I don’t know about you, but coming up with ideas for new revenue streams and product ideas is the fun bit of entrepreneurship for me.
Exploring different ways to bring them to life, deciding on packages and the whole act of creation in business excites the hell out of me. That flight of creativity is the drug that has intoxicated me in the six years that I’ve run my own businesses.
Where it starts to get difficult is deciding what price tag to slap on said revenue stream/product…
And I’m not alone in this struggle.
From the many entrepreneurs I have mentored – from my Mastermind to my Remarkability Clann members, deciding on how to price our offers is a perennial problem for business owners.
This problem is multi-layered:
Perennial Pricing Problem 1
The price tag on our products or services is intrinsically linked with our own self-worth, and if we go back another step, our innate human need to be liked. If people don’t buy our stuff, then we feel unloved. So of course we want to set prices that we know people will pay so that we don’t have to face that yucky feeling. Launching a product and having no-one buy it is the business equivalent of no-one showing up to our eight birthday party – and who wants that in their life? Not me.
Perennial Pricing Problem 2
Business in the 21st century is dynamic – in the last 10 years alone, entire new industries have been born. And for many of these industries, there is zero historical data on which to base pricing decisions. From my personal experience, I started The Remarkables Group at the very infancy of the influencer “revolution” in Australia. There were no rate cards, and no accepted dollar value on influencer content. Thus ensued a world of pain trying to price something that essentially had never been priced before.
Perennial Pricing Problem 3
It’s bloody impossible to compare apples with apples when it comes to pricing – particularly when it comes to the more esoteric areas of strategy, IP and online services. It’s not like an accountant comparing their rates to a fellow accountant’s – monthly accounts reconciliation + invoicing + BAS = monthly fee of $X. Simple!
For many of us in business in 2018, our “products” are likely to involve packaging up our IP for sale – whether that’s via ebooks, training sessions or providing strategic advice to clients. As that IP is completely unique to us and our businesses, it makes it impossible to benchmark it against similar operators in our space.
So what can we do to set prices that are fair to both us and our customers, and that will see our businesses growing with an abundance of cash in the bank?
Here are some golden rules that I practise, and that I share with mentees who are pricing their wares.
Golden Rule 1: Make sure the price covers your costs…
…including your time.
It’s very tempting in the competitive and noisy business landscape we all operate in to drop our prices lower and lower – only to find after some hard analysis by our accountant (if we’ve got a proactive one) that we’re making sweet FA margin on the product/service.
The number one reason business owners feel they’re not getting ahead financially is that they’re not charging enough for what they do – and they’re over-servicing what customers they do have. This means they get set in a crappy cycle that means the bank balance Just. Never. Seems. To. Grow.
Setting a price that realistically will cover all the associated costs with offering that product or service is the absolute basis to getting to the sweet price spot.
Golden Rule 2: For the price you’re considering, will you joyfully give the required energy to that customer?
Recently I was working with a mentee who was creating a membership model that would see her charge members a monthly fee to access her IP via online channels. She was struggling to set the price and the nominal fee she had settled upon would leave her with a handful of dollars per customer once payment fees and software subscriptions had been paid.
We talked at length about the fact that money is just an energy exchange, and we give the energy we feel appropriate for what someone is paying us for that product or service. My concern about her placing such a low price on her membership was that the balance was out – the rate was too low for the energy she would be required to give to it, and when that happens we welcome our good friend Resentment into our businesses, more specifically to our customer relationships.
It’s vital when setting a price that we interrogate whether or not that price is balanced with the amount of energy we want to devote to that customer – the goal is to be paid a rate that means we will joyfully devote that energy to them.
Golden Rule 3: Be happy if they say no and happy if they say yes for that price
This tip was given to me by a past business coach, and I’ve embedded it into my pricing strategy since he shared it. The trick is to set a price that if the customer says yes, we’ll be happy (as we’re happy to give energy generously to that project – refer to rule #2). However if they say no, we’ll also be happy – as we know that our price is fair and that another, more suitable, customer will come along soon.
Golden Rule 4: Rarely discount
I learned the perils of discounting early in the days of my first business.
We were still in the very early days of proving ourselves and we were approached by a household name beauty brand, who wanted to engage a group of our influencers for a project. After consulting with the influencers, we discounted heavily in order to get the project over the line – to the point that none of us made much money at all from it.
The following year, the project was recommissioned given its huge success in Year 1 and the client requested the same influencers at the same price. We embarked on a negotiating journey, and ultimately we settled on a price that was close to our full rate – though not quite. I learned the lesson to be extremely judicious on when to offer a discount, and instead I learned to give added value instead.
If we offer a discount, it instantly devalues our product or service. If we consistently discount, then it has a cumulative effect and our product/service progressively is seen to have less and less value in the eyes of our customers.
A much safer strategy is to provide added value instead of reducing our prices.
Giving 20% off a $500 strategy session = client places a value of $400 on the session.
Including a free book worth $30 with the $500 strategy session = client places a value of $530 on the session.
Wherever possible, encourage customers to buy by offering them bonuses, rather than reducing your prices.
There are times that it’s appropriate to discount, for example when launching a new product or service. The trick is to ensure that this is for a limited time only. This encourages people to get onboard quickly, which delivers massive momentum for a new offer. It also rewards those who do jump in first.
For example, when I was launching my Remarkability Clann membership model to support ambitious entrepreneurs, I offered a reduced monthly fee for the first three months to those who jumped in from day 1. My reasoning was that these people would provide valuable feedback as I grew the Clann, and I also wanted to celebrate those who take the initiative and are brave enough to be the early adopters.
Other appropriate times to engage discounts is when agreeing a longterm partnership with a customer (it’s much easier to nurture one longterm relationship than trying to find 4-5 shortterm ones) and when encouraging customers to pay upfront – meaning your hard costs are covered from day one and you’ve got cash in the bank to cover the curve balls that we can count on in business.
Golden Rule 5: Always shoot higher
Another excellent rule of thumb to engage when settling on a price is to always shoot that bit higher than the rate you are aiming for. This is for two reasons. Firstly, costs are 90% sure to blow out, so this gives you extra “fat” to insulate you from those blow-outs. Secondly, it also means that you do have wiggle room for (appropriate) discounts and negotiations with customers – see previous point!
I hope these golden rules will provide you with an infrastructure to setting a price on what you do, and also to review the prices that you’re currently charging.
Remember that pricing is a constant test and learn process – your customers will vote with their credit cards and tell you what is (and isn’t!) the right price. The key is to get new offers to market ASAP, so that listening exercise can start as soon as humanly possible and the fine-tuning process can get moving.
Also remember that when we listen to our customers – really listen to what their pain points are – and we create solutions for those problems that what you are offering is worth its weight in gold.