Setting your prices is no easy feat as an entrepreneur. And it’s one of millions of things you need to decide when starting a business.
I’ve seen so many small business owners pour their lives and souls into their businesses. They work tirelessly to provide the best service possible, to delight their clients, to go above and beyond. Yet, they fail to understand what they’re worth and how to price their services.
But that’s understandable. Pricing is arguably the most difficult element in your marketing mix. Price your services too low and you’re leaving money on the table (and potentially even losing clients, as we’ll discuss later). Price your services too high and you’ll turn people away. So, how do you get it right?
In this article I’ll share the key things to think about when setting your prices.
When Setting Your Prices, Here’s the Million-Dollar Question… Literally
The first step to nailing your pricing strategy when setting your prices is to understand what your clients are willing to pay for your service aka their “willingness to pay.”
Willingness to pay is my most favorite pricing concept. To illustrate the idea, let’s play a little game of questions:
- How much are you willing to pay for a bottle of water from Costco? Maybe 50 cents.
- How much are you willing to pay for a bottle of water at your nearest convenience store? Probably two or three dollars.
- How much are you willing to pay for the same water in a fancy Fiji bottle? Now you’re probably willing to pay $10 dollars, especially if you’re at a nice restaurant.
The lesson here? People’s willingness to pay is not just determined by the product or its quality. There are other factors that come into play such as brand, location and scarcity.
Determining ‘Willingness to Pay’
In order to determine how much your clients are willing to pay when setting your prices, the first thing you need to do is have a very clear understanding of your value proposition and what makes your service unique.
In our previous example, Costco’s value prop is low cost. The convenience store’s value prop is exactly that, convenience. And Fiji’s value prop is about providing the world’s finest water. Their pricing matches their positioning.
The second step is to determine your ideal customer. By definition different people have different willingness to pay. Therefore, it’s important that you understand what kind of people fit your service best. Typically, we segment people based on demographic and psychographic factors.
– Marital status
– Geographical location
– Situational factors
The goal of segmentation is to find the group of people that will value your product or service the most.
Once you are clear on what makes your service unique and who your ideal customer is, you can start to define your pricing strategy.
3 Steps toward Setting Your Prices
To set your price point, follow these three steps:
Analyze Your Competition. Start by looking at other service providers in your area. How much do they charge? Is their service comparable to yours? In which ways are you better or worse than they? Be sure to focus your attention on those service providers that service a customer base similar to the ideal client you determined in the previous steps.
Look at Your Costs. How much does it cost you to run your business? This is mostly just a sanity check. You should never base your pricing on how much it costs you to conduct business, but you want to make sure you’re not pricing under cost.
Ask Your Clients. You can literally ask your clients how much they are willing to pay for your services. There’s two ways in which you can do this: run a survey or test different price points.
If you’re going to run a survey do not straight up ask them “Hey, how much would you pay for this?” Your clients will likely low-ball you because they want to get the best price possible. Instead use the Van Westendorp model. Ask each person the following set of questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
Generally speaking, I would recommend only using this model if you have a large enough pool of people to survey (about 375 responses should suffice).
Most service-based businesses would not necessarily be able to do this, so I would advise testing your pricing. Start with the highest price you think you can get away with and work yourself down. Be willing to give discounts if they think your price is too high, but you may also be pleasantly surprised by how much people will pay for your services.
How to Charge More for Your Services
The best way to justify a high price is to first increase the perceived value of your service. You can do this by building a strong brand, highlighting your expertise and providing proof of the quality of your service, through testimonials for example.
A great way to prepare customers for what to expect from your prices is to use a brochure. A brochure allows you to present your brand and services in a clear and professional way, so that when it comes to discussing prices, there will be less surprise and pushback from your client. HoneyBook Brochures are interactive and customizable to your unique brand, which makes selling your services so much easier.
Another great way to charge more for your services is to incorporate add-ons in your offerings. For example, offer bundles or add-ons that less price-sensitive clients can purchase in addition to your basic services. For example, if you’re a copywriter, you can have a basic website package and an “expedite service” add-on for those customers who are willing to pay more for speed.
Here’s where an interactive brochure, like the one that HoneyBook offers, comes in handy. You simply outline your basic pricing, specifying the add-ons that you offer, and then clients can pre-select what they want. HoneyBook Brochures automatically generate a proposal (contract + invoice in one!) for you to review and send to your client when you’re ready.
Tricks to Maximize Your Revenue when Setting Your Prices
Last but not least, there are a few pricing tactics that you can try to increase your revenue:
End Your Prices in 9. It has been scientifically proven that ending your prices in 9 makes them seem lower. People tend to round down rather than up.
Leverage the Goldilocks Effect. Present your services in groups of three where you have the first one priced a bit low, the last one a bit high and the middle one just right. To top things off, highlight the middle package as the best value (needless to say it should actually be the best value package for your ideal customer. Never do false advertising).
Create Scarcity. People are more likely to buy when they feel that they might miss out on something great (remember toilet paper in 2020?). Whenever possible, make sure you tell your clients if there’s limited availability or if you’re running a price promotion that will only last a few weeks.
Setting your prices might be the most important thing you do for your business. Pricing impacts the perception of the quality of your services, helps clients understand if you’re the right fit for them and, perhaps most importantly, helps you create a sustainable business. I hope that what I’ve shared here today helps you make 2021 your best year yet.