When I started my business I was all. over. the. place. when it came to pricing. Some days I wanted to charge ultra-premium prices, other days I wanted to be accessible to everyone.
Some days I easily quoted my rates to potential clients, other days I stressed, sweated it out and wanted to cry at my desk before sharing the same rates with another client.
When it came down to it I knew it was because, despite my fancy MBA and experience starting other businesses, I wasn't crystal clear on what I was doing any why I was doing it. And because of that my pricing felt all over the place, and therefore some days it felt good to share, others not-so-much.
When I noticed my clients (you know, the ones I did manage to ask for money in exchange for my services) having the same problem over and over, I developed the 5-step system I'm sharing publicly for the first time here. If you're a new online, service-based entrepreneur, use these 5 steps to develop a pricing strategy of your own.
It'll save you hours of sweat and stress and beating yourself up. Trust me, I know from first hand experience.
STEP 1: WHAT ARE YOUR INCOME GOALS?
Before you think about pricing your services I want you to take a minute to think about your own goals, both for your business and for yourself and your family (or whatever you may want to be financing with this business of yours.
I include this step because if you don’t know where you’re trying to go with your business, and what you need to get there, your pricing is bound to become an exercise in winging it.
And when your pricing is no better than a random guess your income will be the same. No bueno.
To set your income goal, consider what you want for both yourself and your business. And notice I said WANT - not need. That’s an important distinction. When you set an income goal you’re not determining the bare minimum you need to survive. You’re determining what you want to have for the business and lifestyle of your dreams.
First step to getting there: Think about what you want personally over the next year and list those things out. Be specific.
Start by listing your personal monthly obligations (the need) and then add budgets for the other things you want. Think about food, clothing, entertainment, travel and housing desires. You’ll have more but those are the popular ones that’ll get your brain moving. Write all of these down, and once you’re done add them up.
Now do the same for your business. Start with the monthly obligations your business has today (taxes, advertising, web hosting, software, etc).
Then think about where you want to be in a year. What kinds of large investments do you want to make this year? Who do you want to hire? Would you like to pump up your advertising budget? Write all of it down.
You now have a personal and business expense budget for the year. #Yay!
Buuuttt....What does that actually mean for your pricing? It means we can start breaking that final number (your combined personal and business expenses) down to an hourly rate you need to average in your client work.
How do you do that?
Here’s an example: Let’s say your combined personal and business budget is $100,000. For simplicity sake we’ll also assume that budget is spread evenly across the next year, which means your monthly budget (or income goal) is $100,000/12, or $8,333 per month.
Now that you know the monthly amount you need, take it one step further to find your ideal hourly rate.
How? Divide the monthly income goal by the number of hours you want to work with clients each month. This is an individual number that’s different for everyone, but I’d encourage you to not estimate more than 20 hours a week of client work (and even that’s high). Remember this is only the time you’re working directly on client work. It doesn’t account for everything else you need to do each week to run your business: marketing and promotion, administrative work, etc.
Here’s an example: Let’s say you want to work with clients only 10 hours a week. That’s 40 hours a month. When you divide that into the $8,333 monthly income goal, you get a $208/hour effective hourly rate.
Now you know the number of client hours you need to book (client hours meaning either 1:1 clients or time spent in group programs) plus the hourly rate your program prices need to accommodate in order to reach your income goal.
Pro-Tip: This hourly rate is NOT your price. It’s just a number you need to keep in mind to make sure your needs are being met each month. Price, however, is about so much more than simply meeting your needs, and the last thing you want to do is price based on cost, so you’ll simply use this number as a reality check when we finalize things later on but not as a final price.
OK, that was a lot of math. Thanks for sticking with me. Now we move on to more fun parts of pricing: Determining your value and your positioning!
STEP 2: DETERMINE YOUR VALUE & TELL YOUR STORY
We did the math we did in Step 1 to give you a sense of what you want and what it’ll take to get there, but as I said earlier it’s not how you actually set your prices.
Why? Because you should always set price as a function of the VALUE you’re providing, not as a function of what it costs you to provide that value (or as a function of how much money you want to make).
Which, of course, begs the question: How do you define that value?
Answer: By determining the BENEFITS your clients receive from working with you.
So how to do you figure out what do your clients gain from working with you?
You can (and should) approach this question from both a money and not-money angle (haha super professional categories, huh?)
First the numbers (the money): What are your clients going to gain or save monetarily in the next 12 months from working with you?
Here's an example: Business coaches - How much additional income do your clients earn in the year after working with you? Health and Wellness Coaches - how much do your clients save in a year of medical costs after working with you? Designers - how much more money are your clients going to pull in by having a professional presence online instead of the DIY one they’re rolling with now?
You probably won’t have exact figures here but you should be able to make some pretty good guesses. Is their income going to double? Triple? 4x or more? Those are important things to know.
Then tackle the intangibles. What is the value of a dream come true? Of restored health? Of a thriving business or relationship?
Jot down some best guesses. We’ll come back to them later.
STEP 3: POSITIONING
Now that you’ve considered the value your clients get from working with you, it’s time to consider how you’re positioned in the market.
What do I mean by positioning? This is the story you’re telling the market about yourself, your brand, what you do for your clients and how you’re different from everyone else in the market.
Do you want to be known as high-end or accessible? Exclusive or for the masses? Advanced or beginner? Trendy or tried-and-true?
There are no right or wrong answers here, just what feels right to you.
Advanced Pro Tip: I know we’re told over and over that competition doesn’t exist and that your right people will find you, and that’s true if you’re positioned correctly and if you’re telling the correct story.
When you’re not doing those 2 things you risk confusing those perfect customers, and if they’re confused they’ll never find you.
This section is not meant to dredge up comparisonitis or direct competition. It’s meant to point out that how consumers perceive your brand’s value is at least partially influenced by the other messages they see all day long, and how you in turn position yourself when compared to those messages.
When you think about differentiation I don’t want you to think about your direct competition. Instead I want you to think about which brands or other service providers you’d want your brand lined up with.
Who would you want to be mentioned in the same sentence with? What is it about her brand and offerings that makes you want to be lined up with her? What do her customers expect to pay? What would they think of your brand if your prices were significantly higher or lower than the comparison brands?
What would you charge if your brand was in perfect alignment with these complimentary brands? What story would you be telling your customers? What value - both tangible and intangible - would you be providing?
Write down your answers to these questions and anything else that comes up around positioning.
STEP 4: CIRCLE BACK TO PRICES
Now that we’ve taken a look at the 3 big considerations when it comes to pricing - cost, value and positioning - it’s time to see how they line up.
If you were going to price based only on your income goals in step 1 (which you SHOULD NOT do) what would your offering cost?
If you were going to price solely based on the value you generate for a client in a year, what would your offering cost? (HINT: Because you want to offer considerably more value than your program costs, I always suggest this price be 10-20% of the value amount you came up with in Step 2).
If you were going to price solely based on meeting market expectation for the complimentary brands your customers associate with, what would your offering cost?
Now take a look at how your 3 prices line up against each other. Are they similar or wildly different?
1. Value and Differentiation prices are similar and higher than Income price: This is the ideal situation. If the price you wrote down for the value you provide matches well with customer expectation, and is higher than your income goal, that is an indication that you’re close to your ideal price. Let it sit for a day or 2, see how it feels and commit. You’re on the right track.
2. Differentiation price is higher than Value and Income prices. When your Differentiation price is higher than your Value and Income prices it usually indicates that you’re newer in business and still gaining confidence and knowledge in your programs and earning potential.
That is a perfectly fine stage to be at, as long as you recognize that it’s a growth stage and not somewhere you want to stay forever. Keep working towards upgrading your business so its value does line up with the brands you want to be associated with, and you’ll quickly see the numbers come into line with each other.
3. Differentiation and Value prices are lower than Income prices. This is a sign that your business as currently designed is not sustainable. What it doesn’t mean is that you should cut your income goal. Not at all.
What it does mean is that you need to reevaluate your offers and look for ways to drive up the Value and Differentiation numbers to find an offering that is of sufficient value to meet your Income goals.
STEP 5: COME UP WITH A PRICING STRATEGY TO GET YOU INTO ALIGNMENT
How’d you feel about the numbers you listed in step 4? Were your Value and Differentiation prices too close to your Income price for comfort? Did your Differentiation price feel way out of reach? Did you have trouble articulating the value you provide your clients in order to reach a Value price that makes YOU feel good?
First know that it’s ok if your prices are out of alignment. To be honest, most are at first.
The first step of fixing anything is the knowledge that it needs fixing, so pat yourself on the back for going through this exercise and realizing where you have some work to do! Honestly, it puts you ahead of 97% of solopreneurs out there.
The good news: now you have a starting point to work from.
To start, write down a few ideas of how you can start getting into alignment.
Do you need to upgrade something in your business in order to line up with your ideal brands and justify your Differentiation price?
Do you need to add something to your program in order to up the Value price associated with the program?
Do you need to rethink how many clients you work with or how you work in order to accommodate your Income goal?
Pro Tip: You don’t need to fix it all in one fell swoop.
A large component of a successful pricing strategy is making sure it’s in alignment with your confidence and your mindset, so it’s ok to choose a price that’s lower than your ideal Differentiation price for now if that’s where you’re at.
BUT put limits on yourself and work your way up methodically. If you’re a service provider commit to raising your prices every 3 customers. This’ll give you the bandwidth to get comfortable and realize you know exactly what you’re doing, but also not so much time that you’re under-earning forever.
Remember you’re telling a story with your pricing, and you don’t want your mindset to slow that story down.
Keeping your prices lower than they should be for longer than they have to be will start to be noticed in the market, and people will start to doubt you. Mindset is real. Using it as a crutch to consistently undervalue your services is not.
Questions? Story about raising rates (and the world not ending?) Share them in the comments below - I'd love to hear them!