Anyone who has ever been running a service based business or freelancing knows the pain of pricing. Price, known as one of the four P's in the traditional marketing mix, plays such a huge part in getting your services sold. It's a factor in your marketing, it affects your branding. Therefore a common misconception is the price should be low, lower than the competition, to lure more customers.
However, there are many other things that play a huge part in how to price your particular services. Value based pricing, to which I return later in this article, is quite difficult and vague concept to most of us. The most important thing, from your point of view, is if your prices can support your business and your life. As I explain further down this article, this becomes also very important for your clients.
This article isn't about making you rich. It's about making sure your prices create enough income to support your business and, most importantly, your life.
The first thing you need to think, when pricing your services, is how to make the pricing sustainable for you and your business. Before slapping a price tag to your services, start with counting how much income your business needs to stay in business, pay the bills and salaries, and to pay you. There's no point for your business to be if it doesn't make any money.
Competing with prices works mainly for those businesses which can offer mass production of services or products. That way they can cover the costs of making business by producing and selling in masses, rather than offering tailored, one-on-one services or products.
Make a count for what is the lowest amount of money you need each month to run your business and to keep yourself and your family fed, clothed and alive. Keep in mind that you probably have taxes, phone bill, rent or mortgage, car or public transportation related costs, and more to pay. Include all your business and personal expenditures, without forgetting that there may be sudden and unexpected costs.
When you have counted your monthly need for income, the next step is knowing how many clients, projects or billable hours you can do during a month. For example, designing and building a well made website usually takes one to two months. This means that as a professional web designer and/or a developer you can realistically take one to two projects each month. Professional websites don't happen by pushing a button. As a coach you can probably take up to several clients a week, depending on what your coaching package entails. In case you offer group coaching, you can divide the price of the coaching package between the group members.
Now, you might want to squeeze in as much work, as many billable hours, as many clients and projects as possible. However, this is a bad thing for your clients. More clients you are willing to take within a month (or week or day), the less time and effort you can give to each one of them.
Now you can take that monthly minimum viable income and divide it by the amount of clients you can serve within that month. In case you came to a nice round number of 5000 € of minimum viable income and are a web designer, you need to charge at least 2500 € per project to support your business and your life. For a freelancer this may seem like a lot. For certain types of customers this definitely is too much. On the other hand, for serious business this is a low price of a website. And for the serious client this is a bargain.
You may feel tempted to lower your prices in order not to scare clients off. But that way you won't be able to serve your clients or support your business and living. Trust me, the cheap projects are terrible for your bank account, and you can't even use them to get more work. Been there, done that. The cheap projects rarely make great portfolio cases, either. Plus those clients are the ones who expect more and more free stuff from you.
In order to be able to lower your pricing, you need to make allowances. Either you must cut your monthly income need or get the rest of the income elsewhere. However, the latter means spending some of your billable hours in other work. This could be a day job or another business, reducing your business as a side hustle. Or you could try and make the so called passive income. Passive income requires usually much more work than it's title suggests. This is true especially in the beginning, when you must spend time and money in setting up this revenue stream. For example, if your passive income comes from an online course, you must first create that course and all its materials. Then you must market it, to make sure people will find it. After you've made some sales, you probably need to make updates to your course, add more testimonials to the sales page and, obviously, market more. The same goes with any other passive income stream. The both of these ways of getting the minimum viable income reduce the amount of time you can spend with your services. It means you can take less customers or need to adjust your services to offer less value for the clients.
Additionally there's a possibility of taking business loans, or getting some sort of business aid funding. Loans need to be paid back. Both loans and funding are difficult to get and require fitting to quite strict requirements with your business and its finances. In the long run you cannot keep using these methods for keeping your service based business up and running, or you will be in great trouble very fast.
The former option requires cutting from your business and living expenses. Usually you end up cutting more from the living expenses. Cutting from business expenses means less income. You must spend money to make money. Ask yourself if you can really decrease your living expenses without compromising your or your family member's mental or physical health. Some ways to cut from living expenses are to give up hobbies, travel less, live in a smaller house or apartment, stop using a car, eat more home and less at restaurants, party less and so forth. If that's not an option for you, then you probably cannot cut your monthly income.
There's another thing to take into account when pricing your services. It's how your pricing makes you and your business appear. Prices have a great affect on your brand. What do your prices tell about the value of your services? While low prices can seem alluring, they actually make you appear cheap. If you are just starting, a very high price tells about how delusional you are.
A 200 € website or $80 logo design doesn't sound very good. You know, you get what you pay for. On the other hand, 1000 € for one coaching session sounds nuts. You can scare potential clients off with any pricing, if the price doesn't meet the value of the service. Defining the value of your services is difficult, mildly put. Especially if you have trouble with knowing your own value as a person and a professional, you probably have a tendency of undervaluing your own services. Undervaluing your services yourself makes your clients undervalue you as well. And makes it seem like you undervalue your clients. This keeps some of the potential clients from buying your services at all. And the rest will begin to expect freebies and continuously low pricing.
While value is a vague and complicated concept, it is something you must think about when setting your prices. If your services don't appear valuable, nobody will buy them. Cheap price tells about low quality of work, and low value of the service. High price for a service that doesn't seem to offer that much value, is a failure as well.
In case you offer introductory rates or other discounts, make sure to address that clearly to the clients. Or else, you'll have trouble with explaining the clients why your prices aren't as low as they used to be. When offering free services or low introductory pricing, or starting very cheap, you will eventually have to raise your prices to carry your business and life. This could prove to be harder than you thought. Returning clients don't generally like price increases. Others may have heard about your old pricing and be surprised when it doesn't apply to them anymore.
Those clients who want you to cut your prices are the ones who will make your business and life difficult. They want free stuff, services that weren't included in the original contract, and may even fail to pay your invoices. If your services are priced low, at least take the payments in advance. And make sure to be clear about what's included in the price, how many hours you will spend with the project and how many review rounds the client has.
As someone said, your prices should scare you a bit. If you are too comfortable with your prices, it means you are undervaluing your services and most likely not making enough money to support your life and business. It's the same as with that blog post, which almost scares you off from hitting publish and turns out to be the best one you ever wrote. If your prices scare you at least a little bit, then you know you are on the right path with your pricing.
It can be hard to hear the truth, but with your low pricing you aren't doing a favour to yourself or your clients. As a matter of a fact, you are only harming the both parties. Not to mention, angering your fellow business owners. You are setting a bad example. In my experience, if someone tells you to increase your prices, just do that. Don't hesitate, don't wait for a second opinion.
Ditch the clients who aren't willing to pay the full price, or who try to negotiate free extras. While I don't recommend outrageously high prices, price your services high enough, and then a bit higher. Do keep in mind, the outrageous prices can also lure clients. The more a client is willing to pay for your services, the more value you can give them.