Let’s cut to the chase: Figuring out pricing is the worst. For many entrepreneurs, having the “money talk” is the most uncomfortable part of their sales process. I don’t know about you, but when I was getting started, pricing brought up some weird feelings about what I was “worth.” When I would share my hourly rate, it always came with a flurry of butterflies in my stomach.
So, when I was determining how much I should charge, there was an automatic limit on the prices because I felt like an hour of my time could only be “worth” so much. If you’re an artist, you’re selling canvas and paint. If you’re a baker, you’re selling sugar, flour, and water. If you’re a coach or consultant, you’re selling time. All of those things have very finite values.
The thing is, finite values are limiting. They’re black and white. The market knows how much sugar is worth, how much paint sells for, and what the average hourly rate is.
Instead of thinking about your products and services as simply a combination of finite resources, consider them in terms of outcomes. Because, really, isn’t that what you’re selling? I sell business growth and success, not hours of my time. If you sell art, your clients are investing in the happiness that a beautiful space will bring them. And who can put a price on happiness?
(Well, you have to put a price on it – but that’s where this list comes in…)
Once you’ve shifted your perspective to focus on the value of the outcomes that your clients benefit from through working with you, it’s time to assign a dollar amount to that value.
Here are some things to consider (and some things to ignore):
As you’re beginning to sort out your prices, first consider and determine your revenue goals for a month, quarter, or year. In most cases, revenue is dependent on two factors – price and number of clients or sales. We all know how unpredictable sales can be, so pricing is the one factor that you can influence significantly to impact your bottom line.
Divide your revenue goals by a conservative estimate of sales to land at a starting point for your pricing.
Cost of Goods Sold
How much does it cost you to create your product or deliver your service? Do you have hard costs in materials that factor into your profits? The last thing that you want to happen is to have a great month in sales only to realize that you’re only making enough to cover your costs!
Account for those expenses right off the bat by building in an appropriate profit margin (based on your financial goals) on top of your costs.
Consider your competitors’ prices – but don’t be constrained by them. It’s tempting to mimic a similar business when you’re starting out, but resist the urge to base your prices solely on another’s. Research your top competitors and how they structure their product or service offerings. Then, analyze how they differ from yours. Can you justify your pricing?
For example, if your prices are higher, what is the reason behind it? If they are lower, what is keeping you from charging more?
Feedback from Potential Clients
As I’ve said a million times, change is the only constant in the first few years of business and that applies to your pricing as well. Take the first few weeks to gain some feedback from prospects and clients regarding the value that they get from your services. You could even put together a small focus group before launching that allows you to gain valuable insight into how much your prospects value the outcomes from your products or services.
Make sure that you’re soliciting feedback solely from those who are truly within your ideal client profile. (See below: Feedback from Friends and Family)
Confession time: This blog post took me like 2 extra weeks to write. I just couldn’t get inspired. Then, last night, I saw the new Lebron James Kia commercial. In it, Lebron starts out by saying, “Doubt isn’t a storm. Doubt is a drizzle. Just enough to make you stay inside and second guess yourself.” How true is that? When I heard that commercial, it clicked for me. (Good thing I didn’t finish this blog post on the original post date)
Doubt is normal. Acknowledge it, but don’t let it influence your decisions.
Sometimes, when you’re transitioning from a corporate job into entrepreneurship within the same field, you might consider using your previous salary as a starting point. This could work, in some cases, but make sure that you’re considering the difference in taxes, insurance, and other benefits that were built into your salary.
For example, let’s say you previously took home $2,000 per month. Your budget is such that you set $2,000 per month as your revenue goal. What you haven’t considered is that your taxes and insurance come out of your revenue where they were previously taken out before your take home pay.
So, use caution when factoring your previous salary into the pricing for your products and services.
Feedback from Friends and Family
As well-meaning as your friends and family may be, if they aren’t within your target demographic, they are more likely to lead you astray than to provide constructive feedback. For example, I work with primarily female business owners to grow their businesses. My dad works as a project manager for a software company.
It’s easy for me to ask him for advice but, in truth, he’s not the best source of information since he’s, well, not a female business owner.
Pricing can be a sticking-point for many entrepreneurs. Don’t let it hold you up any longer. What is keeping you from setting prices that reflect your value?