How to Price your Products and Services so you actually Make a Living
This post is all about pricing your products or services so that you actually make money. By the end of the post you will have learned that pricing isn't just about covering your costs, why you need a variety of price points and how to work out your costs, how much to pay yourself and how to come up with a final selling price using the free 5-page 'Pricing for Profit' download (which you don't need to sign up to anything to get your hands on!)
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Pricing isn't just about the Maths
Pricing your products is really difficult. Do you want to know why? It’s because you undervalue yourself and what you do. So really the first battle to win in the ‘Pricing for Profit’ war is changing your mindset and appreciating how sh*t hot you are at what you do!
So remember this - people want to buy your handmade bags / jewellery / soap / insert your own handmade creations here because they want something unique, that makes them feel unique and individual and they buy from you because they can’t make it and you can!
People want to pay you to design their website because they want to look (and feel) professional and confident with their online space. And they don’t have the expertise and eye for design that you have!
People want to buy an e-course off of you because they are confused and need direction and guidance. Yes, they may be able to gather the information themselves from other sources but they don’t know what’s good information and how to implement it properly. But you have the personal experience to show them what works and what doesn't and to be there to hold their hand when they need help.
My point? Your customers are paying you to do or provide something they have a need for and can’t do on their own. What you are putting a price on is the value you are adding to their lives.
Obviously there’s costs and labour and overheads to consider (keep reading for your free worksheets taking you step-by-step through making sure yours are covered in your pricing) but if you are providing massive value you can charge a premium price and maximise your profits. Value is especially important when pricing services and luxury products.
The Oxford English Dictionary defines Value as “...the importance, worth and usefulness of something”.
You need to create your products and services for, and market to, the customer that sees the maximum importance, usefulness and worth in them.
Encourage new customers with multiple price points
Multiple pricing points help customers build trust in your brand by trying out your products with a low risk purchase. Lower price points and low risk purchases increase the likelihood of impulse purchases because they need very little (or no) thought other than, “Wow! I so need that in my life!”
When your customer has tried out and loved your low priced item they are more likely to spend more next time. They know you’ll deliver on your promise so the risk is reduced even on a higher priced purchase. If you've not read How to Choose the Right Products and Services for your Online Business, go have a read now, and fill out the products worksheet included in the lesson.
Something priced at £3-£5 is a no-brainer - you spend that on a mug of hot chocolate in some places! £10-£20 and your customer will be putting a bit more thought into whether you’re worth spending their hard earned dosh on and anything over £50-£100 needs to be pretty special before your customer hands over her credit card details. But as I said earlier, there is a market for those higher priced products and tempting your customers, and then delivering (especially if you go above and beyond), with a lower priced product means it will be you they come back to on Pay Day!
How to Build trust in your brand with introductory price points
Imagine you sell handmade baby dresses. You use your own designs, and only create a small amount in any one fabric. Your clothes are unique and beautifully made and your customers appreciate the reason for the £30+ price tag. But it’s still a lot of money. And what about the customer that’s only just come across your website? They don’t know you yet.
But you also sell baby headbands in fabrics that compliment your dresses but can also be worn with outfits your customer already owns for her baby. They take you no time to make and you use your fabric off-cuts to make them. They retail at a starting price of £5.
Your new customer buys one and is delighted with the service and quality and most importantly, her baby girl gets lots of compliments on her gorgeous new headband. So now, when your customer has an excuse to buy her baby a pretty new dress she comes back to you to buy it. She won’t be worried about comparing prices at this point because, going off her previous experience with you and your brand, she knows you’ll deliver.
Special considerations for pricing Services
When working out prices for services the biggest emphasis needs to be on your time, your skill levels and the value you are providing your customers.
You are doing something for your customer that they can’t do (eg; website design), you are helping them overcome a problem in their lives (eg; coaching) or maybe you are creating special memories they will treasure forever (eg; a wedding or baby photographer).
This makes the experience you provide for your customers and the personal connection and relationship you develop as important (sometimes more so) than the price. Make the most of your unique skills and expertise and make sure your website explains exactly how you are going to help your customers and what they get for their money.
How to price your products (the Maths bit)
Ok, I can’t put it off any longer - it’s time to do some maths! To work out a minimum retail price of your products it needs to cover the cost of your overheads, materials costs, your wages and your profit to reinvest in your business.
Of course, I have created a worksheet for you for this bit! It takes you step-by-step through working out your costs to reaching your final selling price. And it's 5 pages long! (<< Click that pink link to download it or the image below)
Fairly obviously, this is the costs of what physically goes into making your products. Include everything, even add a few pence for things like tape or thread that you only use a little bit of. It is up to you if you include packaging costs in the price of your product or in your postage costs but don’t forget to include them somewhere! You might want to add any extras (eg; thank you cards, or a gift box) to your product prices and the actual outer packaging (eg; envelopes, packing tape and labels) to your postage costs.
These are your running costs - heat and light for your workspace, the cost of your broadband, your mobile phone contract, expenses you’ve paid out for equipment, your web hosting and any fees you pay for software or to sites like Etsy.
The easiest way to include these in your product pricing is to work out an hourly cost. Add up the total costs for the year and then divide them by the number of hours you work on your business in a year. Another way is to work out your overheads per product by dividing your yearly overhead costs by the number of products you produce (or plan to produce!) in a year. Personally, I think the hourly option is the easier way to go for a new business.
Your hourly rate
How much are you going to pay yourself? How much do you need to pay yourself to make a living? Try starting off with how much you need (or ideally want!) to earn a month and then divide that by the number of hours you work in a month and see what figure you come up with. Keep that figure somewhere handy as a minimum.
Remember the value concept I discussed at the beginning? It works on you too. How much experience do you have? Have you done extra training in your industry above and beyond the required minimum? Is there an industry norm for an hourly rate? Can you do more for your clients than is considered ‘normal’ and command a higher price?
Working out your time
You need to pay yourself for all of the work you do for your business. Not just the time spent creating products or working for clients. It doesn’t matter if it’s something you love doing and it doesn’t feel like work. If you’re going to have a long-term, successful business you need to pay yourself a decent wage. You will eventually get fed up of working for next to nothing!
To include the non-creating time into your product pricing work out how much time you spend creating compared to how much time doing other things. If it’s about 50/50 simply double the time taken to actually make your product to take the other jobs into account and make sure you’re getting paid for doing them too!
Your profit is what’s reinvested into your business. It covers things like buying new equipment or upgrading what you have, furthering your training, and designing and developing new products. It is often worked out as your total costs multiplied by 2 for wholesale prices and multiplied by 4 for retail prices.
The Product Pricing Equation
Overheads (hourly) + actual materials/purchase costs x 4 (profit) + wages (hourly) = retail price
Don't just be cheaper than everybody else
While I am a firm believer that you shouldn't price your products based on what others are selling theirs for I do think it helps to know what others are charging. You might be surprised and find you are charging less than most and need to put your prices up!
If you price your products too cheaply people will wonder why. They may think your products are of inferior quality and made poorly so won’t buy. By pricing too cheaply you are de-valuing yourself and your work. A high price gives an expectation of quality and worth and some people even like the prestige associated with the higher price tag.
It’s important for you to remember your target market can afford these products. Just because you think it’s expensive, doesn’t mean your customers will!
If you do think your prices seem very high ask yourself why. Are you doing more than most to make your offering more valuable? Or could you add a little something to add value for your customer without adding to your production costs? Could you reduce your costs by streamlining your processes, or reducing your materials or overheads costs?
Time to Take Action! Download and print the Free Pricing for Profit worksheets and use them to work out your product / service prices. Don’t forget the value to your customer when working out your final prices. How is your product or service improving your customers’ lives and how much value do they place on its importance? This will ultimately determine how much they will pay for it. To quote my Dad - “It’s worth what someone will pay for it!”