Many IT companies make the common mistake of creating a pricing strategy by mimicking their top competitors. They do some market research and estimate a price range for particular IT services based on what their top competitors are offering.
But is that truly an effective way to create a profitable IT pricing strategy? Do you think that it will be beneficial for them?
Hold your thoughts for a minute, whatever your answer is, let’s break down these two questions as an example.
Usually what happens is, they conduct their market research, and identify a specific price range. Let’s say the price of IT services like web development ranges between $500 to $700, and web security optimization and maintenance is something around $1200 to $1400 per month.
So, to come up with a somewhat competitive and seemingly profitable pricing strategy for IT services, these companies may set a pricing of $600 for web development and $1300 for website security optimization and maintenance.
Given the benefit of the doubt, let’s say it’s a very well-researched competitive pricing strategy. But the question is, are they considering overhead costs such as employee salary, software, marketing, sales, and all other costs associated with the overall work processes?
Well if the answer’s a no, their judgments are highly flawed, and they are probably making a crucial mistake that can lead to substantial loss.
You need to generate a positive return on investment (ROI) to earn profits, so without properly evaluating your expenses against your investments there’s a high possibility that your business may fail to breakeven, and somehow if your expenses are significantly higher than your net income then you’re doomed to incur substantial losses.
Effectively planning out a solid IT pricing strategy is somewhat tricky, and it requires some tactful decision-making based on comprehensive financial analysis, and of course, properly computing marginal costs.
You can’t simply set a pricing strategy solely based on competitive analysis, there are so many other crucial factors to consider here.
This article is an in-depth guide that focuses on the evaluation of overhead costs, and the determination of the pricing for each IT service such as website development, website security, website maintenance, eCommerce setup, UI/UX design, and development, and more.
Additionally, this article will introduce you to various IT pricing strategies, such as Cost-Plus Pricing, Hourly Pricing, Value-Based Pricing, and Freemium Pricing. By exploring these strategies, you will be able to develop a customized IT pricing strategy that maximizes benefits for your business.
Remember every business model is different, so it is vital to evaluate the capabilities of your business before finalizing its pricing strategy. So, you need to create a unique pricing strategy to leverage every opportunity to maximize your ROI and profit margin for your business.
4 Effective Step-by-Step Guideline to Effectively Set Up a Profitable IT Pricing Strategy
Evaluate the Overhead Costs of Your IT Services
If you want to create a highly profitable pricing strategy for your IT services, it is very essential for you to properly evaluate, identify and document all overhead costs associated with the delivery of your IT services.
The most common overhead costs of IT services include the following:
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Employee Salary and Benefits
It is important for you to effectively list down, and calculate the overall expenses that you’re paying for employee salaries, allowances, pensions, paid leaves, and other fringe benefits.
Let’s say the monthly total salary expense of your IT employees is $50,000, then you should add allowance, and fringe benefit costs to determine the total amount of money invested apart from their gross salary.
If you have to spend an additional amount of $20,000, then your actual employee cost is $70,000.
So, if you were planning your pricing strategy by only considering the gross salary of $50,000, and excluding the additional $20,000, you’d inappropriately determine the total cost you’re spending on your employees.
And, that would take a heavy toll on your break-even, and profitability level, which is why it is vital to ensure your expenses are neither understated nor overstated by any means.
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Infrastructure Costs
Running an IT business means you must bear the expense of networking equipment, servers, different types of IT software, and all the necessary hardware.
In order to keep them available, and operational you will have to spend a significant amount of money per month, and that adds to your overhead costs.
So, consider tracking and documenting all costs spent on infrastructure maintenance, development, and operation to evaluate your actual investment in infrastructure periodically; whether it’s monthly or annual.
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Office Space & Utilities
It is a major mistake not to include office space and utility expenses such as rent, electricity bills, internet bills, and other costs.
Even if you have a setup to run a remote workforce that counts within these costs, you’ll have to pay for virtual spaces and project management software.
Neglecting these investments would understate your overall overhead expenses, and that would cause issues in determining your actual overhead cost.
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Training and Professional Development
To upscale your IT services, it is vital to extensively train your IT personnel, and provide them access to various technical courses.
Any investment in the skill development of your IT workforce is a direct overhead expense.
So, consider including employee training and skill development expenses as a part of your overhead costs.
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Software Licenses and Subscriptions
Providing IT services requires multiple types of advanced software, and most of these software have licenses that need to be purchased and renewed on a monthly, or annual basis.
As these tools will be used by your IT personnel to deliver services therefore these subscriptions are additional overhead costs that you’ve to consider.
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Marketing, Advertising, and Sales
Although this is not a direct expense for your IT services, you’re still investing in running these departments to actively promote your business, and acquire new clients.
Whatever you’re investing to market your IT services, and convert qualified leads into paying clients are overhead costs of your IT services.
So, excluding these investments can drastically understate your overhead costs for IT services.
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Insurance and Legal Expenses
As you’re running a business, you’ll have to invest in acquiring insurance and bear a significant budget to bear legal expenses.
So, that’s why you will have to include these expenses as a part of your overhead costs.
Legal expenses might incur additional costs associated with documentation, record keeping, auditing, taxation, and other regulatory costs.
These expenses may significantly vary depending on your business’s activities and profit margin, therefore you have to consider these costs before determining the price of your IT services.
Determine Specific Pricing for Each IT Service
Each of your IT services has different levels of workload and requires different sets of tools and resources.
So, the cost of delivering these services will significantly vary depending on the IT service that you’re providing.
To make things more clear, and precise, we will be discussing the Top 8 IT services below so that you can distinguish significant differences in the pricing of each IT service.
Top 8 IT Services and their Pricing:
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Website Development
The average price of building and developing a website can range from $1000 to $95,000 depending on the size of the business, and the number of web pages that need to be created, developed, and optimized.
Plus, it also includes the cost of designing a website, adding features, placing elements, and so much more to create a fully functional website.
Websites require frontend and backend development; the front-end development is associated with the visual aspects, and designs of the website, whereas the backend development includes the site’s structure, system data, and other aspects of developing a website.
IT agencies and freelance IT professionals charge for front-end and back-end development by the hour. On average the rate per hour for backend development ranges from $55 to $93 per hour, and the cost of front development varies between $15 to $35 per hour as of June 2023.
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Website Security
Maintaining proper website security is one of the most crucial requirements for any business website. So, that’s why website security happens to be among the most highly demanded IT services worldwide.
The average loss incurred by businesses globally in the year 2022 due to cyber attacks, and data breaches amounts to $4.35 million.
The total amount of business loss has significantly risen from $3.5 million to $4.35 million worldwide between 2014 to 2022, and it’s rapidly increasing each passing year.
Hence, many businesses are taking cyber security more seriously in recent years. The cost of website security services can significantly vary between $500 to $2000 per month or more.
Typically website security services include setting up end-to-end security encryption software, WAF (web application firewall), SSL certificate, and various security optimizations.
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Website Maintenance
Website maintenance is a recurring IT service, businesses of all sizes need effective website maintenance to keep their website up and running.
Plus, without proper website maintenance, it is not possible to effectively conduct SEO and SEM to boost a website’s organic presence and search engine visibility.
Business websites also need to be properly maintained to ensure their website visitors can seamlessly browse, and navigate through their website, and effectively interact with their CTAs.
Let’s face facts here, nobody likes a website that’s hard to use, buggy, and takes ages to load a web page. So to maintain a highly functional, and user-friendly website, routine maintenance is a must.
Many businesses today are aware of these issues, and as there are many technical aspects associated with website maintenance, it’s super high in demand.
The average pricing of website maintenance roughly varies from $400 to $60,000 per month, or more, depending on the level of optimizations, workforce, and resources required.
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Affiliate Software Integration & Setup
Affiliate marketing is one of the most popular marketing strategies to create a highly profitable passive income stream.
Today, businesses of all sizes have their own affiliate program to increase their sales revenue through affiliate marketing, and for all that, their website needs proper affiliate software integration and setup.
So, in the last couple of years setting up affiliate software, and tracking tools have become a highly prominent and desired IT service.
On average it will take you $1000, or more depending on the size, structure, and optimization requirements of specific websites.
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eCommerce Setup
As of now, there are approximately more than 26 million eCommerce websites worldwide, and each day more eCommerce websites are being created.
Ever since the year 2020, online shopping has skyrocketed globally, and it’s rapidly growing. In the year 2021, total eCommerce sales amounted to $5.2 trillion, and it is expected to reach $8.1 trillion by the year 2026.
Whether an eCommerce website is created from scratch with high-level coding skills, or it’s built using eCommerce website builders like Shopify, WooCommerce, or Wix, specialized eCommerce setup services are required to effectively develop an eCommerce website with the help of IT professionals.
There are so many technical aspects and processes involved in developing an eCommerce website, the price of an eCommerce website setup can range from $30 to $10,000 per month depending on website size, structure, and overall business requirements.
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UI/UX Design & Development
A website’s online establishment, visibility, and conversions significantly depend on its design which directly associates with 3 core aspects; its visual appearance, functionalities, and user-friendliness.
So, a website’s design determines its user interface and user experience, and that’s one of the reasons why the term UI/UX Design is commonly used for any website development involving designs.
The average price of Professional UI/UX design typically ranges from $2,000 to $60,000 annually, which is about $170 to $5000 on a monthly basis.
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Funnel Design & Development
Using a proper sales funnel is vital to streamline and boost online conversions on a business website.
Every business needs noticeable digital touchpoints throughout its website, especially the important webpages need to have compelling, and interactive CTAs to drive increased conversions.
So, that’s why designing and developing a robust funnel is highly essential for every business website.
The average price of funnel design and development ranges from $400 to $10,000 per month.
Understand Different Types of Pricing Strategies for IT Services
1. Cost Plus Pricing
Although cost-plus pricing is one of the most common pricing strategies, it is still the most effective pricing strategy to maximize profitability for your IT services.
So, if you are providing IT services like web development, UI/UX development, website security, etc. you will have to determine a profitable price scheme for each.
Here are all the costs required to provide IT services, let’s use website development as an example here.
To provide website development services these are the following costs:
- Employee salary
- Tools
- Overhead costs (rent, tax, paid leave, all benefits, and other expenses)
Let’s say your total cost of web development services is $500 per month. Now, you want to make a profit of 30%, so that’s your markup price.
Simply multiply $500 by 30% and you will get $150, so $150 is your profit. Similarly, calculate your other IT services to determine a profitable pricing strategy.
So, the selling price of your web development would be $650 to earn a profit of $150.
2. Hourly Pricing
There are many IT services that don’t have a definitive completion time, so that’s why it is best to charge your clients by the hour.
Consider following these 4 steps to figure out the hourly service rate to charge your customers:
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Evaluate Your Billable Hours per Year
The billable hours are the total amount of time employees spend to complete client projects, so these are the expenses that directly involve all activities to accomplish tasks and deliver the service to clients.
On the other hand, non-billable hours are administrative, or overhead activities that are not directly associated with the client service.
For example, if you’re delivering web development services, all the activities, and tasks involved in creating and developing the website are billable expenses, which can include all development expenses to emailing the client.
But the brainstorming sessions, meetings, training, software subscription cost, etc. are all non-billable expenses.
To determine the total hours your IT professionals will spend to deliver each of your services, you will have to subtract the non-billable hours from the total expenses.
Hence, if your employees are working 8 hours a day, that’s 40 hours a week, and 2080 hours per year.
Let’s say your total non-billable hours per year is 400 hours, so if we subtract 2080 by 400 then your annual billable hours is 1680 per year.
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Calculate the Total Annual Cost
Add up all your employee salaries, and all overhead costs to compute your total monthly costs, and multiply that by 12 to get your total annual cost.
Let’s say, after adding up all your expenses and overhead costs per month it’s $700, so your annual total cost would be 700 x 12 = $8400
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Determine Cost Per Hour
Now simply divide your total annual cost by billable hours to calculate the cost per hour of your IT services.
So, based on our example, the cost per hour of your website development services would be,
Cost Per Hour = Total Annual Cost / Billable Hours
Therefore, the cost per hour = 8400 / 1680 = $5
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Set a Selling Price Based on Your Desired Profit Markup
To determine a profitable hourly service charge for your website development services multiply the cost per hour by your desired markup price.
Your desired markup price is the additional amount that you should charge with your cost per hour.
So, if your cost per hour is $5, then your markup price would be 5 x 40% = $2.
Therefore to make a profit of 40% you will have to charge $7 per hour, which means you’ll be earning a profit of $2 per hour.
3. Value-Based Pricing
Value-based price is the perceived amount of price that customers are willing to pay for the value of the product or service.
To determine value-based pricing, you will have to conduct extensive market research and competitive analysis.
By doing so, you will be able to figure out a price range that your target audience is willing to pay for your IT services.
Once you have determined a price range, consider charging a competitive price that befits the current market conditions of your company’s IT services.
For example, if your customers are willing to pay $1000 to $3000 for your IT services, then you should plan your pricing accordingly.
Let’s say, according to the current market conditions you can charge $1000 to $1200 for website development services.
So, if you charge $1000 for website development services, and if your overall costs are $600, then you gain a profit of $400 from each service provided.
4. Freemium Pricing
IT services are highly technical, so that’s why many customers are skeptical before deciding to invest, plus the competition in this sector is more fierce than ever.
According to a recent IT industry analysis, it was found that there are over
228,772 website design and development companies in the USA, and the numbers are rapidly growing.
In order to gain the trust of your potential customers, it is a super effective strategy to provide a freemium plan.
Of course, you can put limited features, and usage limits to influence the freemium users to upgrade to your premium solutions.
But by using your free solutions they can get a firsthand experience of your IT services, and that too can create dependency to acquire your premium IT services.
You can even provide Free IT Consultations to attract potential customers who are interested to acquire your services.
Ultimately, it is an option whether you want to include freemium options or free trials but by doing so it will definitely give you a competitive advantage, and it will also increase the chances of more purchases of your IT services.
Use a Combined IT Pricing Strategy to Maximize ROI
Each of the 4 pricing strategies is instrumental in setting a highly profitable price plan for your IT services.
So, it is ideal to use a combination of the 4 IT pricing strategies to ensure a highly competitive and profitable pricing strategy for your IT services.
If you want to maximize your return on investment and earn the highest level of profit, it is crucial for you to ensure that your price plan exceeds your breakeven level so that you can leverage your desired profit margin.
Therefore, while you plan a pricing strategy for your IT services that are best suited for the current market conditions, it is vital to ensure that your selling price exceeds overall costs.
If you need a personalized guide for your IT company’s pricing strategy then get in touch with us, and one of our representatives will contact you soon.
