Something that my students struggle with a lot is pricing strategy. How to price themselves, how to package their services, how to price in the way that makes people want to buy them, how not to price too low, how not to price too high… The whole pricing thing is seemingly a huge mystery.
A lot of pricing strategy problems have to do with mindset. Unsurprisingly, there’s a huge correlation between prices and mindset. You are probably already aware that purchasing things and mindset are really intertwined — when you’re pricing something, it’s really no different.
You have to take into consideration that your client’s decision to purchase is a personal one. It has a lot to do with their mindset on whatever you’re selling, or even just on money in general.
Your job is to overcome their mindset issues in a way that appeals to them and subsequently triggers them to purchase from you.
But it’s also an issue of mindset on our end as well.
When you’re pricing your services, you have the job of putting a price tag on something that you’ve personally made or created. Your services are a part of who you are. This makes having a real “pricing strategy” very difficult.
This struggle manifests itself in two main ways.
Sometimes service providers undervalue themselves. Other times, service providers value their offerings too high.
Both of these scenarios are bad! But it’s also difficult to figure out if you’re even doing one or the other. Basically, everything to do with pricing strategy is super stressful. It’s not a big surprise that we mess it up sometimes!
That being said, I have a few opinions about all of this that may or may not be controversial. Let’s dive in!
My Controversial Opinion on Your Pricing Strategy Advice
The first thing I want to say is I strongly disagree with a lot of the traditional pricing strategy that you hear from people.
One of the most common things I hear absolutely everywhere is “raise your prices!” and “you’re not valuing yourself enough!”
I don’t necessarily disagree with that thought in general. There are certainly times when it’s warranted. And I also think there’s a rich history here.
Why Pricing Strategy is a Hot-Button Issue
A big reason why women started working online so they could make money on their own terms. In a way, the world of online business was a new frontier with no glass ceiling and unlimited potential.
Back then, almost everyone was undervaluing their services online. It was new, so there wasn’t really a way for people to compare prices or come up with an industry standard. It was probably also harder to convince strangers to hand over their credit card from across the country.
Because of all these things and more, we as women undervalued ourselves.
We undervalued our services, our contributions, even our worth as human beings. And so, in order to combat this, a couple of women started realizing what was happening and gave the advice that we were all undervaluing themselves (because we were!), and telling us to raise our prices. It was a great advice at the time, and still probably is really great advice for some people out there.
But, I do think that we’ve gotten to a point where the advice no longer matches up with the current climate of online business.
So, while I do think it’s a good advice to not undervalue yourself, don’t just take that and run with it. You have to actually consider if you are in fact undervaluing yourself. If you’re not, following the advice to raise your prices is not going to be a good idea.
Figuring Out Your Pricing Strategy
This means that the true first step in figuring out a pricing strategy is recognizing whether or not you are undervaluing yourself. (And by yourself, I mean your services. We are all priceless!)
Sounds pretty difficult, though, right?
Well lucky for you, I have a handy-dandy formula you can use to figure this out super quickly.
Just as a note, this pricing strategy formula is best for women who need help figuring out what their starting prices should be. So, this is for new entrepreneurs with absolutely zero experience offering services online.
(Side note: If you are more advanced, discovering your hypothetical starting rate could still be helpful. It will allow you to envision a sliding scale so you can figure out where to place yourself on that scale.)
Finding a Basis for Evaluation
Let’s take a step back and think about how much we’d make if we weren’t in online business. If you were getting a job somewhere, and you had no experience, what kind of compensation would you expect?
Taking this step back is important because it puts you into the perspective of how we as a society value services in the regular atmosphere of business, without you having to take into consideration that you’re an online business. (And yes, we could talk about how women make less than men as a whole. But for now we’re just going to talk about this as a general standard for everyone, regardless of race, gender, or anything else.)
Basically, we’re talking about minimum wage.
That is what you can expect to make out there in the real job market with no experience. True fact.
The current minimum wage (in Rhode Island, as of August 2018) is $10.10 per hour. It varies a lot for each state. (Just for reference, the federal minimum wage is $7.25).
Discovering Your “Minimum Wage”
When I first started my online business, I was transitioning from working for minimum wage at CVS. I started out there at $7.25 per hour. So when I first started my business, I went on Upwork and put my rate as $7.00/hour. That’s simply how much I was used to being paid for an entry-level job. I knew I was a beginner and I shouldn’t expect to make more than minimum wage even if I wanted to, because that’s simply how things work!
But what I did not take into consideration was the fact that online business is a little bit different than a traditional business, especially when it comes to math.
For sanity’s sake, let’s just say the minimum wage you’re calculating this at is $9.00 per hour.
When you’re an employee of a company (i.e. CVS), your taxes are taken out of your pay by the government, and then you receive your check. So if you had a full-time job at CVS for $9.00 per hour, you’d be making about $18,720 per year. After taxes (using this calculator), that would come to about $15,600.
Calculating Your Taxes and Expenses
But when you’re running an online business, it works differently. The government doesn’t take out money before you get it, and you don’t get to keep everything you make. So, at the very least, you have to account for this when you’re deciding what to price yourself.
We’re going to work this out with math.
The first thing you need to account for is your taxes. Traditionally, you’re going to want to save about 30% of your profit for tax time.
You also need to account for your expenses, which is a bit trickier.
First, you’ll want to figure out your profit margin (calculated by taking your total revenue, subtracting your total expenses, and then dividing that by total revenue). So for example, I have made about $104,000 in revenue so far in 2018 and my expenses have been around $56,000 so far. Therefore, my profit margin is 46%.
Unfortunately, there isn’t really an average profit margin for small businesses. It depends on lot on what industry you’re in and what your business model is. For example, I spend a lot on subcontractors because I am an agency model. Other business models may have fewer or different expenses.
The key here is that you want your profit margin to be in a “good” range. Especially when your business is first getting started, keep costs to the absolute minimum (check out the book The Lean Startup!).
Let’s go back to our minimum wage of $9.00 per hour that we decided on. If you add 30% for taxes, that comes out to $11.70. Then, if you add your profit margin on top of that (we’ll use 46%), you come out to $17.08.
The idea behind this formula is that, regardless of whether you are working an entry-level job in the real world or online, you’d be making the same minimum wage “salary.” So as an online business owner, your starting hourly rate should be around $17.00. (But you’ll want to use this formula for yourself and do your own math!)
Adjusting Your Rate as Your Business Grows
You will also want to continue to take this wage thing into consideration as your business grows. Once you gain some experience in your field and have been working at “minimum wage” for a while, it’ll be time for a raise.
Take a look at the site Glassdoor.com to find out average salaries for certain positions. You want to try and find a comparable position that has the same type of responsibility that you do in your online business. Then, using the formula I just gave you, figure out what that same amount of income would look like for an online business.
The good news is, you can typically gain experience more quickly in an online business than you can in the real world. This is because (a) you’re in charge of educating yourself, and (b) you’re the one promoting your services.
So, if you’re able to uplevel your skills quickly, you may be able to increase your rate a lot more quickly than you would be in the real world.
A Pricing Strategy for Raising Your Rates
I get a lot of questions about raising rates as well. Especially when it comes to not just raising the prices on your website, but having to tell your current clients that they’re going to have to pay you more. Eek! I’m experienced at this, but it still makes me a bit nervous.
If you work with clients long-term, this will happen to you at some point. You will eventually have to raise your rates or not be able to afford to keep them on as a client. But how you go about this is tricky.
I frequently hear the advice that you should just tell your clients “here are my new rates, take it or leave it.”
This is horrible! I do agree that it’s important to be assertive and confident. You have to be in order to demand a higher price from your clients. And on some level, you’re going to have to be open to them saying no.
But you also have to consider that, especially when you’re first getting started, the rate that you raise your rates is often happening very quickly.
In my first 6 months of business, my rates went from $7/hour to $30/hour! Coming to a client and letting them know that they now have to pay you $23/hour more than they used to is going to be a bit of a shock to them. And their immediate reaction is probably going to be “What?? Hell no!”
In order to avoid this, I think there’s a happy medium between not raising your rates on older clients or just saying “take it or leave it” at your new rates. And this is something I do with my clients all the time!
I’ll give you example of my own. Recently, I raised my rates on a client and it was kind of a weird situation. She was actually one of my very first clients! At that point, she was my highest-paying client by far.
…And then I never adjusted my rate.
It was a tough situation because I really loved her and she was a client for a such a long time. Plus, she was the one who had said yes to me when I offered her that “insanely” high rate. But eventually it got to the point where my rates had increased from that initial $22/hour rate to now $60/hour!
That basically means I was losing $38/hour every time I did work for her. And on top of that, I couldn’t afford to outsource it to anyone, so I had to do it all myself!
Eventually, she actually ended up selling her business to someone else. I took that opportunity to sell the new owner on a price that was closer to my current rate. Basically, I gave her a “VIP discount” and agreed to $50/hour. I wouldn’t have felt comfortable doing that if she hadn’t sold her business. That is still a $28 per hour jump! It just doesn’t seem fair to do that to someone. And I knew that if I told her that my new rate was $60, there was no way she would agree to that.
Using the Bridge Pricing Strategy
You might run into this type of situation, where there’s a huge leap between your original rate and your current rate. So what you need to do it slow creep up your rates over time. This makes it so that the leap doesn’t feel as big to your clients.
Actually, a “leap” is a great metaphor for the process of increasing your rates.
My strategy for the leap is that, if the leap is too big, your clients need a bridge. This bridge helps create a comfort zone as they shift from one side of the gap to the other.
So, hypothetically, let’s say you have a client paying you $15/hour but your current rate is $40/hour. Get in touch with your client and give them a bridge.
Say something like: “My current rates are now $40/hour. But you’ve been such an amazing client and I really care about your business. So I’d be more than willing to continue at the rate of $25/hour.”
Basically, you’re going to want to meet halfway to make them feel more comfortable.
How Often Should You Raise Your Rates?
And then, 1-2x per year, you’ll want to have that conversation again. Continue to offer them another bridge at 50% of your current rate.
Just keep in mind that I wouldn’t recommend raising your rates more than 1 (or maybe 2) times per year. Stick with this new rate for at least 6 months, if not more. This allows them to get used to the new price. Plus, it makes them feel like they can trust you not to abuse the situation and keep raising your rates every two seconds.
This bridge pricing strategy works because, eventually, your rates are going to top off. You’ll get to the point where you’re so experienced that you’ve reached the top of the sliding scale in your industry and can’t really raise your rates any higher.
In my opinion, I prefer this method to the “take it or leave it” method. It’s a good compromise that allows you to value both yourself and your relationship with your clients. It’s also a show of good faith to your clients — that you wouldn’t unfairly raise your rates on them. They can trust you to be fair with them.
You’ll also want to make sure to give them a good amount of time to think it over. Don’t just say “your next package is at $X” once their current one runs out. Plan it out in advance so that, a little bit after you’ve just sent them a new invoice, give them the heads up that next time their invoice will be at the new price. This gives them plenty of time to adjust to the idea of your new price, make sure they want to continue working with you, or worst case scenario, hire someone to take over for you.
Pricing Strategy for Products
Back in 2016 when I was launching my membership, The VA Vault (which turned into The Client Vault but is now called Systematic Marketing School), I decided to price it at $9.00/month. And let me tell you, I had a lot of friends in my niche say stuff like “$9.00?! You need to raise that price, girl!”
That was so sweet of them, but I just remember thinking “No, this is going to be a $9 product. I don’t care that you think it should be higher, I’m not going to listen to that. I’m going to go with my gut.”
I’ve actually wanted to talk about this for a while, because I am constantly having to defend my prices to the general public. “$7.00 for a mini course? $150 for a social media package? You’re crazy!!”
But I did not go into this without a plan. I know that my prices are low, and I want them to be low. I’m doing this for a reason.
3 Things to Consider When Pricing
And this is a really important part of pricing strategy that a lot of gurus or coaches don’t address. Pricing strategy is never “one size fits all.” Not everyone in the whole world needs to raise their rates.
It totally depends on three things.
- Your experience level
- Your skill set (i.e. what services you’re providing)
- The target market
When I was creating these products and packages, I strongly took that into consideration. My pricing strategy thought process, specifically with my infoproducts, is that “If I’m targeting X market who are brand-new into business with zero experience…what are they going to be able to afford? What price points work for them?”
My goal as a teacher is to provide them with a product that is going to be appealing to them. Which means it’s got to solve a problem and fit in their price range. My goal was not to create high end product…because my audience does not buy high end products.
This is just an example, but it really goes to show that you very much need to consider WHO you are targeting and what they can afford. And I know that I’m right, because a similar membership came out a bit after mine and they were targeting the same audience. But they priced theirs at $97/month. I looked at their sales page and though “No way!!” And guess what? Within just a few months, they ended up discontinuing that offer. (But guess whose membership is still available?! This girl’s.)
Keep Reassessing Your Pricing
I think this advice will be helpful to you, because a lot of service providers when they are first starting out choose to target newer business owners. And then ultimately they end up needed to reassess this decision. They start to realize “Hey, these newer business owners can’t afford to pay me $40/hour, which is my current rate. So that means I need to either lower (or not raise) my prices, or I need to adjust who I am targeting.”
The good news is that reassessing and changing your target market happens ALL THE TIME in business. It’s totally normal to be constantly adjusting, pivoting, and changing up what you are doing, in order to achieve your goals.
The main key is that you always need to consider who you are targeting, what they can afford, what your experience level is, and what you’re offering. All of those things are crucial pieces of the pricing strategy puzzle, and you should consider all of it.
That’s why I made a conscious effort to do. And that’s why I now have about 100 students in my membership (now priced at $14/month). Which a big chunk of passive income change coming in from an affordably priced product! So, suck it.