Welcome to the Price is Right: How to Price Your Product or Service

The average cost for a quality infographic is a few hundred bucks. On the high-end, expect to be shelling out at least a few grand. Maybe they’ll trade for a kidney or two? Or you could give them your first born child? Check the FAQ section on these companies’ websites for more information.

No matter how you slice it, infographics are not the cheapest thing on the menu of content to include on your blog. Sure, they’re all the rage right now, but if you’re shelling out a minimum of $400 a pop, you better have a Bruce Wayne-like billionaire sponsoring your efforts.

the price is rightYet, when Jessica Rhodes started first business, Entrepreneur Support Services, and began creating custom infographics for her clients, she charged $25.

That’s it—only twenty-five bucks.

If I had known this at the time, I would have been covering my website with infographics like wallpaper. I would have sent infographics like ecards to all my friends. I would have Tweeted this deal to all my followers and sat back while the praise rolled in: Thank you for this awesome resource Laurel! I can’t believe these are only $25! Thank you Laurel! I just ordered 20 of them. Thank you! You are the best.

(Ah, shucks, guys.)

Obviously, Jessica is missing a couple zeros on her price. Not just that, but for her first customers, she locked in this poverty-level price. That means if you got in on this deal early, you were golden. You were set to live a long happy life of free-flowing infographics.

Now, I know you’re wondering: Why did she charge so little for her high-quality infographics in the beginning? That’s insane, right? If they were total crap, I could understand the minuscule price tag. Even if they were medium crap and she lived in a remote area of India, I could understand that as well.

But she was creating amazing infographics and giving her customers the deal of a lifetime. What gives? Was she trying to land new customers? Get a buzz about her business going? Build a solid portfolio of work?

Answer D: none of the above.

She said, “One big mistake I made early on was not researching how much other people were charging for infographics and I charged way too little.… Other people were charging hundreds of dollars and my first price was $25.”

The problem was that she didn’t know what customers were willing to pay for her services, so without any data to go by, she just picked a random price. She told me, “I’m really kicking myself for charging so little.”

We’ve all made huge mistakes in our businesses, but I’m using Jessica’s story as an example because I see other small business owners doing the same exact—charging too little for their amazing product or service when they first open up for business. Don’t let this happen to you!

Last week, I wrote about why you need to charge GOOD money for your products or services in my post You’re Not Running a Charity Here. By charging money, you are doing a service for your fellowman. You are proving value to the world. So, if you have any qualms about asking for money, go back and read this article.

This week, I want to discuss what to charge–how to price your product or service–so you don’t get stuck in the same pricing briar patch that ensnared Jessica and countless other entrepreneurs.

Step #1: Research what similar businesses to yours are charging

In order to designate a fair price for your business’s product or service, you first have to know what similar businesses in your industry are charging. You can’t make an informed decision about your own prices unless you know what you’re up against from your immediate competition.

Find at least ten other similar businesses and research what they’re charging. In Jessica’s case, before she originally set her price, she should have found ten or more established infographic designers and determined: (1) the exact services they are offering their clients, and (2) what they are charging for these services.

Once you gather all your data, then it’s time to figure out where you can fit your price within the price spectrum of your competitors. Obviously, there is no exact science for figuring out your ideal price, but be sure to take into account your unique services and features that might set you apart from these other companies (which might allow you to charge more…or charge less…depending on what you’re offering).

Now, go on to Step #2 to determine how to pinpoint your perfect price and set sail towards the magical kingdom of making a shit ton of money.

Step #2: Determine out how much money you want to make

After you’ve researched your competitor’s prices, you still can’t just stick a random price tag on your product or service. In Jessica’s case, she eventually figured out that infographics cost anywhere from $300 to over $5000. Armed with this new information, she immediately knew she had to update her prices to be within this range, but what should she charge? That’s a huge spectrum! If you just close your eyes, point to a number and hope that price is going to work for you, it’s like jumping out of a plane without a parachute and thinking you’ll figure it out on the way down.

Ultimately, Jessica had to figure out what makes sense for her business based on her end goals.

In order to do this for your business, you have to work backwards. You have to figure out how much money you need every month (or year) to operate your business (and make a comfortable living) and work backwards to determine a price for your product or service that will support this.

To effectively work backwards to find your ideal price, write down the answers to the following questions:

  1. How much is your business overhead?
    Add up every cost involved in running your business—office or retail space rent, utilities, supplies, software, email service, website hosting, equipment, advertising, materials, etc.
  2. How much does it cost to make your product?
    If you’re making widgets, how much does it cost to make one widget? If you’re offering a service, how much do you spend on each client (e.g. client gifts, workbooks/materials, supplies, etc.)? Basically, what are the cost of materials to sell just ONE?
  3. How much money do you want to net every month?
    After you’ve paid all your business expenses (from #1 and #2), how much money do you want to make every month? What is your desired net income? Take into account your personal bills and how much money you need to live your life.
  4. How much time do you have to work on your business?
    Estimate how many hours you can dedicate to your business on a monthly basis. Also, how many hours per month is required to work with one client or create one product?
  5. In a one-month period, how many new clients do you think you could easily acquire (or how many products do you think you could easily sell)?
    Make a reasonable estimate on how much business you could do per month based on the time you have available (from question #4) and the trend you’re experiencing in your business now. If you’re currently averaging one client per month, don’t estimate you’re magically going to land ten clients per month. Or if you only have five hours a week to work on your business, don’t think you’re going to be able to take on ten clients. Be reasonable.

 

Now it’s time to work backwards using my handy-dandy price formula (yes, I’m a formula-loving nerd):

YOUR IDEAL PRICE = [(Desired Net Income) + (Overhead) + (Cost of Materials * Products Sold Monthly)] all divided by (Products Sold Monthly)

Based on the question #’s you answered above, here’s the formula again…

YOUR IDEAL PRICE = (#3 + #1 + (#2 * #5)) / (#5)

EXAMPLE: Say you want to net $4000 per month and your overhead is $600, your cost of materials is $20, and you think you can sell 5 of them, this would be your formula…

YOUR IDEAL PRICE = ($4000 + $600 + ($20 * 5)) / 5

= $940 per product or client

WELCOME TO THE PRICE IS RIGHT!!

(Note: Obviously this formula will need to be modified if you offer more than one product or service.)

Once you determine the ideal price that will allow you to make the amount of money you want every month, you then need to consider if that price is within your competitor’s price range that you researched in Part #1.

If yes, run with it.

If no, figure out why not. Do you need to tweak your overhead? Sell more products? Source cheaper materials? Or maybe you’re offering more value and putting more time into your unique product or service, which means the price should be higher.

Bottom line: Use this formula as a guideline to make sure you’re somewhere within the correct ballpark with your price. After that, use your good judgment.

Step #3: Choose a target market that is willing to pay your prices

Your product or service is only worth what someone is willing to pay for it. If no one buys from you, you don’t have a business, do you?

Once you go through Steps #1 and #2, you’ve pretty much determined what price you should charge that will sustain your business and your lifestyle. Now you have to pick a target market comprised of customers who are comfortable with your prices. This means you have to make sure there is a group (or groups) of people out there who are willing to pay full-price for what you have to offer.

In Jessica’s case, her cheap infographics were probably perfect for anyone with a website—cash-strapped bloggers, small businesses, corporations and everyone in-between.

But when she increased her prices, there’s no way she would have been able to effectively sell her services to all these people. Instead, she needed to narrow down her focus and choose a specific niche market that could easily keep her business afloat. Depending on where her interests lie, she might have chosen Fortune 500 companies or leading tech industries or big health insurance companies—companies that can easily afford what she’s offering.

What group (or groups) of people are willing to pay full-price for your product or service?

Figure out who these individuals/companies/groups are, focus all your marketing efforts towards them like a freakin’ laser beam and then forget everyone else.

If you can’t think of a target market that can afford your prices, it’s time to rethink your overall business strategy. If that’s the case, call me and we’ll figure it out.

In the end, the worst thing you can do is make an emotional decision when pricing your product or service. This is a business. Treat it like a business. If YOU don’t recognize that your business is offering tons of value to the world (and that your prices are a reflection of that value), then no one else is going to recognize your value either. You’ll end up struggling the whole time and wondering why no one wants to buy from you.

Figure out your ideal prices from the very beginning and get behind them 100%. If you need to offer a few discounts when you’re starting out just to get the ball rolling and get some customer feedback, that’s fine, just don’t devalue your business and your time by setting your prices too low to sustain the lifestyle that you want.

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Alex Barker - a couple of years ago

Timely post Laurel,
I just picked my price for my course and coaching services. You nailed the important points.
Experience has taught me that you can play more with prices than you think. I’ve run mastermind groups for $37 per member per month and $87 per member per month with relatively similar success.
The rule of the pricing game is exactly what you said : “get behind them 100%”.

    Laurel Staples - a couple of years ago

    Hi Alex! It’s good to see that you’ve noticed in your business that it’s not about the price itself, it’s about getting behind the price. That’s what I’ve always found. Thanks for the comment! Checked out your website…looks AWESOME BTW! 🙂

Naomi@businessstartup - a couple of years ago

Hi Laurel,

I really like what you said about ‘working backwards’ to find your ideal price. You’ve added a really good brake down (it couldn’t be more idiot proof if you tried).

Great post

Naomi

    Laurel Staples - a couple of years ago

    Thanks Naomi!! It’s what’s worked for me in the past, so I hope it works for others! Thanks for the comment!

Robert Linder - a couple of years ago

I volunteer as a Business Coach as a non-profit established to create entrepreneurship for low-income individuals. The steps you outlined are a perfect text for these folks. It is so easy to think one must enter the market with a product/service price tag that is lower than the current market. As your article points out – WRONG! Thank you for literally spelling out the process in making sure people charge a price that makes their business sustainable.

    Laurel Staples - a couple of years ago

    Hi Robert! Thanks for your comment. I have done this the wrong way in the past, so I thought it was time to spell out the RIGHT way to do it. 🙂 Glad you enjoyed the post!

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