What price should I charge?
Fortunately, pricing is an easy decision because there is only one price that matters. You ought to charge what the customer is willing to pay. Unfortunately, that is not very helpful when you are trying to work out your prices at the start of a new business.
What Is Price?
There are three concepts to get straight before trying to set a price for your product or service:
| Cost | This is what it costs you to do the work / provide the service |
|---|---|
| Value | This is what your customer thinks it is worth |
| Price | This is the amount of money you ask in return for providing that value |
Example
A radiator starts leaking all over your downstairs carpet. You ring a plumber and find he can come round immediately but the call out charge is £75 + any parts and labour. You agree to pay. He turns out to be great and fixes the problem with no fuss. You gladly hand over the £85 he asks.
It COST him, say £5 to travel and another £2.50 for parts plus a bit of his time.
You VALUED his service at close to £100 because of the potential damage and mess.
He PRICED his service at slightly less than the value so you felt like you had a bargain when the reality is that you paid 10 x the cost (giving him a healthy mark up).
Approaches to price setting
Cost Plus Pricing
Simply add up all your costs (from the work you have done on your monthly running costs and survival budget) and add a margin on top - 10%, 20% or whatever. See later for an example of a calculation done that way. Cost plus is a poor way to set prices but you might start here because it helps you to understand all your costs. Remember to include all those things that don’t look like costs at first - your preparation and thinking time, phone calls you made, the cost of getting the work in the first place.
Price for market position
Decide how you want to be seen in the market and price accordingly. Are you low cost / high volume? Then price as low as you can to get lots of customers and carve out a place in your market.
Are you offering something that is high quality and special? Price as high as possible to create a feeling of premium quality and exclusivity.
Pricing deliberately to get a particular type of customer needs nerves of steel and deep pockets. If you attract customers looking for a bargain just remember that they will be off, without a second glance, when they find someone even cheaper.
If you go for premium pricing then your whole marketing package needs to scream quality and excellence. You will make more money in less time but may end up making fewer sales. Just be sure that there are enough people willing to buy at this price.
Market Average Prices
Understand the normal price range in your market and price where you are comfortable.
Every market, for every product and service has a range. Do you want to be supermarket value range lager or expensive Belgian lager?
Phone around, shop around and ask around to find the normal price range of what you are selling. Then decide where you are comfortable and price accordingly.
Have multiple versions of what you sell
Sometimes customers find it easier to buy if they have something to compare it with. You can help them by creating a basic, standard and premium version of what you sell.
Make the standard irresistible and the basic, well, basic. The standard specification should meet the majority of customer needs so that you can set up your business processes to deliver them. This means that you can tie any fiddly, one-off or special requests to a premium price.
If your pricing structure is clear to customers the premium price will stop lots of requests for special and non-standard work whilst those that do request it pay you for the inconvenience. A high priced premium version of can also help the standard price to look more reasonable.
Start high, then offer discounts
Having slightly higher prices gives you scope to offer discounts and special offers. Let them know they are getting a cracking discount.
In the end, though, you need to stay flexible with prices and the only price is the price the customer is willing to pay. You will also find that you develop multiple income streams from different customers all with a different view of what they are willing to pay. A two hour talk given at a voluntary group may earn you £50 cash in hand while a corporate customer pays you over £700 for the same two hours. It’s possible to work for as little as £180 a day for a charity customer to over £1,000 a day for very similar content. It just depends on the customer.
Pricing Calculations
A Cost Based Approach
| Item | Calculation |
|---|---|
| Survival Budget | This is your minimum living expenses - say £20,000 |
| Running costs | The annual running costs for being in business - say another £10,000 |
| Margin | Add a 10% margin |
| Basic sales target | You now have a basic sales target to bring in sales of £33,000 per year |
| Divide by the unit of sale | If you are selling driving lessons at £20 an hour then you need to be selling £33,000 รท £20 = 1,650 a year or about 32 a week to cover your costs. Is this feasible? |
NB: this example takes no account of what the market is willing to pay. If customers will pay £25 but you only charge £20 then you end up working too hard and if the market will only pay £15 then your costs or your margin are too high.
Lifetime Value v. Transaction Value
A customer who only pays £100 a month may seem less attractive than a job that earns you £3,000 but if that customer is a repeat buyer and willing to pay £100 a month for the next five years then they are actually worth £6,000. In fact they are worth more than this because you have not had to spend any money to find that work. Very few companies are good at understanding the lifetime value of their customer relationships. Understanding the lifetime value of the relationship and acting accordingly can give you an edge over bigger competition.
If you charge by the day
If you charge by the day, here are a couple of ways to work out your price. This approach uses a very similar calculation to the cost based approach above:
| Item | Calculation |
|---|---|
| Previous Salary | Your recent salary (gross) - say £40,000 |
| Running costs | The annual running costs for being in business - say another £10,000 |
| Margin | Add a 10% margin |
| Minimum income required from your business | 40 + 10 + 10% = £55,000 |
| Divide by 100 days | Anecdotal evidence suggests that people who charge by the day can expect to invoice about 100 days a year |
| Gives a day rate of | £550 a day - remember this is a minimum price |
NB: Again this approach ignores what the market is willing to pay but does provide realistic compensation for the risks of running your own business. Clearly if you already have a pension that covers your survival needs or you think that a 10% return is too high you can adjust the figures.
Here’s an alternative:
I want to bring home £2,000 a month (gross). There are 4 x 40 = 160 working hours a month, so if I work full-time then I must earn at least £12.50 an hour to hit my target.
| Hourly charge | Hours worked per month | Day rate (8x) |
|---|---|---|
| £12.50 | 160 | £100 (20 days) |
| £20 | 100 | £160 (12.5 days) |
| £30 | 67 | £270 (7 days) |
| £50 | 40 | £400 (5 days) |
| £62.5 | 32 | £500 (4 days) |
| £100 | 20 | £800 (2.5 days) |
| £150 | 14 | £1,200 (1.6 days) |
| £250 | 8 | £2,000 (1 day) |
NB: This example completely ignores the time spent on business admin and finding chargeable work. It also ignores tax and NI deductions from your gross sales. The lower your daily rate, the less time and freedom you have to create future work.
Carrie Oakey is a life coach doing a lot of associate work for £200 a day for a big client who charges her out at over £750 a day. In the early days she resented this but has come to realise that the £10,000 income this client brings her each year gives her a good basic cashflow. She spends no money finding this work and they pay some expenses as well. Over the last five years Carrie has earned £50,000 from this client with almost zero costs and she is just beginning to realise that the lifetime value of this relationship is significant. She no longer resents the low price and as a result is even more effective with her clients, leading to further offers of work… Bill Board used to employ contractors when he worked for Megalith plc. He remembers that he paid between £350 and £850 a day. He takes some soundings in the market and decides to offer his services at around £450 a day and take some courses to turn his experience into recognised qualifications. He reckons that with the right certification he could put himself in the higher price range…
Mona Lot starts a specialised hat shop near a popular race course. She only opens during the flat season and will create a bespoke hat to match any dress or shoes that her customers bring along. Although the hats only cost £6 from the wholesaler, Mona finds that she can charge £120 a time AND get repeat business at that price. (After a while she considers changing her name)…
Paul Dalton specialises in very high quality premium car detailing. He charges customers to join the waiting list for his services and is kept busy most of the year. His premium service is 100x the market average.
Make it easy for them to pay you
Have you ever stood in a shop ready to pay for something while the assistants ignored you and carried on talking about their weekend? Have you ever been in the middle of paying for something when the shop manager talks across you at the member of staff who is helping you and they stop and have the conversation while you just stand there? What is your experience of paying for things online? Have you ever got three screens into the payment process and then discovered that they want you to open an account, give up loads of personal details and create a special password before they will let you pay?
These kinds of sloppy behaviours boggle the mind and ignore the fundamental lesson about taking money from people - you need to make it as easy as possible for people to pay you.
Here are some suggestions
Print your bank details on your invoices so that customers can pay you by electronic transfer - they need your account name, account number and sort code
Open an account with PayPal for your business and follow their process to become ‘business verified’. It takes a week or so but the once you have this set up you can:
- Get code from PayPal that puts payment buttons on your website
- Take credit card payments over the phone or in person
- Pay people by email
- Send invoices and payment requests by email
- And PayPal will allow customers to pay by credit card without asking them to create an account
Review the physical process of paying you, walk through the actual steps that someone needs to take and work relentlessly to eliminate steps from the process. If you are visiting people in their homes or they are coming into your premises, make sure that you talk to your bank about how to obtain a mobile card machine that enables you to take card payments
Action
- Know your costs (from the work on cash flow and expenses).
- Find out the price range in your market for what you want to offer them.
- Constantly ask yourself “How can I increase the value and result my clients get from what I do?” As you increase the value, then you can increase what you ask for it.
- Deliver a premium job every time. Let your customers feel like they have got a bargain, more than they expected.
- Remember that a piece of repeat business or from a strong referral has saved you at least 30% in marketing costs. Consider the lifetime value of your customers to you rather than just the one-off income from a job.
- Know what your policy on discounts is so that you are ready when someone asks you (as they will). One useful response to this kind of question is to offer discounts for cash flow. In other words if they pay in full now (so you have all the money now) then you will lower the price.
Checklist for Price and Invoicing
- I understand the price range in my market
- I understand the price / value trade off that my customers make
- I am able to charge a price which more than compensates me for the risk of running a business
- I have a 12 month cash flow forecast
- have an invoice template that makes it easy for customers to pay me
- Ltd Co: My invoice template shows my registered office, registration number and company name
- I know how to create an invoice using bookkeeping software
- My sales process makes it easy for customers to pay me
- I have terms and conditions and can easily print these on quotes and invoices
