversion of qualified leads. Once you get to the proposal stage, you ideally will get a YES response 7 out of 10 times. When you’re converting at this rate, your service-based pricing is probably right.
Want to increase your service-based pricing? Amp up your marketing efforts.
Someone once told me that price is not just a reflection of value… price is also a reflection of the quality of your marketing efforts. Diamonds are a great example. They are not actually very rare when compared to other precious gems. However, the marketing efforts have been incredibly effective at creating consumer demand. Therefore, perfect diamonds have a large price tag. Want to significantly increase your pricing (along with profitability and margin)? Create a focused marketing strategy and implement it consistently. Not sure where to start? Let’s talk.