Pricing your Services (or products), Four Factors to Consider
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Pricing your services or products, Four Factors to Consider
It happened today, one of my clients who I have preached “you are worth it, know your value, don’t be afraid to charge for your services” over and over to, committed to a job that she immediately knew she drastically undercharged for. This post had been on my to-do list and that was the push that I needed to get it written.
Chances are if you are reading this you are doing so for a business purpose. A business is intended to make money! If you have a valuable service (or product) that you are providing to willing customers, there is a price for that service (or product). Let’s talk about the 4 factors to consider when pricing your services.
Working Backwards: How much cash do you want/need to take home?
An employee of a company is focused on this amount when they accept a job, why wouldn’t you be as a business owner? We want to know that our services (or products) can provide for our family, help reach our financial goals, and help to grow our business. Paying ourselves is a huge portion of that equation. Nobody wants to put in hard work and only get paid $5/hour for their time.
Start with the end goal in mind and work your way backwards. Based on the Profit First System that I recommend to my clients, you should generally be paying yourself 50% of your sales amount. In order to do that you need to determine what you are satisfied with making and then charge at least twice that amount to your customer.
Example: To meet personal financial goals while only working the number of hours that fits your schedule you need to make $50/hour. In that case you need to price your service at $100/hour. If you don’t bill at an hourly rate, you would multiple $100 times the estimated hours it takes to complete the job and that becomes your package rate. (Ex. 10 hour project at $100/hour would equal a $1000 sales price)
Factoring Costs Involved: What costs will I incur for this service (or product)?
After determining our desired take home amount, we need to consider the costs involved with a particular service (or product). Are there fixed costs that you will need to cover prior to making a profit on a particular service line? Example: if you are a photographer you will need to buy a camera and part of the money you make from your services will go towards paying for that camera or other necessary equipment.
In addition to fixed costs, there may be variable costs that increase as the number of customers increase. Example: In the photographer’s case they may need cloud based storage for the images that increases as the number of photos or files they have increases or maybe they rent a studio by the session. Be aware of these service (or product) specific costs and address them when setting your pricing.
Overall Business Plan: How does this service (or product) fit into your overall business plan?
When offering an introductory service or attempting to attract new customers, we may offer a lower price to gain the business of that customer, with the hope of future sales to follow. If this service (or product) is the heart of your business the pricing may not be as negotiable, you know your value and charge accordingly. This portion of your business must be profitable for you to have a sustainable business model.
In the case of a one-time project that you are doing for customer, which doesn’t fit your main line of business, you may adjust the price either up or down based on the situation. An argument could be made if this is a loyal customer, by offering a reduced price on this service it will help generate future sales whether from them or from referrals they send your way. You could also make an argument this is outside your wheelhouse and that you are going to charge a premium for a project like that to account for a learning curve.
Market Research and Competition: What is your target market/ideal customer willing to pay and who is your competition?
The only way to generate sales is to have a market or customer that is willing to pay for your services. You can offer the most amazing customer service, but if you don’t have someone willing to pay the price you set your business won’t make it. Period. The best way to determine this factor is to ask them, do some market research and figure out their price point and what they find valuable.
In addition to the amount your customer is willing to pay, you should do some research on your competition. If you are a boutique type business that sells premium or customizable products/services, your prices will generally be higher than a business that is based on standardized products/services. While your competition should be a factor, I caution you to not allow that factor to have too much of an impact on your pricing. This factor should be a simple check point and mostly be used to determine ways to set yourself apart.
Remember: Pricing is never set in stone and a good business should continue to review and update pricing when necessary. Utilizing these four factors when setting your pricing will help you run a profitable business and keep you from making the mistake my client made today.
One of my favorite quotes is “Know your worth and then add tax.” Believe in the value that you are providing your customers and be willing to charge what you are worth!