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One of the biggest hurdles new business owners and aspiring independents struggle with is how to price their products and services.  It’s a delicate balance between knowing the costs of your products and services, understanding how customers interpret the value of those products and services, and remaining competitive in your market.

However, having a negative relationship with pricing, and with money, is what causes a significant number of businesses to fail within their first 5 years.

Effective pricing strategies are built upon knowledge, confidence, practice, and intimately understanding the needs and interests of your target customer. When you’re new to the idea of working for yourself, it’s very easy to believe that your prices should directly reflect the years in which you’ve been out and operating on your own as a business. And this is a huge stumbling block for entrepreneurs, because your clients aren’t paying for the length of your operational history, they’re paying for the specialized value and solutions that you offer to them through your products and services.

And that value is derived from a number of tangible and intangible aspects, including your time, materials, your skills and talents, your knowledge and expertise in being able to service that market.

We All Make This Mistake, Fear Not.
When I made my entrepreneurial debut back in 2009 as an career consultant-slash-coach, I was charging a measly $85 to write a professional resume. By that point, I had spent several years running a recruiting agency, and had the better part of a decade’s experience in HR and career advising. My prices weren’t low due to a lack of experience; they were low due to a lack of confidence and knowledge around pricing my services appropriately at market value. Competitors were charging 3 times as much, some of whom hadn’t been in business much longer than myself.

Now I charge $200 and up for a resume, and I probably should have been charging that back then as well. My clients are happy to pay for a quality product that’s going to ultimately help them find a job in less time than before. For a struggling job seeker or career changer, the value returned versus the investment made is much, much higher.

You might be thinking, “Well if I charge lower prices, I’ll potentially attract more clients than my competition.”

The problem with this school of thought is that while you may attract more clients in the short-run, clients who are drawn to you primarily because of your low prices and not your skill sets and value, are the wrong types of clients. And these are the clients who are often difficult to work with, demand flexibility and free handouts, ask for their money back, and simply don’t appreciate the value of what you’re doing for them.

When you underprice your work, you also run the risk of leaving your potential customers wondering why your prices are so low. Don’t think they’re not doing their homework and comparing you against your peers who offer similar products and services. Undercutting your value raises a potential red flag that suggests something is missing in your service, that you’re inexperienced, or worse – your services simply aren’t worth the higher fee (and we know that’s not true).

There is no one-size-fits-all pricing formula that will accurately apply to every type of business. But there are a few key points to keep in mind as you’re working through the pricing process, to help you price your work at a level that’s reflective of its true value to your customer, and respectful of your talents, knowledge and expertise.

Understand What Factors Go Into Your Pricing
Pricing your products and services is about more than making a profit margin on the costs associated with running your business and creating those products. It’s imperative to understand what it is that your customer is paying for when they hit the “Buy Now” button. They don’t care about the costs of labor or materials that determine your pricing. They care about the credibility and experience of working with the person providing the product or service – you. Especially if you’re a service-based business, what the customer is paying for is not only your time, but your expertise, your knowledge and the ability to tap into those things on a premium level. And you need to be comfortable communicating that “hidden” value to your customer.

So for example, if it takes me 4 hours to write a resume, it’s not just about charging a flat rate for 4 hours of writing – I’m also charging for access to and the ability to leverage my close to 10 years of experience in hiring. They’re not just hiring me because I’m a good writer – they’re hiring me because I understand the inner workings of the hiring system, and can offer them the necessary tools, resources and direction around how to navigate the job market.

Know Your Basic Costs of Services
If your business revolves around products that require materials, labor or other vendors to create, it’s important to understand the bottom line cost of doing service. If you’re pricing a necklace at $100, and it takes $40 worth of materials to make (including materials, shipping costs, and administrative fees associated with listing it on Etsy, etc.), you’re looking at a return of $60 on each of those necklaces, and over 5 hours at a profit of $12 per hour. Is this in line with what you value your talent and skill at? If it is, then fine – this is where potential to do volume might influence what you charge. But if you feel that you’re falling short at the end of the day, you may want to look at how you can increase that margin, whether it’s charging more for your products, or reducing the costs to create them.

And if you’re a service-based business with less overhead, you still need to look at the recurring costs associated with servicing your clients. You should know the exact number you need to hit in revenue every month to cover your costs (rent, subscriptions, supplies, etc.), and then price your products and services accordingly to cover those.

Get Clear on Who Your Ideal Customers Are, & Your Ability to Service Them
One of the biggest mistakes I made starting out was pricing my services based on what I thought I could afford, versus what my ideal customer could afford. Again, your ideal customer is the person who not only can afford to pay you for your work, but who wants to pay you for your work. There will always be potential customers who would love to work with you, but can’t afford your services, and that is your judgment call whether or not to work with them. But if you know that your target market is upwardly mobile women 30-45 who make six figures and above, that is who you should be pricing for – not the young professionals who would really benefit from your coaching services, but who can’t actually afford you. Wouldn’t you be happier servicing less clients at a higher cost if they were all your ideal clients, versus more clients at a lesser cost who
really aren’t ideal in the end?

Your pricing structure may change as your business evolves, and that is completely acceptable.  They key idea to keep in mind is that your pricing should be based on value that you (and perhaps only you) can provide to your customer. What does that value encompass- what skills, experience, knowledge, insights do you possess and offer your customers access to that your competitors don’t, and how? What is unique about the experience you’re providing, and what makes you the go-to expert for this particular market segment? These are all monetizeable aspects of your produce and service offerings, and are an important part of what makes up your overall customer experience.

{Featured image via Graphic Artist’s Guild Handbook of Pricing and Ethical Guidelines}