Let’s be honest, one of the major reasons we’re in business is to make money. Ideally, as a self-employed business owner, you do something you love by selling a service or product to your customers. However, if you don’t make a profit and you’re selling less than the costs, it’s likely your enterprise will fail. How to price for a service or product is built upon many factors, from market demand to competition and buying supplies. Therefore, it’s one of the most important, and difficult, on-going decisions when running a business.
Many of my clients feel anxious about what they should charge their clients. Are they charging too much? Too little? Plus, accounting for most self-employed business owners is a major headache. But it doesn’t have to be. I’ve set out these guidelines to help you work it all out and get what you deserve. So, if you’re struggling to set your pricing structure, read on to learn more about what you have to do.
Value your work
Whether you’re a freelancer, artist or hairdresser, one of the first things you need to do is think about the value of your time. For example, how much do you invest in creating your product or service? If you have spent time making or doing something fantastic, then that is an attractive value in itself. As the old adage says, ‘time is money’ so ask yourself, how much are you worth to potential customers? It’s likely they’ll see the value in paying more for something that effort has gone into, and your prices should reflect this.
Do your research
Doing some simple market research will afford you inside knowledge about what your competitors charge for a similar product or service. These days, much of the research involves simply going online to see what your rivals are offering their customers, and for how much. You could do mystery calls to competitors or comment on social media platforms. This will help you to see what potential clients would expect for a certain price and help determine your business’ financial goals.
Although it’s not a good idea to concentrate your entire pricing strategy based on your competitors, you should certainly be comparing what you charge and your unique selling proposition (USP) against what they’re offering.
Calculate your costs
As tempting as it might be, don’t guess your costs! Instead, work out how much it costs to provide your service to clients. Once you have worked this out, you can calculate your gross profit margin. There are two vital costings to consider when pricing for services and products.
Direct costs are made up of measurable cost objects. For example, overheads, training, labour, equipment and materials.
Indirect costs are defined by invariable factors, i.e. are unlikely to change, and are generally not associated with one particular item, such as rent, insurance, advertising and utility bills.
Your job is to determine how much these aspects of your business are reflected in your pricing strategy: cost-based pricing or value based pricing. From here, you can begin to track your numbers to work out your business profits.
Define your buyers
Any shrewd business person will know about branding, but do you implement this into your pricing strategy? Do you know who your customers are? Or the type of people they are? You need to define who your target audience is based upon the demographic information you have researched; for example, gender, age, income, education, lifestyle, etc.
Once you’re armed with these details, it can offer valuable insights into the way you can match up your service to what clients want. For example, is it price or quality that appeals to them? What motivates your customers to buy from you? All of this will help you determine what price you should charge. It will also help build a solid relationship with your customers.
Decide on your rates
For services: One of the biggest pitfalls, especially for freelancers, is calculating whether to charge by the hour or the project’s flat rate. Each option has their pros and cons. For example, an hourly rate might be useful for smaller projects that are tricky to estimate the time involved. In contrast, a flat rate is usually charged for larger projects whereby you can judge how many hours it will take. Again, do some careful research to decide which best fits your industry.
For products: having done your research and calculations of costs, you now have to put a mark-up on your price. You’ll need to apply the totals of all costs and multiply it by the percentage you want to add, for example 20%. Work out what pricing strategy you will use and then compare it to your competitors. This is so you can adjust it if necessary to calculate your business profits.
Extra Tips: How to Price Services and Products
- Always review your pricing strategy so you stay on top of trends, expenses and customer demand.
- Undercharge and your customers consider your product or service as being inferior to your competitors. If you want to sell for a lower price, do it as an introductory or exclusive offer.
- Overcharge and your business might be considered as ‘pricey’. If you do want to increase prices, consider doing it as part of a launch or the inclusion of an extra value.
- Don’t mix up rate and price! Calculate your costs and then factor in your rates.
- Network with others in the same industry as you so you have a greater understanding of what you offer outside of your own business.
- Test out your prices on your customers to see if they’re a good fit for your sales margin.
When considering how to price for services and products, a quality service or well-made product is something most people will pay for. And, remember, there isn’t one single pricing formula for everyone so be flexible and focused to match the value of your business.
