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Guide to Smart Pricing: What Are You Really Worth?

piccoli investitoriGetting your pricing just right is tricky.

There are big downsides to keeping your prices too low. But it’s easy to raise them too high for people to buy anything anymore.

There are some basic ways to look at pricing and pick the “right price.” Everyone repeats those methods whenever pricing is discussed.

However, “look at your competitors” doesn’t really help you to find the right prices unless you only aim to be the cheapest.

So, how do you find the perfect prices for your products and services?

7 Problems You Create With Low Prices

People sometimes think, “I’ll cut my prices so more people will buy…”

Think again.

Here are just seven reasons why you shouldn’t aim to offer the lowest prices you can possibly survive with:

  1. You cut your profit margins. Do you know how much-exactly-your profit margins are now? If your margin is now $50 on a $100 product and you cut the price by $25, you lose 50% of your net profit.
  2. You can’t invest. Low profit margins mean that you can’t invest into anything. Any additional marketing expense, for example, leads to even smaller margins, which is unsustainable if you already have small margins.
  3. You need to attract more customers. You won’t automatically get more customers when you lower your prices. The lower prices just make it a little easier for people to buy. You need many more people to make the buying decision for you to get to the level you were on with higher prices.
  4. You lower your products’ perceived value. Like it or not, people almost always expect an expensive product to be better than a cheap one. Discounting your products too much can even make you lose customers (instead of getting more of them).
  5. You can attract the wrong customers. This isn’t necessarily a problem for you. But if you aim to attract clients who could afford a more expensive option, you’re likely to lose them with low prices if the pricing makes you seem inexperienced, low-quality, or unprofessional.
  6. You can end up with “bad” clients. People who are willing to pay a premium price for your products and services generally appreciate them more than those who are only willing to pay a bargain. Which group do you want to attract?
  7. You start competing on price. If your products are a good choice just because they’re cheap, anyone can put you out of business by offering even lower prices. It’s certainly possible to make a great profit by selling lots of low-margin products, but it’s extremely difficult to make that business model work.

So, when you’re thinking of how much you should charge, don’t look for the lowest price you can live with. Rather, look for the optimal balance between price and number of sales.

How Much Could You Earn Doing Something Else?

This is a good place to start when you consider your prices.

It doesn’t help you pinpoint the right pricing, but it gives you at least something to compare your prices to.

This is easier to calculate if you sell services. But it applies to products as well.

First, what if you sell services:

  1. Look at each service separately.
  2. Count the time it takes to complete a project (remember to include all the time it took to get the project and everything you actually do during the project).
  3. Count how much money the project costs you (including advertising, client lunches, etc.).
  4. Deduct your real costs from the project fee and divide the result with the hours you spend on it.

You should be left with a fairly good estimate of your hourly rate for each type of service you sell.

When you consider offering a new service, estimate the real hourly rate you can make with it. Sometimes you can justify going well below your best hourly rates. But usually sticking close to your current rates-or going a bit over them-is a safe bet.

But what if you sell products?

This is a much more complicated calculation. But let’s look at an example.

Let’s say you build an information product around your expertise. An ebook called, “How to build your own guitar.” And it takes you 250 hours to finish.

Estimate how much you can earn from it: How many can you sell? How much can you charge? How much will your payment processor take (or if you use PayPal, remember to count how much they steal on top of the normal fee)? Will there be refunds (and how much do they cost you)? Will you pay for advertising? Are there delivery costs? And how much time will selling it take (and if there’s need for customer support)?

Putting all that together, you might end up with something like this:

  • 250 hours to create the product
  • 10 hours per 30 sales for marketing, selling, and customer support
  • 30 sales per month
  • 5% cut for payment processor
  • $2 advertising cost per sale
  • And the price is $67

That means your hourly rate for the whole project is $7.11 after the first month. After six months (assuming nothing changes), your hourly rate goes up to $35.80.

After a year you’re even higher ($59.98/hour).

But that kind of a system is very difficult to build and maintain. And maybe you could get $200/hour for selling services.

That’s all to say that “passive income” isn’t necessarily quite as passive as you might think. And if you’re building products to “make money while you sleep,” you might end up earning way less than you would with something else.

That being said, your hourly rate isn’t the only thing you should consider.

What’s The Real Value of What You Sell?

Consultants are the prime offenders of this rule, and they often lose huge opportunities because of it. But the same thing often happens in almost every industry you can think of.

Let’s say you sell technical consulting services.

A specific project takes you two full weeks to finish (80 hours), and your normal rate is $70/hour. So, based on the hourly-rate-thinking, you should charge $5,600 or maybe round it up to $6,000.

But what’s the real value of your service to the client? What if they save $10,000 per month because of the work you do for them?

Even if you charged $100,000, the fee would still make perfect sense for them.

You’re basically losing $94,000 in that one project (if you’d have the guts to ask for $100,000 = $1,250/hour).

However, you shouldn’t just directly jump to the highest fee you can justify. But you should know what it is. Or rather, you should know what’s the perceived value of your product or service to the client before you set your price.

But the perceived value isn’t only about the money you help them make or save.

What Are The Reasons People Choose You?

I hope you’re not aiming to get customers by offering the lowest prices. It’s not a very good business model for most of us.
But if not because of low price, then why should people buy from you?

Your products and services have to be the best in at least one way, and people have to understand what it is. If they don’t understand what makes you the best option, they’ll never buy from you.

Are your products the most durable? Can your software do things others can’t? Is your service the most comprehensive? Are you the fastest to finish the project? Are you specializing in something others don’t understand?

Your products’ and services’ perceived value is based on your customers’ preferences. If they want something that you provide more, better, or faster than anyone else, they’re happy to pay extra to get it rather than buying the cheapest option.
You have to know what makes your products worth buying in your customers’ eyes-even if you don’t have any customers yet (then think of your target customers).

When you know the reasons people choose you, you can focus your marketing on those reasons. And you can justify your prices much more easily than if you’re just guessing why people consider buying from you.
To find the right pricing for your products and services, you have to consider how much your target customers value the different reasons for buying from you. And compare your products to the competing options.
For example, people are rarely willing to pay extra to get a product in a specific color that only you sell. But if your product lasts twice as long as the closest competitors, you can justify a premium price.

Try this quick 5-step system to find the core reasons your target customers should pay attention to you, join your list, or buy from you.

You can then focus your marketing on the ideas that are most likely to push people to action, and you can raise your prices to the level people are comfortable paying you.

When you’ve looked at your prices through all these lenses, you should have a much better idea of what you should charge.

If you have any questions, just let me know in the comments 🙂

About Peter Sandeen

Peter Sandeen dreams of sailing with his wife and dogs on the Finnish coast-unless he's helping someone build a clear marketing message and strategy that creates sales consistently. Download the quick 5-step exercise that shows what ideas are most likely to make people want to buy your products and services.

28 thoughts on “Guide to Smart Pricing: What Are You Really Worth?

  1. My mailbox overflows with marketing advice from every sort of marketing guru but Peter is one guy whose posts I ALWAYS read.

    He’s one of the real ones.

    Nice post, Peter.

    Terence

  2. I don’t know anyone who attended college for free (or on the cheap), so investing in acquiring skills to run a business to serve others shouldn’t be treated any different. When it comes to setting prices, “Whoever minds doesn’t matter & whoever matters doesn’t mind,” is my mantra.

    A post like this is always timely. THX

  3. Thanks for the great article Peter. Pricing is often a tricky issue. I’m often tempted to lower my prices, but you put up a good argument for why I shouldn’t. I’ll remember this every time I’m tempted to lower my prices from now on. Look forward to reading your 5 Step System.

    • Hey Kara,

      Thanks 🙂

      You’re not alone. People often see it as a solution to a problem that really has little to do with pricing…

      Let me know if you have any questions I can help with.

      Cheers,
      Peter

  4. Great article Peter,
    I like points 5 and 6 – that is so true – once you charge a low fee you are stuck in the spiral with those clients – they will always expect to get something for (basically) nothing from you.

    • Hi Lorraine,

      Thanks 🙂

      And yeah, lowering prices too much starts a vicious cycle. And it’s hard to get out of it without starting almost from scratch…

      Cheers,
      Peter

  5. Often people lowball their prices because they do not believe in their own value. If you do not believe you are worth the money, no one else really will! Know the value of you, know the value of your product/services, and know the value the customer will receive.

    Looking forward to checking out the 5 step system.

    Thanks for the great post!

  6. About halfway through this article, I thought “I bet this is a Peter Sandeen post” – and scrolled down to the byline to find out I was right!

    What do you suggest when the link between your product/service and the potential customer’s future earnings/savings isn’t so direct? I sell English courses and people who learn ESL will have wider career and travel options… but I can’t put a specific price tag or a guarantee on that.

    By the way, I’ll be in contact soon for a consult 🙂

    • Hey Shayna,

      Great to hear from you 🙂 And thanks, I’m happy to hear that.

      That’s a bit tough. I’d start from getting a sense of what the general price level is. And thinking of how you compare to others in the field.

      Then you should consider what makes people choose you and how much they value the reasons they choose you. For example, if they believe they’ll learn in one of your courses as much as they’d learn in two “normal” courses, you can comfortably price your courses at around 1.5x the normal price.

      Another point of view is the perceived benefit. If your customers expect to get a raise because of their improved English skills, even a fairly high price makes total sense.

      What do you think?

      Cheers,
      Peter

      PS. Looking forward to working together again 🙂

  7. Good food for thought. I especially appreciate your argument against being the “low price leader.” I’m doing a price structure for my service right now and your post was very timely- thank you!

  8. I’m a little late getting here, but hope you’re still checking in.

    I’ve made a big shift recently in how I think about pricing, not just in how I communicate it to clients, but also how I think about it myself.

    Basically, I’m trying to avoid any thought of an hourly rate. For two main reasons:

    1)I’ve found on projects that I’ve worked for an hourly rate it can create a sort of tension between the desire to do great work and a concern of not wanting to seem to be inflating hours to the client. On a project working on videos for one client, I was less likely to try out things that may have produced a better video, like adding in some music or new effects, because of this tension.
    2) As a writer, it has become very clear to me that not all work hours are created equal. Hours in the day are less of a limitation than the amount of energy different types of work take. An hour writing requires more energy than an hour doing serious research, which takes more time than an hour doing keyword research or accounting.

    For this reason, I really try to look at each project according to its value to the customer and how much of the work will be high-energy, rather than pricing according to an estimated number of hours. I also take into consideration the likelihood the client will become a regular client vs this being a one-off job, as the former is more valuable to me (which also goes back to the “not all hours are created equal” concept).

    I’m curious what your take on this approach is.

    • Hey Kristen,

      Good that you moved away from the basic hourly rates 😉

      Your points are spot on. But there’s also the fact that people can wonder, “$1,000/hour?! Are you kidding?!” or whatever is your hourly rate if it’s above $50.

      So, I agree. Strict hourly-rate-based fees are rarely the best decision. However, there are plenty of cases where they work. For example, monthly retainers can work really well (e.g., 5 hours of web master work per month).

      Cheers,
      Peter

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  10. Hi Peter,

    This is a really great article.

    I think pricing is one of the biggest challenges that IMers/bloggers struggle with, especially when they’re new to the game.

    It’s def something I struggled with when settling on a price for my current product. I’ve been thinking of repricing my product and I’ve been brainstorming what to price a subsequent product I’m developing so this post will be helpful in assisting me with that.

    Thanks for sharing your insights with us.

    Ti

  11. Hi Peter,

    This is a real eye opener, especially since I’m in the process of getting a product ready for launch.

    I played around with the pricing structure for several days. I didn’t want to price it too low as I put a lot of value into the product.

    Yet I didn’t want to overprice it because that would just push people away. Your post definitely helped me understand how to base my decision. I will be back to read some more…thanks.

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