How To Set Your Pricing
If you don’t have solid pricing, you won’t make money in business. If your prices are too high, people won’t buy. Too low, and you will be working for free, or worse, you will lose money. Learning how to set your pricing is a key component to being successful in business.
Snapshot
Decide how much you want to make
Choose a pricing model
Know your market rate
Demonstrate your value
Set your prices and stick to it
Decide how much you want to make
This step may seem a little oversimplified but this is a more important question than you might think. The answer to this question directly affects how you set your pricing. Once you know your income goals, it’s fairly easy to figure out how you need to charge for your product or service.
For example, if you are a freelancer working 40 hours a week and want to make $2,000 per week you need to be billing $50 per hour, right? Wrong! Just because you are working 40 hours a week doesn’t mean that those are all billable hours. In addition to doing the ‘client work,’ you also have to do a lot of administrative tasks like working on bookkeeping, invoicing clients, updating your website, marketing your services, client communication, etc. Once you take care of these tasks your 40-hour workweek only yields 20 to 30 billable hours at best. Not only that, but you also need to consider overhead like equipment, office space, and other administrative costs.
The good news is that you can simplify and automate a lot of administrative tasks with software like QuickBooks Online or by outsourcing technical tasks like your website maintenance. However, these options do have costs associated with them and administrative tasks will still take up some of your time. So instead of charging $50 per hour, you might need to bill $75 or $100 per hour to reach your income goals within your 40-hour workweek. The key is determining what you want your income to be and then use that to back into how to set your prices.
Choosing a pricing model
There are many ways to charge for your goods or services. Each pricing model has pros and cons but it’s up to you to pick which one works best for you. You can even get creative and combine pricing models. The following is a list of some basic pricing model examples.
Hourly rate
You charge per billable hour for your services. Example: attorney charging by the hour.
Fixed project rate
You establish a clearly defined scope of work to be performed for a set price. Example: a website design project.
Labor plus materials
You give a fixed labor bid plus an estimate for the materials to be paid by the client. Example: a painting contractor painting a home exterior.
Retainer (typically monthly)
You have an arrangement with your client to deliver certain services on an ongoing basis. Example: bookkeeper recording monthly transactions and running reports.
Subscription
Similar to the retainer pricing model but typically for a physical or digital product. Example: Harry’s Razors or QuickBooks Online.
Set pricing (product)
You have a product or productized service that has a set price. Example: food truck selling tacos.
The key is to figure out which pricing model will produce the most income for you while being the most attractive to your prospective client. When possible, you want to be able to take advantage of economies of scale, increased efficiency due to more experience, and leveraged technological advances. Going back to the earlier example of the freelancer. If you got really good at what you did or was able to leverage technology to decrease the time investment needed to deliver your service by half, what would be the best pricing model to go with?
If you continue with the hourly model you could simply double your prices since your productivity had doubled. This is viable but only to a point. At a certain point, new customers might be turned away by the sticker shock of the high hourly rate having never seen how fast you can deliver. Not only that, but you are still simply trading time for money.
If, on the other hand, you went to a fixed project rate you might could charge $2,500 for a project that now only takes you 10 hours to deliver. Your hourly rate is now the equivalent of $250 per hour but the client doesn’t care since they deemed the end product worth the $2,500 investment regardless of how much time you put into it.
Know your market rate
It doesn’t take much investigation to figure out what the going rate for your product or service should be. Typically, you can simply Google for common pricing ideas or call your local competition. Some may have their pricing on the shelf at a local store or on their website online. Doing a little detective work will go a long way in helping you figure out how to set your pricing.
Once you have scouted out the competition you will probably see that there is a range of prices. Where you land in that range is determined by the level of service you deliver and how you position yourself in the market. In other words, ultimately your pricing comes down to the perceived value you deliver.
For example, carpet cleaning company A has great reviews, their employees wear respectable uniforms (including shoe covers), and drive custom-wrapped vans. Company B, on the other hand, shows up to the job site in ragged jeans, a rusty old creeper van, and walks in the client’s house with mud on their shoes. Which company do you think would command a higher price?
The point is this. You can position yourself towards the upper end of the going rate by being professional, delivering exceptional value, and marketing yourself well. You don’t want to price yourself out of the market, but you do want to deliver tons of value so you can command a higher price.
Demonstrate your value
This leads us to our next point, demonstrating your value. When you’re trying to decide how to set your pricing you should be able to pinpoint specific ways that you bring value to the table. At a basic level, you must perform the service, accomplish the task, or deliver the product. However, as mentioned above, there are other ways to increase your perceived value as well.
For example, when the cleaning team from company A shows up they are sending a message to the client. The message is saying “We can deliver the service with excellence and respect. We also won’t destroy your home, stalk your family, or try to steal your belongings.” In other words, by showing up the way they did, they gave the customer peace of mind that they would be well taken care of and that this was going to be a good experience. People will pay more for an exceptional experience. They will also be more likely to refer their friends to you as well!
That being said, don’t shy away from demonstrating value to your customers. Provide social proof through testimonials and reviews. Showcase special awards and high ratings. Speak directly to your customer’s fears to reassure them (i.e. we promise to treat your home like our own). This will go a long way to demonstrate your value to your customers.
Set your prices and stick to it!
Now that you know how to set your prices, don’t be afraid to charge what you’re worth! There will always be some grumpy cheapskate who comes along and tries to bully you into giving them a steep discount. Don’t do it! Chances are you probably won’t enjoy working with them anyway.
The reality is, if you set your prices correctly, you will have the funds to be able to focus on delivering the most value to the clients who appreciate it the most. By sticking to your pricing you avoid shortcutting yourself or your clients. It is ok to offer discounts or special promotions occasionally, but as a general rule stick to what you know you’re worth.
Conclusion
Learning how to set your pricing as a business owner or freelancer is vital to your long-term survival. Many entrepreneurs fail to set their pricing correctly and end up working so many hours that they are only making minimum wage! Thus they burn out and give up. So be intentional about your pricing and you will be amazed at how much more you will enjoy your work when you’re getting properly paid for your efforts!
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