Tara Hall

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May 11, 2016

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Choosing a pricing strategy for your service-based business

In two previous articles about listing your prices online, I gave three reasons not to list them on your website and 3 reasons to list them online. However, both articles assume that you already have a pricing strategy for your services.

If you’re struggling to determine prices for your services, then this article explains four different pricing strategies that you could apply to your service-based business.

This article, by the way, is not about calculating an hourly rate, project rate, or salary.

Value-based pricing

I mentioned value-based pricing in “Should you list your prices online? 3 Reasons not to” because this pricing strategy doesn’t have a set price for a service or package for all clients.

The philosophy behind this strategy is to base your prices upon the perceived value that your services bring to the client. For this strategy to be effective, you have to understand your client.

As an example, I used a monogram to appear on a wedding invitation versus a monogram logo to be used by a company. If you employ value-based pricing, then you charge more for commercial use of a monogram and less for personal use of a monogram.

Despite the fact that the work is the same, how the work is used by each client differs. Hence, the perceived value of the work is also different.

This strategy also applies when it comes to licensing your work. If you provide a service, such as custom illustration that can be licensed by another business, then you’ll likely want to charge more for that service because of the value the work provides to your client.

In licensing situations, what you design may be used repeatedly by the client over a specified period of time. Therefore, your services bring the client more value than the same work done for one-time only use.

3 tiered pricing

Generally, tiered pricing uses three price points: a low, middle, and a high to convince you to buy. When presented with only one option, our decision is either yes or no, but given three options, the decision becomes either/or.

Three options allow us to compare features, benefits, and prices, especially when the prices are not significantly different. This strategy works best when the prices are relatively close to one another, for example, $99, $299, and $499. However, it doesn’t work well if the three options have a wide range, for example, $10, $100, and $1,000.

With tiered pricing, the lowest price option is usually the anchor price leading us to choose one of the other two higher priced options. However, this strategy can work in the opposite direction with the high price intended to drive more sales of the lower price options.

Product companies including KitchenAid and Apple use this pricing strategy, but the same strategy can apply to a service-based business as well.

Take for example a life coach who offers three packages of services:

Not every client can afford the life coach’s one-on-one coaching package. By offering three package options, she can cater to clients with different budgets and needs.

Free + Premium = Freemium pricing

Freemium is a pricing strategy in which you offer a basic or entry-level service for free, but charge for more advanced services. You’ve probably seen this strategy dozens of times online and may even be employing it in your own business now.

App companies often use this strategy by offering a free, but limited feature version of an app. The free version may solve problems for many of their customers, but some customers will buy the full version for more advanced app features.

If you’re a small service-based business, how can you use this strategy? You may already be giving your audience something for free today, such as a webinar, ebook, white paper, and so on. But a good example of a freemium offering is a free ecourse.

Let’s say that you’re a small business marketing expert with online courses. As a way to attract more clients to your paid courses, you offer a free email list building ecourse sent to registrants via email daily or weekly.

If you can convince your audience of the value of your expertise with the free ecourse, then they may want to purchase your premium offering, which may be:

Freemium service offers can be great for do-it-yourselfers, but some prospects don’t want a DIY solution and instead purchase a premium offering.

Prices ending in 9 or 7

Occasionally online, I come across an offering with a price that ends in 7: $97, $197, $997, and so on. This is part of the odd pricing strategy in which rather than price a service with a round number, such as $100, it’s priced at $99, $97, $95, and so on.

Prices that end in 9, however, seem to increase sales because we associate prices such as $19, $29, and so on with bargains and value. In one experiment conducted by MIT and the University of Chicago using women’s clothing:

They had three basic prices, $34, $39, and $44. Surprisingly, the $39 item sold the best, even better than the cheaper price of $34.

Is 7 more magical than 9 when it comes to pricing? While there have been studies conducted on prices ending with 9, I couldn’t find any similar studies to support prices ending in 7. All evidence that I found online about prices ending in 7 was anecdotal.

One way in which to use this strategy may be to use a price ending in 9 or 7 the next time you provide a project estimate. Or if you list your prices online, maybe tweak a price. For instance, if you offer an ebook on your website, list the price as $29 or $27 rather than $30 to see if it has any effect on your sales.

Final thoughts

I’ve covered only a small portion of the many pricing strategies that you can use. If you want to learn more about pricing strategies, a perennial topic that never gets old, then you can find hundreds if not thousands of articles on the web.

And if you want a deeper dive into the psychology behind pricing, check out the book Priceless: The Myth of Fair Value (and How to Take Advantage of It) by William Poundstone.