Pricing your product or service can feel like a game of educated guesses. But believe it or not, there are some key factors you should consider to help you set the right price for your business. There are also several different strategies you can use that will help you determine the price point where you’ll attract the right customers and make the most profit.
First, let’s take a look at five of the most important factors you need to consider to set your price.
Variables to Consider When Setting Your Prices
Cost of Goods
Your cost of goods is the amount you pay for the materials used to create your products. If you’re a product-based business and your product is art, for example, then your cost of goods would be the expense of the paint, canvases and frames. If you’re a service-based business, you likely do not have any cost of goods, but you do have expenses, which I’ll explain next.
Did you know the easiest way to increase your profit is to lower your costs? In the video below, I’ll give you two foolproof ways to lower your cost of goods and increase your profit by about 30%!
Your expenses are the other costs you have in order to run your business. Both product- and service-based businesses have expenses. For example, a house cleaner uses Windex and a hairdresser uses shampoo and conditioner. Other costs include operational expenses such as paper for orders, boxes for shipping, overhead expenses like lighting and phone service, gas for deliveries and so on.
Calculating your time, as you probably know from experience, is much more complicated than just adding up the minutes or hours spent creating an actual product; it’s the time invested on anything having to do with your product. This includes the time spent on the phone taking and writing the order, preparing, creating, cleaning up and boxing the order, as well as shipping, sending receipts, billing the order and so on. Those are work hours and you need to include them in your price.
And as soon as your customer starts making changes that require more of your time, the price should change as well. For example, imagine you run an Etsy shop selling those cute banners for birthday parties. You get a request for your best-selling five-foot pink-and-white Happy Birthday banner that’s priced at $20, but the customer would like you to add her daughter’s name, Savannah, under Happy Birthday.
You can totally do that!
Once the order goes through, you get a follow-up email that reads: Oh, and can you please extend the length by two feet?
Y’all, this is no longer a $20 banner. You’ve added an additional row of letters and more materials to fill the extra space—so your cost of goods has definitely gone up. But don’t forget about the extra time it will take you to complete the bigger (not to mention customized) project. The moment a customer changes the scope of their order, the cost needs to change as well.
Related: Extra Time Means Extra Cost
Another factor to consider when pricing is the quality you’re providing. If you’re using high-quality materials for your product, you’ll want to charge more to cover those costs and price your product for what it’s worth.
The higher the value of the product or service, the higher you should set your price. For example, Banana Republic and H&M are both places you can buy clothes for the office. I, personally, shop at both when I need new business-casual outfits. But when I’m investing in a classic blazer that I expect to wear for several years, I don’t go to H&M—I go to Banana Republic (or a brand of similar quality). And I pay more for it.
If you have a service-based business, you might be wondering how you determine your level of “quality.” If that’s you, your quality will depend on your skill level, but the perception of your quality will be determined by a few other things such as years of experience, level of education, portfolio of past clients and any awards and accolades you’ve received. If you’re just starting out, your goal might be to just get clients. You might want to charge below average while you are still gaining experience and establishing your client base, referrals and portfolio. But as your skill level, experience, education, clients or awards increase, your price should increase as well.
As your skills, experience, education, or awards increase, your price should increase as well.
The photographer my husband and I used for our wedding was insanely talented but also affordable and within our budget. Then, a few months after our wedding, he was named “Best Photographer in Nashville” by a local magazine. Receiving this award meant he could—and should—raise his prices. So, when my friend used him for her wedding pictures a year later, she ended up paying a lot more than I did! And that was completely appropriate.
Like our photographer, the quality and experience you offer will help determine the value of your service. That, in turn, will help you set the right price.
What the Market Will Bear
It’s important to think about what the market is willing to pay for the product or service you’re providing. In general, the higher your price, the smaller the market that can afford it. The goal is to find the sweet spot that maximizes your profit while maintaining a strong customer base.
The truth is there’s an average selling price for almost everything on the market. That includes Etsy items, handmade items, fabric items and items from a home-based business. It’s just reality. For example, unless your name is Kate Spade or Tory Burch, you probably shouldn’t be charging $600 for a purse just because it took you a long time to make it. It’s not the customer’s fault that you sew as slow as Christmas!
To determine what the average selling price is, take some time to research your competition. That can give you a baseline of what the market will bear for that type of product or service.
Don’t rely on just one of these variables to give you the answer you’re looking for. Work through all the variables to help you narrow down your price range. I bet you’ll discover your work is worth more than you think.
3 Pricing Strategies to Consider
Now that you know about the different variables that can impact your bottom line, let’s look at some of the most common pricing strategies you can use for your business. Every business is unique, so don’t feel like you have to do exactly what someone else is doing. Trial and error are a natural part of the process.
Pricing for Market Penetration
Pricing for market penetration is a strategy many new businesses use to gain customers early on by offering lower prices than industry standards. But as I’ve said before, this is a common mistake in small business. Once you train your customers to expect lower than average prices, it can be difficult to raise them.
Don’t train your customers to expect lower than average prices.
I don’t recommend this strategy for another reason: You’re building your business for the wrong person. Here’s what I mean. Your target market is a group of people that want what you have to offer and are willing to pay the price you charge. When you start out charging significantly lower than what your work is worth or what you plan to charge in the future, you’re attracting the wrong customer. You are also positioning your business and brand as being something that you’re not—cheap.
I only recommend this strategy if you’re a service-based business, such as a photographer, speaker or coach, and you’re totally unknown. You can start out charging less than you plan to in the future, but I recommend that you communicate that to your customers from day one. You can offer “introductory pricing,” which makes it clear this is not your normal price. Then, as soon as you get more credentials, experience or awards, you can gradually raise your prices.
Bottom line: Generally you’re better off charging what you’re worth on the front end.
Another pricing strategy is to set prices higher than your competition. This strategy can work really well for small businesses and handmade goods. The key to making it work is showing potential customers why your product is worth the higher price tag. Then after you communicate the value, you need to deliver on it! Make it your personal goal to make your products and services actually worth ten times what you’re charging your customers. That’s how you exceed their expectations, create repeat and loyal customers, and earn word-of-mouth marketing because your customers were so happy with their experience and the value that they received.
The last strategy I want to share with you is bundle pricing, where you sell multiple products for a lower rate than if they were purchased individually. Using this pricing strategy, your customers get a “bonus” for free, increasing the value in their eyes! Who doesn’t like getting more stuff for less money?
Selling bundles is not only a great way to encourage your customers to spend a little extra cash, but it also helps you clear out previously unsold items in your inventory. This works especially well if you sell complementary products—but don’t force it.
For example, if you’re a wedding photographer, you might bundle a couple’s wedding day photography with an engagement shoot. It’s included in their package, so they feel like they’re getting something extra for free.
We use bundle pricing at Ramsey Solutions all the time. When my book, Business Boutique: A Woman’s Guide for Making Money Doing What She Loves, came out, we offered the e-book, audiobook and a Marketing Basics video lesson to anyone who preordered it.
Figure Out What Pricing Strategy Works for You
Whether you’re behind a computer, sewing machine, or mixing bowl, whether you’re teaching, cleaning, or designing, regardless of your “type” of business, the bottom line is you need to charge what you’re worth!
These variables and pricing strategies are a great way to get you started in determining what that number actually is.
Once you decide on a starting price, plug your numbers into my free Profit Potential tool. Profit Potential will help you find out exactly how much money your business can make on a weekly, monthly and yearly basis. It will even take the guesswork out of how much to set aside for taxes! Discover your Profit Potential today!