February 7, 2024

Pricing Foundations

Pricing Foundations

Pricing is as much art as it is a science - there is no one right way to do it. The “right” price is highly dependent on your business offering and the economics of your business.

One of the most common ways to price services is by taking inventory of providers that offer similar services nearby and adjust our prices based on that benchmark. For example, if the going daycare rate in my area is $40/day and I offer extended pickup or dropoff windows, I might charge $50/day or $40/day plus a $10 fee for picking up outside of typical pickup or dropoff times. This approach to pricing assumes that the perceived value of our services are similar to, if not the same, as other daycare providers in our area and the area in which you operate is no better or worse. 

Another way of approaching pricing is to estimate “willingness to pay” for the consumer - that is, estimating the maximum price someone would be willing to pay for our services based on how you believe your value is perceived, the value they get from your services, and their ability to pay (income). Then you select a price that is at or below this point. The difference between the price you charge and their willingness to pay is considered “consumer surplus.”

Have you ever purchased something and feel like you paid the most you were willing to pay for that item? Where the price you paid felt almost uncomfortable - to the point where you almost regret the purchase decision? That is what it feels like when something is priced at your maximum “willingness to pay”. When you set your prices, regardless of how you set your prices, you always want to leave room for “consumer surplus”. Leaving some amount of margin on the table helps ensure that the customer doesn’t feel ripped off or overcharged by your services. This also allows you to serve a larger segment of your ideal customers as everyone’s willingness to pay will vary slightly.

I recommend combining both approaches: take a benchmark of what other businesses in the area charge, then estimate what your clientele might be willing to pay based on their unique services.

In the next post I cover pricing in more detail and the differences between fixed and dynamic pricing strategies.

Learn more about the principles of revenue management by reading the rest of our Guide to Revenue Management.

Chris Tilson