Figuring out the best pricing model for your business can seem daunting. However, there is a tried and true way to figure out what is the best pricing model for your value proposition. Do your research and find the approach that works best for you and your most desirable customers. There are many different pricing models out there, and there is no way you are going to be able to please everyone. Frankly, depending on your C.O.R.E. Discipline, you should know when to say yes, and when to say no.
The most important thing to remember when pricing your products or services is that you need to cover your costs and make a profit. You also need to consider what the market will bear. If you price higher than the perceived value of your goods and services, you will not make any sales. However, if your prices are too low, you will not be profitable.
When determining the best pricing model for your business, consider your target market’s economics, demographics, psychographics, price elasticity, and ethnicity influences. These will all affect your pricing model and success rate. Once you have considered these things, you will be well on your way to coming up with a pricing model that works best for your business.
One thing I came to realize consulting across the globe was that economies and cultures change, but psychology always stays the same. -Ryan Chute
What is a Pricing Model?
A pricing model is a framework that a business uses to price its products or services. A good pricing model accounts for the cost of production, materials, equipment, the overhead costs of running the company, and the demand for the product or service. The goal is to set persuasive prices that will cover all costs while still being appealing the potential customers.
The most important thing is to make sure that the price you present is easy to understand and implement. Customers should easily calculate how much they will be paying for your solutions. And there should be no surprises when it comes time to pay the bill.
Pricing is a vital part of your overall business success and should be given careful consideration. It’s not something you should change on a whim, so it’s crucial to choose the right approach.
Pricing Strategy vs. Pricing Model
If the pricing model is the framework you will use to price specific products and services, then your price strategy is the overall game plan you have to sell as much as you can of each product or service.
Therefore, Residential Home Service Businesses may use several different pricing models, depending on the type of product or service you’re offering. This is your pricing strategy. For example, a subscription-based price model for club memberships, a flat-rate pricing model for repairs, and a fixed pricing model for more price-inelastic goods and services.
Individual pricing models are vital, but they are only one part of the puzzle. To be successful, you need a comprehensive pricing strategy that accounts for optimal sales conversions. That includes costs and competition, to consumer behavior, and your perceived value proposition. When developing your pricing strategy, keep in mind that your ultimate goal is to generate the most profit overall, not just profitability on a specific item.
There are two fundamental approaches to positioning yourself in the marketplace:
- Costco Pricing: Low price, lower margin, high volume.
- Tiffany Pricing: High price, high margin, lower volume (comparatively).
Just because you want to charge more money doesn’t mean you should. If you charge too much, you won’t be able to close the deal or get pegged as a rip-off.
When it comes to producing profits, you need to make sure the money keeps flowing. That means closing deals while factoring in discounts, finance fees, commissions, labor burden, equipment, and materials.
Rarely is “money no object” for customers. And even when it isn’t a factor, nobody is willing to get ripped off (perceptually or in actuality). When value is vague, or your goods are commoditized, your price becomes a test. Therefore, it is up to the seller to figure out how to present the price in a way that passes the test.
You can always lower the price to get a deal, but you’re probably not going up.
In this article, Wizard of Sales® will propose a unique pricing model that helps you establish trust. This pricing model is made for the consultative sales approach that is common in residential home service businesses, where you sell to the people sitting across from you at the kitchen table.
Start your pricing model revolution today. Book a demo with Wizard of Sales®.
Types of Pricing Models
There are many kinds of pricing models that a Residential Home Service Business can use to price their products and services.
Time and Materials Pricing Model
Time and materials are the traditional pricing model for service businesses. Time and materials have a place in certain limited applications, but is now generally considered to be outdated and outmoded by flat-rate pricing models and the like.
In this pricing model, businesses charge for the time and materials used on a specific job. There is little room for discretionary purchases like warranties or expenses that factor into delivering the goods like truck expenses, windshield time, training time, downtime, overtime, certifications, or apprentices. While you can factor this into your ‘shop rate’, you limit your ability to charge a higher price for a higher value service (like being fast because you’re experienced or requiring a specialized certification).
Flat-Rate Pricing Model
Also known as upfront pricing, flat-rate pricing models factor in the anticipated time and materials with a calculated buffer and profit margin to deliver the solution. Flat rate pricing is easy to explain and easy to offer, but when presented before explaining the value of the solution, can quickly turn against your Techs attempting to close the sale.
This pricing model is an industry-standard in 2022, and there are a number of approaches on how to close with this pricing model. Where many companies fall short in their flat-rate pricing is the two-phase calculation that needs to be made to factor in finance and commission expenses. Because these two expenses are calculated on the sale price, they are often incorrect or excluded altogether.
The only other consideration to consider are jobs that require a disproportionately high quantity of labor hours. In these instances, a slightly different calculation is required to ensure you realize the profit you are hoping to achieve.
|PRO TIP: Be sure to calculate your club membership discount into your pricing model. For example, if you want to make $599 for a capacitor replacement and you offer a 10% club discount, your retail price should be $665.55 (599/0.9). While your unloyal, non-club members will have to pay a bit more, you are rewarding your most loyal and profitable customers.|
Subscription Pricing Model
Pricing your club membership seems counterintuitive to many business owners. Not only are you undercharging for valuable services, but you’re also typically offering a discount for your full-price goods and services when becoming a member.
When choosing your price, there are two essential elements to factor in:
- Market price for the membership
- Your value proposition (ie. what you are delivering for the money)
Strategically, you are better off providing a superior value stack to your competitors for the price. That means everything from the time you spend onsite to the amount you pay your team to deliver the service.
Lastly, do not ignore the psychology of subscriptions. You want to frame up your subscription pricing in a way that is most likely to convert, and there are a number of nuances that will make your club membership easier to justify.
Fixed-Rate Pricing Model
Some products and services are more elastic than others. The inelastic products and services are typically the ones that are easiest to compare (eg. diagnostic fees, trip fees, tune-ups, duct cleaning, capacitors, and scheduled maintenance). In these instances, a fixed-rate pricing model can help expedite the sale.
Fixed-rate pricing means charging a single straight fee for the product or service. Often there is a variety in the cost (eg. various capacitor prices), but you determine the average cost of the goods and services and create one price for all of them. This allows your salespeople to speak with confidence which will naturally transfer to your consumer.
eCommerce Pricing Model
We are seeing more and more Residential Home Service Businesses putting their prices up online. This is a deeply relevant and critical turning point for how business owners choose to disclose price.
In December of 2019, we saw the general population shift past the 12% adoption rate for consumer goods online. In data science, this is a very significant juncture for consumer behavior. While posting your prices online has risks, there are a variety of ways to present your prices that instigate the decision to work with your company over the competition, without sacrificing profitability, including simply telling it like it is, bundling, and two-phase hybrid pricing.
Bundled Pricing Model
Bundled pricing is particularly common when bundling discretionary options with essential options. While we would naturally bundle in a suite of products and services to deliver the priority repair, bundling in additional items with this solution is a way of earning incremental profits.
Incremental profits are my favorite profits because they do not require you to account for fixed operations expenses because you have already accounted for them in the initial sale. Why does this matter? Because now you can naturally offer savings for the bundle and still capture above-average profit from the sale. This strategy is particularly profitable if you are bundling in items that you can fix easier since you already have the system opened up or taken apart already.
Hybrid Pricing Model™
Transparency is more relevant than ever in residential home services. Price is measurable, and money is treasured, therefore price is a test that your company has the opportunity to pass or fail.
However, that doesn’t mean you can’t make money, too. It just means that you may wish to take a different route when selecting your pricing model.
The Hybrid Pricing Model™ is a hybrid between good old fashion Time and Materials pricing and Flat Rate pricing. Let’s take a standard 40-gallon hot water tank, for example. When a prospect calls in wondering how much you charge, you build trust by answering the question as asked.
In the Texas market, you can buy a 40-gallon hot water tank for $550 to $700 today. Depending on the fittings and energy source, a company could charge $2,000 to $2500 to install the tank, including all of the appropriate costs, including specialized tools, certifications, licensing, permits, etc. Your plumber also may get onsite and discover that you need to perform some unexpected building code upgrades. These might cost between $500 and $900 to perform.
So when a prospect asks your CSR how much you charge for a 40-gallon water tank replacement, you can tell them with sincerity that you charge $550 to $700 for the tank plus the installation and necessary code upgrades. This answer will satisfy a higher percentage of prospects than refusing to answer their price test, allowing your plumber to get in the door to verify the unknown variables on installation and code upgrades.
By breaking it up into 3 manageable chunks, you are avoiding the big scary $2,500 to $4,100 (or more) for an installed water tank, disqualifying you immediately with no option to build value. You do, however, make it easy for your plumber to go out and assess the situation, and present options. You also establish a baseline of trust for answering the price test, as asked.
It is unfair to expect your CSR to know how much it will cost to install the water heater since there are unanswered questions that only a plumber can ascertain once on-site, and code upgrades are not an optional upgrade to pass inspection in most states.
Wizard of Sales® focuses on bundling, cross-selling, and upselling opportunities to improve conversions, average sale, and profits. Any pricing strategy requires the appropriate training, but the goal of pricing is to make a healthy profit with as many people as you can as quickly as you can.
The Wizard of Sales® Hybrid Pricing Model™ is designed to work well with a consultative approach to selling, pricing, and negotiation that feels right to your buyer and is consistent with your Technician’s values.
Low Friction Pricing
When it comes to pricing and negotiation, you need to reduce friction in all the right places. Now, we all know a little friction is exactly what is needed to close the sale, but we need to get the opportunity to reach that point first. The Wizard of Sales® Hybrid Pricing Model™ is designed to fit the buying process.
Effective persuasion often takes a bit more time, but if that means closing more sales on the first sit at a higher average sale and profit, it is time well spent. You’ll find that will take far less time than the alternative; a lower appointment rate, a lower closing rate, at a lower average sale and profit.
Try this unique approach to pricing and negotiation and see how it affects your revenue.