Business Basics: How to Price Your Product or ServiceDavid - About Business - August 14, 2020
So, you've just started out in business, and you still have no idea how to price your products or services? That's fine. Every business owner has once had this issue. Pricing ain't easy. Yet hopefully, there are multiple approaches to solving that problem.
I've been freelancing and operating several businesses, and here I'll share with you what I learned the hard way. I'll give you a handful of techniques to establish your pricing strategy, and determine what's the ideal price for your products or services.
Let's find out how to create a pricing strategy that fits your needs and meets your customers' expectations at the same time.
4 Effective Pricing Strategies
Here are the different pricing strategies I either used or learned about while operating my companies:
Competitors-based Pricing: Act like you're a customer searching for your products or services. Then, list all your competitors, and see how much they price for the same product or service. Eventually, set your price according to what you've found. Pricing lower than your competitor might appeal to more customers, although it might make you look cheaper as well. Pricing higher than your competitors will set you off-range, yet give the feeling that you're providing better quality.
Pro: Your competitors make money, so you know already which price range works.
Con: It may lead you to a race to the bottom where your competitors do all they can to lower their price.
Time-based Pricing: If you happen to be selling your time for money, you can just set an hourly rate for your services. It's both common and convenient. Consultants, lawyers, analysts, developers, designers. There are many fields where having an hourly rate is the traditional pricing strategy. It's easy to figure out, and you can adjust your rate based on scarcity and experience. The more scarce your skills are, the higher the price. The more experienced you are, the higher the price as well. Check out how much other business owners charge, and set yourself within the overall range.
Pro: Customers are accustomed to that pricing mechanism, and they know what to expect. It's also convenient for you since you know approximately how long your tasks will last.
Con: It's a pricing strategy that works for selling a service, but it's not suited for selling products.
Value-based Pricing: If your product or service enables your customer to save time or money, you can use these metrics to determine your pricing. For instance, you can charge a fixed rate that is based on the amount of money your customer saves thanks to your work. This pricing strategy works well especially when customers don't feel like spending money until they see results. By charging an amount of money that is based on the results you achieve, your customer might feel keener on working with you. This pricing strategy is often used by lawyers who deal with financial cases, or developers who specialize in automation.
Pro: This pricing strategy shows confidence in your ability to deal with a customer's pain point. And it also enables your customer to gauge, using facts and numbers, how impressive and effective was your work within their business.
Con: Your pricing may climb up quickly. If you work on automation for instance, and base your pricing on the time you make each employee save daily within a whole month, your statement will skyrocket. You must strike a balance.
Elevator Pricing: This pricing strategy mostly applies to products and goods. You set a price for your product, and see how well it sells. If it doesn't sell enough, you try to lower your price. And you keep lowering until it sells as much as you want, and generates enough profit. On the other hand, you can start low, and keep increasing the price until your product doesn't sell enough.
Pro: This pricing strategy helps you quickly find the ideal price for your product based on the market's demand.
Con: Customers may get angry and confused as to these fluctuations.li
Before You Go
I thought I'd share some last thoughts with you before you leave. These are the most important things I learned as a freelancer:
You must be proud of yourself, and have confidence in your work and in your ability to provide value to your customers. Otherwise, you won't ever feel comfortable announcing your price or asking for money. Beyond that, customers will feel that you're not comfortable, and they'll leverage that to negotiate and lower your prices. Be proud of yourself, and meet your own personal expectations towards yourself.
Define a pricing strategy that makes you feel good and aligned with your values. If you price your product or service too low, you'll feel exploited by your customers. And that will destroy your motivation. On the other hand, if you feel like your pricing is too high compared to the value you're providing, you'll feel ashamed for stealing that money, and that will destroy your self-esteem. Just price your product or service according to how much you think they're worth, and make some adjustments based on your needs.
Do not underestimate your work. It's not because it takes you only 10 minutes that it has to be charged a sixth of your hourly rate. Your work has value, regardless of the time you spend on it. Make sure you always consider how valuable you're to your customer in the long game, and adjust your pricing according to that. You might also be super effective, and that could explain why you're so quick at doing your things. Then, adjust your pricing based on the time it should normally take to do your work.
The market decides There are times when we're so proud of ourselves that we end up getting hyped. And that leads us to overprice our product or service. Remember one thing. If your customers aren't willing to put in the money, your work has no value. The market decides. If you're too expensive, the market will tear you down. In the end, the value of your work depends on how much your customers want to pay for.
As for finding your first customers, pricing your work will feel difficult at the beginning. Keep selling, and eventually, you'll find the right pricing for your work.
Are you telling me that you've got another technique to find the right pricing for your work? Let us know in the comments.