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Pricing Your Services for Profit

California-based Aplus.net is one of thousands of companies offering customers domain registration, Web site hosting and design, and ISP services — services that have become commodity businesses. But Aplus.net doesn’t price itself as such, explains Christopher Boring, the company’s vice president of marketing. It charges its customers more than many of its competitors. And yet surprisingly, Aplus.net boasts a customer list that tops the 200,000 mark. The reason? The company positions itself as a quality leader.

“We provide 24/7 toll-free support and offer a suite of more than 100 tools as part of our core package,” says Boring. “That’s worth something to a small business.”

Boring is onto something, experts say. While it might seem like low pricing is the number one variable that can win you customers, it’s only a small part of the equation. In fact, pricing yourself at the bottom of the pile can often work against you.

“If you price yourself too low, you’re a slave, diminished in the eyes of your customer,” explains Walter Zweifler the founder of Zweifler Financial Research in New York. “At some point, you have to accept the reality that some people have tunnel vision and only buy on price, but many of them soon realize that’s false economy.”

Aplus.net’s Christopher Boring confirms cut-rate pricing can also create a negative perception about your product. “If you’re seen as the price leader, you’re not necessarily seen as a quality leader,” he says. And then there’s the danger of raising rates after starting with a low introductory price. Customers feel cheated and often look for the next best thing.

A better strategy, says Zweifler, is creating what he calls “just right pricing,” which provides enough of a profit margin without alienating customers, or even worse, being forced to discount from your original quote.

You can do this by starting with your cost base and building from there, says Dr. William Ward, Warehime professor of business administration at Susquehanna University in Selinsgrove, Pennsylvania. Assess the obvious: How much do your materials cost? How much do you pay for labor and overhead? How long will the product or service take to deliver? The combination of these fees is your bottom line — what you need to break even.

Once you have that number, think about profit. How much do you want and need to bring in?

Beth Zimmerman, principle and founder of Cerebellas LLC, a Long Beach, New York-based consulting firm, says she makes sure her pricing is right by doing “gut checks” of scope and pricing. She examines her current and former projects and consults with business colleagues who are familiar with her market to make sure her prices are in line with the market.

“This ensures that a proposal is going out ‘right-sized,’” she says. “I never reduce costs without a commensurate reduction in scope of work, and have found that being upfront about this cost-value relationship is respected by clients and prospects.”

She also assures her clients that she’s sensitive to the fact that cost is an issue. “It takes away their anxiety that you’re just there to get what you can get out of them,” she says.

And both Zimmerman and Boring do something else that Susquehanna University’s Ward says is key: constantly review their prices to make sure they are competitive.

Explains Ward: “A lot of people think pricing is like launching a boat. You come up with a price and let it go. It isn’t like that. You have to give it a lot of attention to keep your business afloat.”

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