Zen and the Art of Setting Prices

Whenever a new business starts, odds are they are going to mess up their pricing. Whether they are so high that they never get a sale, or too low and so they never get a sale because they’re so cheap, most everyone gets this wrong in the beginning.  

Let’s say you’re a solopreneur in a service business. The common place to start is to look at what it costs to keep the doors open and add a 10% margin. Say it costs $250,000 to run their business for a year. That comes out to $120 per hour (8 hours a day, 5 days a week, 52 weeks a year). Add 10% and the company’s hourly rate is $132 an hour – if it’s a 5 hour job, that should run $660.  

In a way it makes sense behind the scenes, but that doesn’t mean it makes sense to your client. If the work you are doing for them is going to make them $150,000 this year (or save them that much money), they are going to see the price of $660 too cheap and thus unable to create that much value – the price needs to be in line with the benefit they’re getting or they will pass (even if you can do the work for that rate).  

Now let’s say you’re a solopreneur who is at capacity. While you’re going through your hiring process (link to When to Hire New Staff) you get a new prospect. You can’t do the work without hiring, so now your price is going up significantly. Your old rate doesn’t work anymore.  

The same process is true if you are running a product-based business. Odds are you are accounting for shipping costs, receiving & stocking inventory etc in your prices. But if your warehouse is full and you need to expand, that next unit is going to destroy your margins. Thus your pricing needs to reflect that major shift in your fixed costs to keep the lights on.  

The reality is you will get more sales if people like the value proposition of your product or service –it’s why Timex and Rolex are both able to sell what is basically the same product at completely different prices.