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“How much should I charge?” is a question I get asked often.
“How much will it take for you to smile when you see that client’s name come up on your caller ID?” is my answer.
“How much will it take for you to smile when you see that client’s name come up on your caller ID?”Click to tweet
Finding just the right selling price with a good profit margin is an often ignored element of a small business marketing strategy.
The price of your product is the dollar amount your customer is willing to trade for the perceived value they get in exchange. And it’s also the amount that it takes for you to do your work, deliver a product or service with a joyful heart and a smile on your face.
The price of your product is the dollar amount your customer is willing to trade for the perceived value they get in exchange.
When you think about it, the price you set for your product or service says more about you than it does about your customer or the quality of the product or service you sell.
Setting the price of your product or service requires more than pulling a number out of thin air. Setting a price for your product or service requires just a bit more effort than laying out your costs and adding some profit percent too.
Once you understand where your price comes from, setting a profitable price will magically become much, much easier.
The following process for setting the right price for your product or service is a little different than you might find elsewhere – but it’s the process I’ve used to help me stick to my price and make much more money for doing a lot less work.
Decide on How Much Money You Want to Make
Do you know why you’re undercharging?
Because you haven’t worked out exactly how much money you want to make and what you’re going to do with it. Look, your brain is super smart. So if you just say I want a million dollars, your brain already knows that this is not a true figure and it seems unattainable. So you’ll ultimately sabotage yourself.
Your first goal is to determine how much money you NEED.
You have to start with “what’s so” and then set realistic pricing strategies to ultimately get to where you want to be.
The first step in any pricing process is to have a firm grip on how much money you want in your pocket or bank account for the amount of work that you’re going to do.
It’s a “Pay Yourself First” philosophy. To do that, you need to see exactly what it costs for you to run your business.
How to figure out your costs (even if you can’t do math)
If you hate accounting as much as I do, think of your costs as where your time and money go.
At the end of these three steps, you will know how much each hour of your working day is costing you.
- Determine how much it costs for your business to exist. As a math dummy, I like to keep things simple. All of my business expenses are charged to a business credit card. If I want to know how much it costs to operate my business, I just look at what I sp
- Keep track of your time. To do this, I installed a free time-tracking tool called Toggl. For 30 days I tracked where every minute of my time went and tied that time to client projects or my own personal projects.
- Tie your costs to the products and services you’re selling. This is where I enlisted the help of a bookkeeper and it was the BEST money I ever spent. If you don’t have a bookkeeper, you can find one on UpWork or ask your network who they might recommend. Danielle is my bookkeeper (who I found on UpWork) and she specializes is Quickbooks Online (which is the bookkeeping tool I use). In less than a month and for about $200 I had the answer to this question.
Now that you know how much money is coming off of your revenue (top line), you can set a reasonable goal for what you want your bottom line to be.
For example, let’s say you’re a consultant that bills $10,000 each month and your expenses are $6,000 each month. You know that you’ve got $4,000 in your pocket at the end of each month. If that’s not enough and you want to get $10,000 after expenses, then you need to add an additional $6,000 to your BOTTOM line.
Armed with this information, you can now start looking at your offers and seeing how you might change your pricing to meet your goal. But don’t do anything just yet — let’s keep going.
See What Your Customers Are Paying
Notice I didn’t say “research the competition”. This is an important distinction. Instead, look at exactly what your customers are paying to achieve the result you promise. Looking at your industry this way will uncover insanely profitable opportunities for you!
How to Collect Industry Pricing Information
The best way to start this market research is to create a folder or a document about the problem your product or service solves. DO NOT start a folder or products or services – this will sabotage everything.
Now look for products and services that solve this problem. Here is where you will likely see what competitors charge. The difference is that organizing your competitive pricing based on the problem your customers are solving will help you differentiate yourself better.
Document each one listing the features, the benefits, and the pricing.
It won’t be long before you start seeing patterns and glaring areas of opportunity that will help you set your product or service apart from the competition.
After this process, you will have a price range for your product or service.
Decide on a Pricing Strategy
This is so much easier than you think. At this stage of the process, you only have to decide if you’re going to price high or price low.
But be careful:
- If you’re offering a higher price, then you have to deliver an exceptional customer experience to provide value.
- If you’re offering a low price, you need to have a process in place that consistently delivers value while also being profitable for you.
Let’s look at the different strategies companies you already know have taken:
- Wal-Mart – Low prices, access to products fast, anywhere. Wal-Mart is in the Logistics business because this is the skill and strength they use to keep prices low.
- Norstrom – High price, luxury, customer experience. Nordstrom is in the customer experience business. They invest in customer experience and hence the prices are higher.
Neither is good or bad, both retailers have chosen very different pricing strategies and different areas of strength to invest in.
So, based on what you know so far, where are you going to be on the pricing spectrum?
To work that out, you can plot what you’ve learned on a grid.
It might look something like this:
I’d actually recommend that you do this on a piece of paper first — there’s something very powerful about drawing these things out. It gives you the ability to adjust the quadrants in a way that helps you see things more clearly.
At the end of this process — you will know what to charge, why you charge it and what your customers will get from you that they won’t get from another alternative.