How to Make Sure Your Price is Right

by Eddie Reeves on

A quick business fable:

Debbie is a startup bookkeeper who wants to earn $100,000 a year. She plans to charge $50 per hour working 8 hours a day, 5 days per week, 48 weeks per year, taking one week off for Christmas, one week for spring break and two weeks for summer vacation.

After a year of hard and frustrating work, Barbara shuts down her business, poor in wallet and poor in spirits.

Why did Debbie fail? Because she ignored a cardinal rule of entrepreneurship: Her pricing strategy didn’t work.

Even if every single hour of her week was allocated to billable work, she was still thousands below her income goal. And that was with leaving zero time for marketing, administration, professional development, personal/sick days and the other necessities of successful entrepreneurship.

Far too many business owners fall into the same trap as Debbie. Here’s how to make sure you don’t:

Finding the pricing “sweet spot”

The marketplace will always let you know if you are offering good value for the dollars you charge. If your service sounds appealing but overpriced, obviously, they won’t hire you. But what many business owners don’t understand is that the same thing will often happen is your price is too low.

People know instinctively that if you a promise them diamond quality service for a bargain basement price something is wrong.  They will either think that your service is substandard or that you will find hidden ways to increase the price.

To set your fees in the “sweet spot” that offers the perfect balance of value for the client and for you, start with a strong understanding of all of your costs of doing business – both hard costs and soft. Next, take a broad scan to look at what competitors are charging and how their services are viewed.

Ask the hard questions

After having those factors firmly in mind, ask your self some hard questions about whether you should be in this business:

  • Do you bring real value to a specific segment of the marketplace?
  • Is that segment large enough to build a meaningful business within?
  • Can you differentiate your service in a way that is easily understood and desired?
  • Can you provide that service at profit margins that will grow over time?

Once you have answered “yes” to those questions, you are ready to set your prices.

Decide on the top-of-mind price you think is fair, and then increase it by 20 to 50 percent.

Why? Because years of working with companies have demonstrated repeatedly to me that most entrepreneurs significantly underprice their service. They automatically resort to the “stinking thinking” and fear of adverse market reaction before even going to market.

Far better to charge a price befitting the value you bring – even if it seems a bit high – and then letting the market influence your adjustments.

There’s a lot more to pricing strategy than I have covered here, but I hope these ideas will help stimulate you to work on making sure your price is right.

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