There are really just a few basic pricing strategies out there. Everything else is simply a variation. Let’s take a look at the different strategies you might be using – because yours may ultimately be to your detriment.
This is one of the most common pricing strategies used by freelancers and new business owners. They calculate their costs to produce a product or deliver a service and add a markup, usually a small one.
Unfortunately, many freelancers calculate their costs inaccurately, by forgetting to include indirect costs like administrative expenses, invoicing systems, and time spent marketing — or because they don’t track these.
This strategy doesn’t work unless you’re closely tracking all the time, resources, and monetary costs you use to run your business in order to calculate your costs, and you build in buffer for your markup.
This is the number one strategy quoted by new businesses and solopreneurs who are undercharging. They set their prices based on what the competition charges.
Many times, I see this strategy being used by new businesses who are still getting a feel for the market. They have a general idea of who the other players are, but they don’t know their direct competitors — so they end up pricing their own offerings based on an incomplete picture.
Another issue that arises with this strategy is that you are giving up complete control over your prices and packages. If you’re copying your competition’s prices, it means their business practices will ultimately limit your business’s growth. You don’t know their internal process or margins; your competition may have different resources at different costs that make their low pricing more feasible for them.
This is the pricing strategy that kills new businesses. This is often used by brand new businesses who operating 100% digitally with no overhead — or at least they think they have no overhead.
These businesses set low, no-frills prices trying to become the go-to business for their niche, pulling in a large volume of work or clients.
The dangerous aspect of this strategy is that if you have any unexpected costs (like technology problems you pay to resolve, taxes come in higher than estimated, etc.) you’ll go into the red. If you’re operating on a slim budget to start, you likely cannot withstand being negative.
I see a lot of startups trade economy pricing for penetration pricing. Although it’s not quite as dangerous, it still comes with a lot of risks.
Instead of setting and forgetting their offerings at a low price, startups set a low price to enter a competitive market with plans to raise it later.
Of course, that is if they make it that long. Assuming a business is able to withstand economy prices without going under, you’ll endure so many other challenges. You’ve just built an audience and list of clients at a low price point; many of them won’t convert to the higher price point, meaning you’ll have to start from scratch building your audience and referral system.
Why solopreneurs and startups undercharge
In all of the pricing strategies above, most solopreneurs and startups inevitably undercharge. Why? Undercharging is intrinsically tied to undervaluing.
How Undercharging = Undervaluing
With Cost-Plus Pricing, solopreneurs don’t know how to price their offerings, so they calculate what they need to get by and add a bit on top as profit instead of asking for their worth.
With Competitive Pricing, startups aren’t sure how they measure up against the competition and can’t explain why they are unique, so they hop on the price bandwagon instead of differentiating themselves.
With Economy Pricing, freelancers are afraid to be rejected or lose out on business, so they price themselves low enough that anyone can afford them, often pricing themselves out of business.
With Penetration Pricing, new business owners feel insecure about their experience or skills, so they undercharge for their offerings until they gain more self-confidence.
Most new businesses and early-stage startups are guilty of undervaluing themselves, and undercharging. Why? They’re insecure.
It’s hard to ask for what you’re worth if you haven’t figured it out for yourself.
Let’s take a look at the reasons behind each of those pricing strategies one more time.
YOU DON’T KNOW HOW TO PRICE YOUR OFFERINGS
When you’re just getting started in business, it’s all a learning curve. There’s so much you don’t know, so you take the internet in search of resources to fill in the gaps. When you see everyone doing the same thing to determine their prices, it’s natural to think that’s how you’re supposed to do it. But the truth is it may not be right for you.
YOU DON’T KNOW HOW YOU MEASURE UP TO YOUR COMPETITION
As you navigate the branding process, you’ll inevitably need to determine what your USP or Unique Selling Proposition is. In other words, how are you different from everyone out there in the same niche? The answer is personal and requires that you know yourself well, aka a hard question to answer. If you’re struggling to determine how you stand out, you’ll likely discover that it’s far easier to blend in. But you’ll never grow your business the way you want.
YOU ARE SCARED NO ONE WILL PAY WHAT YOU WANT TO CHARGE
Asking for money is uncomfortable. Being rejected feels awful. Sitting in silence until you wait for someone to respond to your request for money can be downright painful. So, it makes sense that you would want to avoid those feelings altogether by choosing a price that doesn’t make you (or anyone else) squirm. But you’ll end up squirming anyway when you can’t pay your bills or your business starts to fail.
YOU’RE NOT 100% CONFIDENT IN YOUR SKILLS OR ABILITY TO DELIVER
As solopreneurs, we wear multiple hats, including the sales hat. You are the one explaining why you’re the person for the job or your product is the one to buy. There’s a reason that sales requires a great deal of confidence, and if you’re not 100% assured of your skills and ability, you may feel uneasy about promising something that you’re not convinced you can deliver. Which makes the idea of starting low and building up later sound appealing. But you’ll encounter the same confidence issues when you start to increase your prices later.
How to charge your worth
The first step to charging your worth is to believe in yourself. This, of course, is a long-term process, because building self-confidence takes time and consistency. Here are a few things you can do to begin:
- Replace negative self-talk with positive affirmations
- Record what you’re grateful for in a gratitude journal
- Surround yourself with an uplifting support network
- Ask for reviews/testimonials after every client project
- Smile at yourself every time you look in the mirror
By turning these small actions into daily habits, you can start to change the things you believe about yourself, and build your self-confidence. Getting feedback from clients gives you insight on what you’re doing well and what you can improve, whereas smiling at yourself teaches your subconscious that you are a happy, positive person.
But, to start seeing a change in what you’re earning, you need to change your pricing strategies.
This is by far the hardest pricing strategy to implement, which explains why so few businesses actually attempt it. That said, it’s the best option for entrepreneurs and solopreneurs. Why?
Value-Based Pricing allows you to set the price based on how much the customer values what you’re offering. This is where psychology comes in.
This strategy allows you to charge more for your work, meaning you’ll be more profitable and can grow your business more quickly.
The perceived value to the customer is based on a few different factors, but you’ll need to do your research to find out what this looks like for your business.
How to determine your value-based price
While a value-based price isn’t determined by your costs to deliver a service or what your competition is doing, you will need to take those that into account.
1 | Determine your ideal client avatar
This is not the same as your target audience, which has a much broader scope. Your ideal client avatar should be based on a single, individual person. Value-based pricing is entirely based on knowing your ideal client, because it’s all about his/her perception of the value of your offering that sets the price. Spoiler: you may have more than one ideal client avatar!
2 | Get to know your competition’s offerings
This is not about copying your competition’s prices, but rather understanding what your competition is offering that you may or may not also provide. Before you can set a value-based price you need to understand what your prospect may choose as an alternative. To do this, look at all the features, benefits, perks, and so forth that are differentiated between you and your competition. What are you doing or providing that is completely unique?
3 | Put a price on it
Now that you know how you’re different from your competition, you need to put a dollar amount on that differentiation. Think about this from the client’s perspective, but double check that the dollar amount is higher than your costs to deliver that service; that requires ensuring that the value you offer is higher than your costs as well. The total financial value is the price tag for your offering.
How to scale your pricing faster
Value-based pricing is a tough cookie to crack, so it may take more than a single attempt to find your sweet pricing spot. Here are two things you can do to speed up the process of getting to an accurate number.
1 | Survey your clients
Don’t contact everyone you’ve ever worked with; choose only clients that you loved working with. You’re trying to better understand your ideal client, so only choose clients that you’d ideally enjoy working with again. Ask them how they value your prices, if they feel like they got a deal, and what the results of working with you has been. Results drive value!
2 | Work with a coach
Looking at your business strategy, financial picture, and internal processes with an objective eye is no easy task. Sometimes, you need another pair of eyes to give you feedback or advice. Working with an experienced business coach can help you scale much faster than taking the DIY approach.
3 | Test and iterate
If you’re not sure where to start, but you know you need to increase your prices, then do it. Give your current clients notice now that you’re increasing your prices by 20% then measure their reactions. If no one bats an eye, you can continue to increase. If you get push back, then you need to consider whether these are your ideal clients.
Hi, I'm Rachel!
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