3. Price Setting When You Go Self-Employed

    Price Setting When You Go Self-Employed. Pricing is critical. Too high and you’ll price yourself out of the market. Too low and you won’t be able to pay yourself. Here’s how to find that sweet spot when it comes to pricing.

    Price setting when you go self employed

    Pricing is tricky. But it’s not just fundamental to your business. It affects your ability to pay yourself.

    There are loads of pricing theories out there. So to help you, here are some of the common pricing methods for people who are self-employed.

    What is Pricing?

    Pricing is the amount a seller charges for their products or services.

    To find the right price a business can choose from many different pricing methods. The one they choose will depend on the:

    • Product or service they sell
    • Costs
    • Desired outcome
    • Customer demand
    • Competition

    Pricing Methods for the Self-Employed

    Here are the most common pricing methods for self employed individuals:

    Fixed Price

    This is an approach where the seller sets a price to do a job regardless of time or cost.

    For example, a self-employed gardener who charges a fixed price to mow lawns of a certain size, regardless of how long the grass is.

    Hourly Rate

    It is common for freelancers to charge an hourly rate for their work.

    To get to their hourly rate a freelancer will divide their desired annual salary down to work out their hourly rate, making an adjustment for holidays, sickness etc.

    This is often appropriate when:

    • you’re unsure of how long a job will take;
    • as an initial pricing strategy to understand more details;
    • it’s an industry standard way of price setting.

    If you need to set an hourly rate then take a look at my guide to Setting Your Hourly Rate (it has a free calculator you can download to help you).

    Competitor Based Pricing

    This pricing method involves setting a price based on what competitors charge.

    Depending on your industry, your customers may expect to see a certain price, especially if you operate in a particularly competitive market.

    There’s no point charging more because your customers will go elsewhere.

    You also may not want to charge less than your competitors because you will simply loose money.

    Time and materials

    Commonly used by hand made creatives and in construction. The time and materials pricing method is where the final price is determined by time spent and the cost of materials.

    You’ll need to work out an hourly or monthly rate as well as keeping details of the costs of delivering a job.

    Customer Based Pricing

    Customer based pricing is charging a price that the customer is willing to pay.

    This may mean that you charge more than you thought was possible – perhaps you offer some intangible benefits or “free” services.

    Or you may find that your customers are not willing to pay a price that covers your costs and pay yourself a salary.

    Premium Pricing

    Premium pricing is particularly attractive to some self-employed individuals. It involves setting a higher price for your product or service because of additional premium services or higher quality and experience.

    What this means is you may have a smaller client base but charge higher prices.

    In other words less hours and more money!

    Cost Plus Markup

    This pricing method involves identifying the cost of delivering a job and then adding a fixed percentage to this.

    The fixed percentage added is a way to cover the overheads of running a business such as salaries, accounting and admin. It’s a very straightforward method of pricing.

    Penetration Pricing

    This pricing method involves setting a low price to make their product or service more attractive to new customers and increasing market share.

    This is great for raising awareness and taking customers away from your competitors.

    But when you run a small business making losses on your sales is something that needs to be handled strategically. Especially if you have limited cash flow and need to pay yourself a salary.

    Common Pricing Pitfalls

    Mistakes happen. Especially if you are not experienced with pricing and self employment.

    Here are some pitfalls you need to look out for:

    • Not charging for their own time and unable to pay themselves a salary;
    • Charging too little and ending up working crazy hours;
    • Choosing the wrong pricing strategy and attracting the wrong type of customer/client

    Top Tip: charging less doesn’t mean you attract more customers or even the right type of client. So taking the approach of being the cheapest will not necessarily yield the right result for you.

    What If You’re Not Sure about Pricing?

    Perhaps you’re a disrupter or maybe you want to bring a new pricing strategy to replace an outdated industry standard.

    Whatever the reason, if you are not sure about your pricing, the best advice I can give you is to test, learn and make changes.

    Testing is the best way to learn what potential customers want to pay and how.

    Anita Forrest
    About Anita Forrest

    Anita is a Chartered Accountant with over a decade of working with small business owners. She is the creator of the ‘Go Self Employed’ website, where she simplifies complicated self-employment topics such as taxes, bookkeeping, banking and insurance.