If you don’t get your pricing strategy right, you could struggle to stay afloat or win new clients. Discover everything you need to know about setting a pricing strategy, including different pricing models you can explore and how to raise your prices.
Pricing strategy is one of the most crucial aspects of running an independent business. You could be pricing your services too low if you’re barely making ends meet despite a long list of clients.
On the other hand, your pricing could be too high if you’re struggling to acquire clients after the inquiry stage. Neither of these scenarios is ideal when you’re trying to run a profitable business.
How do you set a price that’s right for the client but also right for you? How do you make sure you’re actually generating profit? What if you’re an established business owner, and now you want to raise your prices? We’ll cover all this and more in this article.
- An inside look at the psychology of pricing
- How to price a service?
- Pricing models for independent businesses
- Why pricing shouldn’t be your only consideration
- Tips for raising prices successfully
- HoneyBook — Your small business success partner
An inside look at the psychology of pricing
Before we get into the nitty-gritty of pricing for independent businesses, it’s important to understand the relationship between pricing strategies and purchasing behavior. You’ll see why in just a bit.
The way you price your services (as opposed to the price alone) can impact whether a client decides to buy from you. That’s because using specific pricing tactics can trigger subconscious responses from potential clients, influencing them to buy through the psychology of pricing.
Let’s look at some specific examples.
Charm pricing and left-digit bias
Studies from the Journal of Consumer Research point out that if a client had to choose between products priced at $12.99 and $13.00, respectively, they’re more likely to choose the first option.
According to the American Marketing Association (AMA), this is because “consumers often judge just-below prices, or prices that end in $0.99, to be much lower than the closest round number — a tendency often referred to as “left-digit bias.”
This strategy might not be ideal for your main service packages, but it could be a great strategy to test for ad-hoc services and digital products.
A simple tweak like this can make your offers a lot more attractive to potential clients (as long as you’ve covered the other basics, such as value and convenience, in your offer).
Pro Tip: Clients don’t always buy on price alone. In most cases, it’s a combination of other factors, such as value and convenience. Research your competitors and identify how you can add more value to what you do and how convenient you can make your entire clientflow of inquiring, selecting services, and moving forward with a project.
If you’re offering some sort of a subscription-based service like monthly social media management at $400, for example, try pricing in at $399. The difference is just a dollar, but to a potential client, it “feels” like there’s more value to the dollar than at $400.
Incidentally, this strategy is also called “charm pricing,” and is just one of several popular psychological pricing tools marketers have been using for decades to optimize sales.
How to price a service
We know that pricing can impact our leads, new clients, and returning clients. But how do we know exactly what to price our services?
These guidelines can help:
How much are your costs?
The first aspect you want to consider is how much it costs to provide your service. So if you’re a photographer, for example, the following could be a sample list of all your potential costs:
- Equipment costs (Camera, lens, etc.)
- Insurance costs
- Software costs
- Website hosting and license fees
- Mobile/phone expenses
- Traveling expenses
- Marketing expenses
- Costs for training or further education
Based on how you’re paying for these items (one-time, once a month, or yearly), calculate how much you’ll need to keep aside for these expenses every month, for example. This will help you understand how much, on average, you have to hit every month to cover your operational expenses.
How much will you charge for your service?
Next up, you want to look at how much you will charge for your service.
Let’s say you’re a wedding photographer. List your expenses per shoot:
- Additional labor charges (if you’re having more people on board for support)
- Fuel, props
- Cost for digital downloads/USB stick to be shared with the client
- Web hosting for client’s image gallery
- How much you’re paying yourself for your work per hour (most business owners forget this vital step!)
You’ll want to spread your operational costs and your service charges across photography sessions to recoup your costs and generate income. Determine a base charge for each project or session to cover these costs.
Then ask yourself these questions to arrive at a “fair” price for your work:
- How much experience do you have?
- Are there any relevant licenses and certifications you possess?
- How in demand are you? If you’re just starting out, you may not have the advantage of charging premium pricing. But scaling prices gradually is something to look into as you become more well-known and established.
- How much do competitors charge? When you’re just starting out, you don’t want to go too low or too high in comparison. You want to appear competitive, as that can maximize your chances of getting new clients.
- The amount of work you have to do pre- and post-service. For example, communicating with clients, preparing contracts, emails, meetings, briefing, uploading images to the gallery, website, USB, etc.
Factor in your profit margin
A profit margin is, in straightforward terms, a measure of how much revenue you’re making from your sales after deducting the costs of running your business. It’s usually expressed in percentages.
To calculate your profit margin, determine your net income, which is what you have left after subtracting your expenses from your revenue. Then, apply the following formula:
Profit margin = (net income/revenue) x 100
Divide the net income by your revenue and multiply by 100. The number can tell you how much profit you’re making to the dollar. If your profit margin is 20%, it means that for every dollar you spend on your business, you’re earning a profit of $0.02.
At this point, you may wonder if there’s an ideal profit margin number you should be achieving. The short answer is no. That’s simply because each small business will have its own idea of what profitability means.
Generally speaking, according to the Corporate Finance Institute (CFI), “10% net profit margin is considered average, a 20% margin is considered high or good, and a 5% margin is low. “
Here are a few ideas on how to increase the profit margin for your small business:
- Outsource tasks — When you’re managing your business’s functions by yourself, you may end up spending a lot on training, mentorship, and technology. You won’t necessarily have the expertise in all aspects of running a business, such as marketing or finance.
Think about outsourcing tasks that could eat away at your time and add to your costs. Consider specialist contractors or freelancers to eliminate the costs associated with hiring full-time employees, such as health insurance. Besides, expert contractors can help you optimize results on a smaller budget.
- Convert your existing customers to raving fans — Your clients can be your biggest cheerleaders if you make that extra effort to exceed expectations. Ask your clients to leave public reviews (that’s one aspect of marketing sorted!). Also, ask them for referrals.
New clients are more likely to trust service providers if they’ve been referred by people they already know and trust, like friends, peers, and associates. Referrals can be a great way to bring in new business without having to spend a dime on marketing.
- Rethink your services — Look at how you can expand your offerings to lock in clients to more services. Also, consider retainers or maintenance packages so there’s recurring revenue. For example, as a business coach, you can offer monthly check-in calls as part of a package for ongoing support.
- Invest in technology — Using technology can help eliminate the higher costs of using multiple systems. With HoneyBook, for example, you can manage projects, create interactive and memorable client experiences, manage invoicing and payments, and so much more.
Pricing models for independent businesses
Many different pricing models have been tested over the years by established businesses and found to be successful. But only some of these will fit the scenario of an independent business.
Next, we’ll cover six pricing strategy examples that are ideal for independent and small business owners:
1. Penetration pricing strategy
Penetration pricing is when you kick-start your new business by offering low prices as a way to bring in business. You then slowly scale up your prices as you start gaining a steady flow of clients and referrals.
This approach can be controversial for two reasons — you’re undercutting your competitors to win new business, and there’s always the potential that your offerings may be viewed as lower in value.
Further, you will need to have additional funds to support you while you establish yourself. It’s possible you may end up barely breaking even.
2. Value-based pricing strategy
In the value-based pricing model, you’re charging the price you think your service is worth (usually premium-level). This is one of the pricing methods you can adopt when you don’t have much competition. In other words, you’re the only person who’s offering the service.
The good news with value-based pricing is that you can become profitable very quickly with fewer clients. But because your service is new to the market, you may have to work a little harder to establish enough value for clients so that they buy.
3. Cost-plus pricing strategy
Small businesses can find that cost-plus or mark-up pricing is the most straightforward pricing method to deploy. You simply work out your costs and add a percentage markup that makes sense to you profit-wise.
The cost-plus pricing can be effective if you’re offering simple and set services like Canva template packs as a graphic designer. You can expect steady returns. But when you use this model, you’re not necessarily looking at the market or what customers are willing to pay.
4. Competitive pricing strategy
With a competitive pricing strategy, you’re basing your prices on what competitors are charging for similar services.
- You price lower than your competitors. So, you have an advantage in getting new clients.
- Your price is similar to your competitors, but you offer value add-ons. So, it looks like you’re offering more for the same price.
- Your price is higher than your competitors because you believe what you offer is far superior.
While low pricing may be a great way to get attention for your business when you’re just starting out, it’s not the most sustainable strategy in the long term.
Look at providing value and convenience to make your prices truly competitive.
5. Price skimming
Price skimming is more suited to distinct offerings or services with very little competition in the market. Given there isn’t much competition and you have services that people want to buy, you can price your service high or set your own price.
When your service becomes more popular and as competitors enter the space, you can lower your price to make it more competitive.
The biggest negative with this strategy is that you won’t be able to stay premium as more competitors start to enter the space. You may also be exposed to the risk of upsetting clients who bought your services earlier at higher price points.
6. Bundle pricing
Bundle pricing is when you group several services or products and sell them at one price as a bundle. So, if you’re a small business marketing coach, you may have readymade training and tutorials that you can bundle together as a single package.
So, for example, you can create an “Instagram Marketing Maven” package for $199, which includes the following:
- Instagram Branding Makeover video tutorial, normally priced at $65
- Instagram Marketing Mastery video tutorial, normally priced at $199
- Instagram – How to Reach Out to Influencers e-book, normally priced at $29
Indicate the original prices in your marketing communications to emphasize how much value your clients are getting out of the deal. You can even continue to sell your products individually to offer choice.
When offered options like this, clients can perceive the bundled package as very appealing.
Why price shouldn’t be your only consideration
Regardless of the pricing model you choose to adopt or the price you decide to set, you always want to think in terms of value and convenience for your clients.
Most clients aren’t necessarily looking at only the price to decide whether they’re going to buy or not. They’re also looking at how much value they’re getting from their service and how much more convenience your service offers.
Take the example of a maternity shoot photography service. Some photographers provide a package consisting of monthly shoots for the newborn and their family, including props, choice of poses, digital downloads, display gallery, and USB stick.
The client gets the experience of working with someone they already know to shoot and record their baby’s growth. An added benefit is that you have a fixed client for the duration of the engagement, whether that’s months or a year.
Tips for raising prices successfully
We talked earlier about the need to evaluate and update your pricing at least once a year. If you’ve reached a stage where you’ve stabilized your clientele, and your business is growing organically, it may be time to raise your prices.
But how do you do this without upsetting your regular clientele? Here’re some tips that can help:
- Timing is key – Give your clients advance notice. The last thing you want to do is surprise your clients with a price rise a day or a week before. Clients will appreciate the heads-up because it gives them time to prepare for the switch.
- Sell the rationale – Provide an explanation to your clients as to why you’re raising your price. You want to frame it in such a way that it relates to the client’s service expectations. For example, you can talk about having to raise prices to continue to provide the same level of service because of increasing costs for businesses.
- Provide additional value – This may not always be possible, but it’s worth adopting because it can make the process of transition and acceptance for clients easier. Think about any value-adds you can include to your new pricing packages without putting in significantly more work.
- Do it in person – As far as possible, communicate the price rise with your client directly, whether in person or on the phone. An email can seem cold, impersonal, and not as considerate. Demonstrate openness to answer any questions or concerns they may have.
- Test with new clients first – Before you share the price rise news with your existing clients, you want to test whether the market’s ready first. See how your new price works with new clients. If the market is willing, there’s a good chance your existing clients may be more easily persuaded.
HoneyBook – Your independent business success partner
Setting your prices is just one small step within your broader clientflow. You still need to capture leads, successfully showcase and sell your services, book clients, and onboard them into your business.
To do it all, use HoneyBook’s clientflow management platform. It’s the standard for independent business like photographers, business consultants, designers, and many more. When your clientflow is running smoothly, you get to focus on strategy and growth.
That means you get to add more value that helps you raise your prices and attract more clients.