Many founders and entrepreneurs and professionals do not have clear methodologies for coming up with pricing. This is common, and it comes up a lot.
For most, it’s either a voodoo equation involving doubling your living expenses and subtracting a percentage, or it’s based purely on what everyone else is doing .
The cost of what you do is a panic-point. Nobody has enough faith in themselves to charge what they’re worth or in their customers to pay for what they use. The result is businesses and freelancers that cannot maintain a healthy margin.
In all likelihood, you are not running a charity. You are attempting to reach profitability, or turn a profit right now, or find a way to build the value of your company in order for your investors to have a return on the capital.
What this means is that you need to take your margins seriously and in order to do so, take your pricing seriously. There’s 2 considerations I want to talk about here.
What do you have the guts for?
Make no mistake, the most important part of your pricing is guts. Pure guts. It takes them to stand in front of a customer and state your fees and price schedule without flinching, without adding caveats and without hinting that you’ll take any price they offer you out of sheer desperation.
It takes guts to set out your prices and stand by them. Most younger freelancers and founders do not have those guts. They will always present their prices as a wish-list, that they are completely ready to reduce and squeeze.
I can’t tell you to just harden up and put your game face on. That’s not a positive piece of advice, and you’re not going to listen to it. What you need to do is work out what price point you can set forward and stick with.
Once you have that line, you have the first price that you can offer. And you also have a base, a starting position from which you can gradually increase. If you know you’ll be able to stand by one price point, you can add experiences, features or simply the passage of time, and push it up.
What do your customers expect?
Your customers already have a limit to what they’re willing to pay. It’s a limit that’s probably nothing to do with the value of your service or product, and purely on their prior experience. They’re paying $11.99 a month for Spotify, and they’re paying $11.99 a month for Apple Music, and therefore there is no way they’re paying $19.99 a month for Tidal. Thanks for playing.
The same applies for freelancers. Look at freelance writers. How much should an article be worth? Probably a lot more than is being paid out on the gig and market place sites. But people are used to paying a certain amount (it’s low and depressing) and will likely balk at paying more.
So what do you do? You have three options here.
- You meet their expectations, putting yourself on even footing with your competition.
- You undercut their expectations, taking an advantage over your competition.
- You let your pricing exceed their expectations, to the absolute limit of what they’ll stand for, and justify it with a clear value proposition.
The first option is fine. As long as you know what the expectations are, it’s a simple and easy way to price yourself or your startup. And fine is a solid level. “Put it in front of wine or dining, and you’ve really got something.”
The second option is only good if you can afford it. You might not have heard of Pets.com. You should research them. When people joke about losing money on every sale and making it up on volume, Pets.com is the punchline. In itself, the idea of pricing low enough to gain traction is great, and Amazon proves that it can work. But it’s a risky move.
You have to know that your lower prices are not going to drive you out of business. They’re either allowing for a healthy margin, or you’re following Amazon’s path of losing money but having enough cash to sustain it.
The third option is my personal favourite. Our principal Chris Charlton has a wealth of experience building, helping and investing in businesses. He once told me that it’s easy to make more money than your competitor. You just charge more.
The trick is working out what limit you can push your customers to, and what value you can add to make that limit worthwhile. Tidal blew it because they smashed right past the limit, and their value was tough to see. Or perhaps, non-existent.