How to Set Pricing for Products and Services
One of the most daunting parts of creating a business – whether you’re selling services or products online or in person – is figuring out how much to set pricing. Knowing what to charge your clients or customers is a difficult conversation to have with yourself, no matter how long you’ve been in business or how big of a customer base you have. Enormous companies and brands fiddle with their prices all the time based on the economy, resources, market demand, and inflation. So, don’t worry if you struggle with pricing or find yourself wanting to change your prices in the future. It’s totally normal.
We’re going to talk about methods and formulas you can use to fairly determine pricing. The prices you end up with should be competitive but fair and allow you to make a profit while also being logical.
How to Find a Baseline
Before we even look at products, services, markets, competition, you need to determine a baseline- what the minimum amount of money you need to make, and how much time you want to spend on what you do. This will inform many of your future steps. Let’s jot down a few numbers.
Personal Expenses
- First, determine your annual personal expenses – your rent, groceries, streaming services, all that stuff.
- Next, determine how many hours you want to spend on your work per year. If you run your own business that includes not only client work but working on your business, too.
- Divide the first number by the second number – this is how much you need to charge for your work on an hourly basis.
Whether you’re providing products or services, you’re spending time working and you need compensation. Remember though, if you’re in the United States and are self employed, you need to keep taxes in mind. So, take that hourly number and tack on another 20%. If you’re not in the US, determine what you need to put away for taxes and use that percentage instead.
Business Expenses
Now, determine your annual business expenses. This includes any sort of office rent, subscriptions to important software, your employees or contractors wages, the cost of internet, etc. Then, determine how many projects or how many products you want to sell per year. Divide the first number by the second number. This tells you what your sales numbers should look like in order to break even. Remember taxes! So add 20% or your local percentage to that number.
Finding Your Rate
So, what do we do with these numbers now? Combine them:
If your hourly rate is $100 and your per-project rate is no less than $2,400, and it takes you 20 hours for that project, you’re looking at charging the client $4,400. This means that you can pay yourself for this project as well as any business expenses you need to cover.
Service Based Pricing
Look at a project like building a website. If it takes you two hours to design and build a webpage, there should be a price associated with that service. Now, when a client asks for 10 pages, you can easily provide a quote based on that number. Add up all the tasks in a project and you’re left with the total project cost.
Pricing based on your time is a fantastic way to make sure you’re being fairly compensated while keeping your pricing consistent and logical. If a client then asks for another page halfway through and you let them know you’ll need another $200, you can explain why: that is what your time is worth.
These formulas give you a great place to start. But there are some other important things to keep in mind when building out your pricing.
Who Are you Selling To?
You need to give some thought to your target client or customer. Your ideal audience is always going to be someone who is ready to spend whatever it takes to get results. However, that’s not always the reality. Take an honest look at your typical client or customer and what their budget would look like.
For example, if you offer services to freelancers, you should expect to encounter smaller budgets compared to if you’re selling software to Fortune 500 companies. You don’t want to charge too much and price out your audience. No amount of marketing will be able to bridge that gap if folks just don’t have the budget.
At the same time, you don’t want to charge too little and devalue your services or products. How much of a value will this person place on your offering? Is your product or service a must-have, or a nice-to-have? All of this matters when choosing prices.
Who Are You Competing With?
A good way to get an idea of what to charge – and what your market expects – is to look at what similar companies or businesses charge for comparable products and services. Your clients will be doing the same. Research other brands and compare what they do or provide to what you do or provide. You may want to charge a little less than they do in order to stay competitive. Or, if you want to offer more value than they do or present a more high-end brand, don’t be afraid to charge more. Shoppers take more than just the flat cost into account when making buying decisions.
What’s Your Minimum?
What is the lowest you could charge for your product to keep the lights on? What is the smallest amount you could charge for a service or project in order to keep yourself afloat? Profit comes when you break past that minimum, at which point you can consider growing and scaling your business.
To Sum Up…
Building pricing is a huge topic and can be approached in many different ways. This is not the only way to determine how much you charge. But if you’re stuck, start here and make alterations based on your unique situation.
