Every business owner regularly hears the following question: “How much?” Telling someone your price is always a little weird, especially when you recently raised it to what some believe is an unreasonable number. Eventually, you stop looking for the customer or client’s twitch and don’t worry about them saying, “Well, let me think about it and get back to you.” They tend to stop saying such thing when you stop worrying about them.
Despite the importance in setting the right price, fear holds small business owners back from aiming for their desired profit margins. We do it despite the obvious value we provide in our products and services. And then we stop having fun as entrepreneurs because the margins are awful.
Let’s be clear: your first job in owning a business is to make money.
Price strategy affects your ability to make money just as much as quality of your product and the marketing/sales system you use. Bad price can crush your business. In some cases, it’s not even about how much money you want to make, it’s just about hitting the mark of how much money you need to make.
I have 10 practical tips for small business owners on setting prices for your products and services to help you overcome this problem.
- Better to be expensive than cheap
- Do basic market research
- Push your price past your comfort zone
- Use limited low pricing to break the First Purchase barrier
- Define your ideal buyer (he or she will pay more)
- Add a little to charge a lot more
- Price according to your value or impact
- Change how people pay you
- Create comparison pricing
- Do your math on how much money you need to grow
#1: Better to be expensive than cheap
You can take this advice to the bank at least 80% of the time. Fighting to be the lowest cost option is a losing battle. Don’t sell your leather wallet at the same price as Walmart. They are sourcing the cheapest materials and using the cheapest labor. You can’t win at that game. Even worse, if you price cheap, you’ll get demotivated quickly. Sure, it’s fun to see people buying your products in larger quantities, but you’ll end up in the negative with no way to rebound.
#2: Do basic market research
You don’t want to conform to your industry standard, but it helps to know what your competition is doing for pricing.
Let’s imagine you run a lawn care service and want to raise your price. Right now, you charge $49 per hour per person on the job. If you see all of your competitors are charging $65 per hour, then you know you have room to raise your price. This doesn’t mean you want to jump up to $90 per hour, but you can definitely get away with moving to at least $70-75.
Most business owners don’t look for this free information. You can Google prices, do “mystery shopper” calls to competitors, and even ask around on social media about how much people currently pay for your service. If you do the last one, you may even pick up some clients by getting them to switch providers. Market research sounds overwhelming, but a little goes a long way.
#3: Push your price past your comfort zone
Let’s be clear about two things:
First, you’re not an impostor.
And second, you can’t force someone to make a purchase they don’t want to make.
There are better makers and service providers than you. So what? Do you still produce a high-quality product or result? Are you likable and trustworthy? I remember when I first started making wood and leather goods for myself. I compared myself to the big personalities on YouTube and Instagram, thinking, “I’ll never be as good as them.” Turns out, I didn’t need to be. What I discovered was often the inverse. There are people making goods who are celebrated and yet have lower quality products than me. I remember a book on leatherworking I picked where all the examples inside were definitively inferior to what I made. Yet this person wrote the book on it! That erased a lot of the mindset garbage holding me back.
You deserve more than what you currently charge. (Speaking of, I’m going to raise prices on a couple items I sell right now.) Your current customers would probably tell you the same thing! It’s sad to think about how many small business owners leave money on the table because of mental barriers.
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#4: Use limited low pricing to break the First Purchase barrier
The biggest challenge you face is getting someone to pay you the first time. Once you’re “in,” you can move someone up your value ladder.
To break the financial ice, you can price an entry level product or service to get someone to buy something from you. I’m sure you’ve seen HVAC companies offering $47 annual inspections of the heating and cooling system. Obviously, this is a pathway for them to sell you additional servicing and cleaning of the units. They are also trying to secure your loyalty and affinity for when you decide to upgrade or replace your HVAC system.
You can choose to go with an outright loss leader price or set up products on sale to tempt buyers. Everyone likes a deal, which is why they purchase the HVAC offer. You’ll see them say it normally costs something like $197 but “…we’re offering this special deal to new customers in your neighborhood.”
Of course, you can always make the sale price what you would normally like to charge and move up the listed retail price. This “on sale” pricing strategy is more common than you think.
#5: Define your ideal buyer (he or she will pay more)
Which would you rather do of the following?
- Sell 100 units at $100 each with $33 cost of goods and $25 cost of acquisition (marketing and sales expenses); or…
- 35 units at $200 each with $33 cost of goods and $45 cost of acquisition
In the first example, you make a profit of $4,200. And for the second… you get a profit of $4,270.
Of course, the second example requires less manufacturing time, less shipping, and less admin time. Plus, you have fewer customers and they are less likely to complain after buying (a fun psychological advantage of premium pricing). You also get to spend more money in acquiring each customer, so you aren’t stuck searching for the lowest cost marketing options. Instead, you get to invest in making a sale and building a stronger relationship with the buyer.
But how do you find these buyers?
You need to choose a specific audience. You are searching for what legendary copywriter Gary Halbert calls “Players with Money.” These people in need of and capable of paying for your good or service.
Most marketers start with basic demographic information to define the ideal buyer. From there, expand into activities in the person’s life – “lifestyle brands” make a killing by aligning with a person’s hobbies and interests. What about their philosophical, political, and religious beliefs? Make a list of the media they consume, including favorite shows, musicians, and writers.
When you speak in alignment with a specific buyer, your price elasticity automatically increases.
Oh, did I also mention that people capable of paying for the more expensive unit are far more likely to buy more from you? The cost of making your second sale to each new buyer should be considerably lower, and you get to role that money into your profit margin.
#6: Add a little to charge a lot more
The easiest “hack” to bumping up your price is to look around at what others offer, charge a fair margin more, and fill in the value-gap. Harvard Business Review frames it in an easy-to-understand way:
Imagine that you are in the market for a GPS device, and that many models are available from various manufacturers, all priced at about $200. Thanks to that clustering of options, you are mentally prepared to part with an approximate amount of cash: $200. Now suppose you come across a model at your local electronic goods store that costs $300. How do you react?
If you think like the customers in recent studies we conducted, you don’t automatically dismiss the higher-priced model. Rather, you’re motivated to take a closer look: Perhaps added features justify that price—features you haven’t considered but might in fact care about. Thus the manufacturer has produced exactly the response it needs to compete in an intensely price-conscious market.
HBR, “How to stop customers from fixating on price”
What can you add that allows for premium pricing? If you are a local baker, charge extra to include serving tools and disposable cutlery that are color-coordinated with your birthday cakes. Your markup could be a comfortable four-times cost of goods. Possibly higher. Another idea is to sell birthday cakes to businesses who regularly celebrate their employees and include customized birthday signage. Make yourself a version of a “one-stop shop.” Buyers value this experience.
As a side note, I think it’s particularly interesting when you figure out how to charge more for less. You see this in food, where items with fewer ingredients often cost more. This usually because of supply and demand, plus the cost of spoilage (since they don’t use as many preservatives). The “I’ll pay more for less” phenomenon exists in every industry; it’s just not always obvious.
#7: Price according to your value or impact
Lots of course creators and coaches will vastly underprice themselves. If you charge $100 per hour to coach a local business twice a month but help increase revenues by $75,000 on the year, you are vastly underpricing yourself. Plenty of coaches make this mistake. And the business owner will likely find a pricier coach who they believe has greater expertise soon enough.
In the law firm consulting business I run, my rate is currently $500 per half-hour of private telecoaching and $8,000 plus travel expenses for an in-person consulting day. Frankly, I think that number is a steal, because just one additional client per month through my monthly telecoaching all but guarantees additional profit for the owner. It’s not unheard of for my clients to put multiple six figures or even seven figures of additional revenue on their books while working with me over a year or two. I need to price myself at that rate to create buy-in on behalf of my clients. They take our sessions more seriously when it’s a bigger cost. I also know the value I bring to the table. If I’m going to give my clients my best, I need to be paid an amount that focuses both of us.
If you sell shoes that take 3% off a runner’s minutes per mile time, that’s a big deal. If you add 25 yards to a golfer’s distance driving off the tee, you’d better be paid handsomely for it. Your impact in both cases is bigger than the number. The golfer can show up his friends next time they hit the course (emotional boost) and the runner can celebrate hitting new personal bests after feeling static in progress for the past year.
#8: Change how people pay you
Do most people in your industry charge by the hour? Change to flat fee pricing.
Are you in the business of increasing someone else’s revenue/profit through marketing, operational efficiencies, or financial structuring? Consider charging a percentage of expected value added.
Car accident lawyers use contingency fees. This is a percentage of the money they recover for you, meaning you can hire a personal injury lawyer for zero money up front. They take the risk in exchange for a potentially significant reward on the other end – of course, they risk getting nothing if you get nothing.
Is invoicing after a project is done common in your industry? Make people put down 50% up front with the other 50% due on completion. You get cash flow and make each of the payments feel like a little less than just asking for one lump sum at the end.
#9: Create comparison pricing
Most searches for “red herring pricing” will show you information on IPO filings. However, it is also a simple but effective price strategy. Basically, you price one of your offerings at such a large price so your other offerings seem reasonable.
Conventional wisdom says most people will choose the “middle” option if given three different prices.
For example, if you offer three chef knives, the prices may be $50, $75, and $100. Most buyers will pick the middle option, but many will still pick the lowest end.
We can improve the purchase rate on the middle option by changing the prices. Keep the lowest at $50, change the second to $90, and move the third to $200. The people who bought at $75 will still buy at $90, improving your margins. And many of the previous low-end buyers will move up to the middle tier, because it now seems like a bigger “steal.” Best of all, you have certain people who just buy the most expensive option by default, because they perceive expensive as being the best.
You improve the uptake on the costlier options by creating reasons for the price differences. It could be the quality of the steel or a story about the manufacturing processes.
#10: Do your math on how much money you need to grow
It’s is much easier to figure out pricing if you are a true solo and intend to stay that way. However, most business owners wouldn’t mind there being some dollars to spend on hiring an assistant or second producer of the service. Don’t price just to eke out a living. Set your price to include reinvestment in the business. This includes pricing out equipment upgrades, training, material upgrades, travel to trade shows, marketing costs, and more.
Your math is yours, and you shouldn’t shy away from padding the price to hit your desired profit. That’s the advantage to being your own boss: you get to set your value!
Charley
I help small business owners, freelancers, and marketing DIY'ers get an edge up against the 800-pound gorillas in their markets. Like your business, this site is a DIY project showing you how to do what I've done in other businesses, including a law firm and a major coaching group for law firm owners.
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