“How much should I charge?” is a question I get asked a lot. “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. Finding just the right selling price with a good profit margin is an often ignored element of a small business marketing strategy.

It’s funny how we’re all about cash flow and sales volumes, but we hesitate to raise prices or get creative with bundle pricing.  Let’s face it, great pricing is more than just adding on a percentage to your product costs and it’s more than matching competitors pricing.

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.

Know Where Your Price Comes From

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.

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 what 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?

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”. 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 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 every minute of my time. Then I 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). 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 you know how much money is coming off of your revenue  (top line). And, 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 y.ou’ve got $4,000 in your pocket at the end of each month.  If you want to get $10,000 after expenses, then you need to add an additional $6,000 to your BOTTOM line.

Now you can now start looking at your offers and seeing how you might change your pricing.  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

  1. Create a folder of customer problems.

    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 on products or services – this will sabotage everything.

  2. Collect products and services that solve each customer problem.

    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.

  3. Outline features and benefits.

    For each of the products and services you’ve collected that solve a problem, outline the features, benefits, and pricing.

  4. Look for opportunity gaps

    Focus on each level of pricing and what features are available. Notice what is missing and attach a price to it.

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, have a process in place that 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.
  • Nordstrom – 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 and why you charge it.

Most importantly, you’ll know what sets you apart from everyone else.