Founding your own company or working on your own is an amazing adventure. Having the freedom to decide what you want to do and how, what technologies to use, or how to organize your time are some of the reasons why most of us chose this professional path. But let’s not fool ourselves: running your own business is not easy. There are difficulties that you’ll have to deal with.
One of the main problems and burdens that we entrepreneurs have is, of course, money. If you work for someone else, your main concern will be to do your job well so that they don’t fire you. If all goes well, you’ll receive your paycheck every month and you’re good to go. But, if you have your own business, things are completely different. Making money will be your responsibility. And if you have some employees, prepare to get some extra stress and worries, as there’ll be more people depending on your doing a good job.
That’s why it should not come as a surprise that one of the main secrets to succeed with your business is to find the right price for which to sell your services. Get it right and your business will grow and thrive. Get it wrong and you’ll fail.
In today’s post, I will explain the three main strategies that exist to define a pricing strategy. As you will see, most “newbies” in this entrepreneurial world usually focus on one or two of these three methods and ignore the most important. I hope that, with my help, you’ll get this right!
Let’s be clear for a moment: if you have a business, you want to make money. That’s it. Your first and foremost goal should be to make enough money to cover all your costs, or you’ll go bankrupt. And, ideally, you want to add a small benefit on top of it, so that you can grow and expand your business.
You may not achieve this goal for two reasons:
- Your price is too low. Many professionals, especially when they are starting, set low prices in the hope of being the “cheapest alternative” and thus capture customers. By doing this, however, you risk that, on the one hand, customers see you as “low-value” professionals and the end result is the opposite: you get fewer customers. And, on the other hand, it’s possible that the price you have set does not even allow you to cover costs… which translates into bad business.
- Your price is too high. Conversely, you can also fail in the other end of the spectrum: set too high a price and you may not have any customers whatsoever. Of course, there may always be an exception and you might get one customer willing to pay that price but you obviously need more than one customer. When it comes to pricing, you have to walk in your customers’ shoes and think about what’s the value of your offering.
a) Cost-based Pricing
Probably the first method we use to price our services is to calculate how much they cost and, after adding a small percentage on top of these costs, get the final price. And this thinking makes total sense, since “what it costs us” to offer a certain product or service is the lowest price we can set or else we would have losses.
If you decide to set the price based on your costs, you have to take into account all the costs. That includes raw materials, distribution, labor, traveling, equipment… absolutely everything you need to work must be included there.
Companies or individuals that define prices with this strategy solely usually compete for price. They aim to be the cheapest in the hopes of getting the highest volume. And, as I said at the beginning, the goal of this post is the opposite: teach you how to earn more 😉
b) Competition-based Pricing
Another very common strategy for setting prices is to look at your competitors: see what they offer, their value proposition, and how much they charge for that. Looking at your competitors is a good strategy to better understand the market you’re in and the players it has.
However, we must ask ourselves several important questions if we choose this path. What exactly do they offer? What’s their value proposition? Are they dumping prices to get a lot of customers? Who are their providers? What segments are they aimed at? Do we want to compete in the same segment or not?
We have to understand the exact segment they are targeting and what they are offering to set the prices they have. From there, we can decide if we want to attack the same or a different market and what prices and strategies we will perform to gain market share.
c) Customer-based Pricing
Finally, the most difficult pricing strategy, but the one that gives the best results, is to focus only on what really matters: the customer. The best pricing strategies are those that take into account the perceived value customers get from our offering.
When you sell a product or service to a customer, an exchange occurs: they give you money in exchange for your solving a problem they have. Depending on what that problem costs, they will be willing to pay you more.
But remember: even if you focus on this “perceived value” to set your pricing, you still need to keep in mind your cost structure and make sure you end up with a profitable business. If your customers don’t think your products or services are that valuable, they won’t be willing to pay much, which means you might not break-even… and you’ll have to figure some things out.
3 Tips to Raise Your Prices
So, how can you raise your prices in WordPress? After all, it looks like a lot of people want to get things for free, right? There’s plenty of plugins out there solving problems for free! First and foremost, you need to change your mindset. Don’t be the guy people come to because of your low prices. Aim to be the guy people want to work with because you’re the best!
#1 Know Your Customers
The first tip I am going to give you to raise your rates is easy: know your customers. If we want to set our prices based on the value they get, we need to know who they are and what they expect, right?
Who is your customer? How did they find you? What budget do they have? How much does the problem they have right now cost per year? How much are they willing to pay to solve it? These are all questions that will help you understand what problems they have, how much money they have, and, ultimately, what’s the right price for your services.
#2 Be the Best Professional Possible
If we want to solve “important problems,” we have to be one of the best in our field. We live in a world that moves forward at a dizzying pace: we always have a new technology we can use to implement better and faster solutions.
If you want to be able to charge more for your services, it must be clear that the value you bring to the end customer deserves that price. You have to prove yourself. Practice, study, learn, participate in community events, keep training… all the baggage you can take to the next interview with a client will play in your favor.
#3 Monitor Your Prices and Test Changes
The market is not static, so prices shouldn’t be either. Don’t be afraid of trying out different prices. As years go by the cost of living goes up. Which includes your costs. So it’s normal that you update your rates too every now and then. You might be charging less than you could simply because you never dared to try! You should always be trying new combinations in your product or service catalog: cross-sells, recommendations, discounts, etc.
Be cautious when raising prices, but do it. Define a strategic plan by which you will gradually raise prices over the next 5 years. Study how each small increase works when acquiring new clients and maintaining existing ones. And, of course, don´t forget what is the best way to do these tests: performing A/B tests on your website.
There are different strategies to set your pricing, but the most important of them is the one that takes into account the value your customers gets from you. So do everything in your power to “know” your customer and give them what they need for the price they’re willing to pay.