6 strategies for setting the right prices for your small business
Pricing your offerings - especially if you are a service-based business or in the creative field - can be a very tricky proposition. Set them too high and you will hear the crickets chirping. Set them too low and you will attract primarily bottom-feeders (never a good prospect) plus everyone else will assume since your product is of low quality. There are all sorts of books and courses on setting prices, but it really doesn't have to be all that complicated. I've been working in marketing for 20 years and have been involved with the pricing strategy for several products, and every time the process started out in one direction and inevitably changed course several times until we either ended up where we needed to be or decided that no price would be satisfactory (certainly not where you want to end up, but better to find that out earlier than later on when you have dumped lots of cash into the business). So whatever kind of creative business you own - whether you're a freelancer or own a graphic design, web design, photography, PR or marketing firm - these 6 steps will put you on the right track. 1. Know where your break-even point lies This requires knowledge of your fixed costs (labor, materials, overhead, etc.) and where you product or service starts to become profitable. If you are a freelancer working out of your house, you will start to be profitable at much lower price levels than if you run a 10 person firm and have an office lease, health care benefits, 401(k) plan and other things to pay for. Just figure out your monthly nut you need to cover to keep your business afloat, and this is your base that you can then add onto to increase your profits. 2. Research competitors' pricing Start by making calls to your competitors to find out what they would charge for a variety of garden-variety projects or products that you will be offering. This may not be so easy to do, as people often want names and backgrounds of their business prospects as well as to meet with you to discuss this face to face. So what I do is just call and tell them I am getting a ballpark idea of what it would cost to buy X, Y and Z and that I don't want a formal estimate but just a sense of what I would be looking at. Some businesses may even balk at this, but many won't blink at telling you generally what they would charge - whether it's their hourly rate or a per-job rate. In addition, if you have a good friend that runs a business, you could have them call your competitors and do this. It sounds more plausible coming from an actual business that might be interested in their offerings, and you may get more accurate pricing. 3. Ask your prospective customers Find 10-20 prospects and ask them generally what they would be willing to pay for your services or products. I would encourage you to do something more formal, like calling them up to set a time to talk and then asking them questions about what they would be willing to pay for a variety of different items or deliverables. When we were pricing our small business management for creative firms, we first looked at competitor pricing and then, based on the competitive info we gathered, created and sent out a quick e-survey to a list of small businesses owners who we knew. This information gave us a good starting point for our first round of pricing. Be aware that your prospects will always underestimate the price they will actually pay, so consider the prices they offer to be the very, very low end of what people in the industry should charge. 4. Decide whether pricing will be a major brand attribute Some premium brands (think Mercedes Benz, Gucci and even Starbucks) have woven their pricing structure into their brand, as the high price represents an aspirational aspect of the brand and gives it a cache that less expensive brands don't possess (i.e., many people would rather be seen drinking from a Starbucks cup as opposed to a Dunkin Donuts cup). At the other end of the spectrum, there are brands like WalMart and TJ Maxx that hang their hat on low prices and deals. What you need to determine is if you want pricing to be part of your selling proposition and, if so, in which direction. Important note: Rarely do you want to be the low-cost provider, mainly because someone will always be willing to go lower than you, and from there it's a race to the bottom. You will have to do more work and sell more just to remain profitable, and there are still many people who associate low prices with shoddy service and product. 5. Start higher and find the tension point It's always much easier to set your initial pricing higher and then lower it than starting low and then elevating it. I have worked with several large brands who were trying to raise their prices after lowering them, and the immense pushback they got from their customers gave them no option but to keep their prices lower. And what is the "tension point," you ask? Well, imagine you're shopping and see an amazing pair of shoes that you really want. They're not crazy expensive, but they're priced so you have to think for a moment how much you want them and if they are really worth the price. After trying them on and finding out how well they are made, you decide that they are worth the price and that you would kick yourself if you passed them up. So you buy them. That moment when you reflect on the price and the value you are getting for the price is the tension point, and if your pricing is accurate then your prospects should feel at least a little bit of tension when contemplating your services. What you don't want is pricing so high that they never even consider you or pricing so low that they immediately sign off because what you're offering is such a steal. 6. Test with packages If you are a service-based business, if it's possible to put some of your services into packages, create an escalating series of packages for certain service categories. For example, if you are a graphic designer and regularly create corporate identity packages for businesses, develop 3-4 different packages of escalating prices so that your prospects have choices among different prices and services provided. This can give you a good sense of the range of prices that prospects are willing to spend on your services and let you tailor certain types of services/products for particular audiences and needs. You will probably notice that people will opt for the packages priced in the middle, and this is consistent with the findings of many social psychology studies Best of luck, and just remember to test, test, test. ------------------- Want an easier way to create proposals, send out invoices and track your billing? Try Planning Pod's business management tools and free up your time for more billable work. Click here for a 14-Day free trial for software for event professionals.