Pricing your products or services can be a sticky issue. If you’ve set up your business based on a passion or purpose, it can feel challenging to put a monetary value on your offer. Money generally is an area that can feel icky, and money conversations can be tough.
Whether you are an online shop or salon where you need to publish your prices on your website, or a consultant who prepares quotes for potential clients, when you are a small business owner, sooner or later you need to decide what your price is and actually communicate that. The stakes are high, because price has a total impact on your business, and getting it wrong can mean you don’t make enough money or you don’t get any customers. It’s also the area of our business where we have to get to grips with numbers, which isn’t everyone’s area of strength, and the area of our business where a lot of psychological issues come into play. Many of us have blocks around money, or simply a lack of experience in valuing our services to charge an appropriate price. So how do you set the prices in your business? Here are some options:
Cost based pricing
In this approach, you should add up all your costs and divide by the number of sales you plan to make, plus a percentage to make your profit. This can be a relevant strategy if you are a retailer or a manufacturer and it means that, as long as you sell what you plan, you will make a profit. But it is not overly helpful if you are a service based business. It doesn’t take your customer into account and it takes no account of the market or changes in costs.
What do your competitors charge?
This can be quite easy information to find out, and you probably want to price your product or service competitively. But also it has disadvantages, in that it doesn’t start to look at the quality of your offering. What if your competitors don’t offer the value, the extras, and the expertise that you do? In every market there are cheaper and more expensive service providers, and this approach doesn’t help you determine which is the right one for you. It also doesn’t allow to take into account challenges your competitors have in setting their prices – if they find it hard to charge what they are worth when setting their prices, you are simply following their mistake. And pricing cheaper than your competitors can just make you look cheap and low quality.
What will your customers pay?
This is a much more powerful approach and relies on you having done the work to define your product or service offering and define your ideal customer. Are you offering a mass market product or something more bespoke? Are you targeting a niche customer with a disposable income who will buy from you once? Or do you work on a repeat business model?
Listen to your customer feedback. Are they telling you that your service has changed their life? Are you booked up for months in advance? These are all signs that your prices are too low! They may be telling you up front that you are too cheap – listen to what they are saying, this is valuable feedback.
Does everyone pay the same price?
In a service-based business, it is quite common to have different pricing points for different customers. You may have a VIP club, where customers pay more to have more of your time, or a quicker response, or other additional benefits. Your regular customers may have access to discount or loyalty programmes. Alternatively, you may have a cheaper offer – for example a group coaching programme which is cheaper than your one to one offer. You may value a steady stream of cash into your business and incentivise those customers who pay you every month by direct debit.
Whatever your variable pricing model, you ideally need to keep these offers clear and consistent, so potential customers can see what they get at each price offer.
Think about the rest of your brand
Your pricing strategy needs to be consistent with other areas of your brand. If you are going for a premium price, all aspects of your visual identity and branding need to look classy and expensive. Brochures printed out on your home printer, or phone snaps of your product don’t communicate your premium offer to your potential customers. Make sure you brief your designer if you want to be charging a high price, and ask them to help you create a consistent brand which results in customers who are comfortable paying the higher price.
Pricing isn’t an easy decision, but the good news is that it doesn’t have to be a permanent one. There is nothing to stop you raising your prices regularly, until you find the place where you are happy and your business is seeing a steady stream of new customers.
If you want to talk pricing strategies with someone who understands the marketing issues and the financial ones, book my power hour!