Many service businesses set their prices the same way. They look at what competitors charge and pitch a little below it to look competitive. It feels safe, and it wins work. Over time it also leaves the business charging less than its work is worth, often without the owner noticing.
This article explains why pricing from competitors pulls prices down, the signs that you are undercharging, and how to set prices from the value you deliver.
Why pricing from competitors pulls prices down
When one provider prices slightly below the others to win work, the others often respond by matching or undercutting. Each round moves the reference point lower, and over a few years prices across the sector drift down while costs keep rising.
Competitor pricing also tells you very little. You do not know a competitor’s costs, whether they are profitable, or whether they are buying market share at a loss. Setting your price from theirs means relying on decisions you cannot see.
Your price also tells prospects something about you. A price well below the market can suggest a business that is less experienced, or under pressure, even when the work is excellent.
Signs you are undercharging
If several of these apply to your business, your prices are probably too low.
- You win nearly every proposal, and prospects rarely question the price.
- You have not put through a meaningful price increase in two years or more.
- Your prices were set by looking at what competitors charge.
- The team is busy, but profit has stayed flat or fallen.
- You regularly discount to close a deal.
- Clients say things like “you’re very reasonable”.
- You would struggle to pay yourself properly if you stopped doing client work.
How low prices shape your client base
Clients who choose you because you are cheapest are likely to leave when someone cheaper appears. They also tend to be the most demanding: they negotiate on every deliverable, ask for work outside the agreed scope and see your expertise as a commodity. Your team spends more time managing them and less time on the work.
Meanwhile, clients who would value the work and pay properly for it may rule you out because your price suggests a different kind of provider. Over several years, low prices produce a client base that makes the business harder to run. A client scorecard helps you see which accounts are affected.
Pricing from the value you deliver
Clients pay for the result of your work. An IT support company provides business continuity. A marketing agency provides new customers. An engineering consultancy provides a project approved on time and within budget. When you price the hours or the deliverables, clients can only compare you on price. When you price the outcome, the conversation moves to what the result is worth to them.
Value-based pricing starts with that question. The practical steps are:
- Find out the client’s real problem, which is often different from the first thing they ask for.
- Map your service to the outcome it produces for them.
- Put a number on that outcome, using the client’s own figures where you can.
- Set your price as a fair share of that value, and explain it in those terms. This guide covers what to say.
What changes when prices reflect value
Profit improves because the extra revenue comes from work you are already doing. The MSP case study shows an IT provider that raised prices by 8%, kept every client and grew profit by 43%.
The client base usually improves as well. Clients who buy on results tend to be more collaborative and stay longer. Higher margins pay for better people and tools, which improves delivery and supports the price. That makes the business easier to run and, if you ever sell it, more valuable.
One thing to do this week
Pick one piece of work you are delivering now. Write down what the outcome is worth to the client, then compare it with your invoice. If the gap is large, read how to raise prices without losing clients next.
If you want to see how far your prices sit from where they should be, the Pricing Health Check gives you a picture in a few minutes.
If you run an MSP, the MSP Pricing Scorecard takes three minutes and gives you a score and a full report by email.
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