How to Perfectly Price Your Products & Services

Imagine you need a new pair of shoes.

Which type of shopper are you?  Are you the one who heads over to Walmart looking for a budget bargain?  Do you invest in a fancy new pair of Louboutins?  Or are you somewhere in between?

Each will serve the same purpose.  Some might argue that the Louboutins are an investment or that they’ll last longer, but if you were looking to actually use the shoes until they wore through really, the intrinsic value that they provide is relatively the same.

One of the most common questions I get from clients is “how do I perfectly price my products and services“?  It’s one of the most anxiety-inducing decisions as most people subscribe to the thought that if you price it too high no one will buy and if you price it too low people will take advantage of you and you’ll lose out on potential profits.

Though how you price your products IS important, that is certainly not the reason – it’s a story we tell ourselves.  One that is fed to us by marketers.  One that is fed to us by our mind based on past rejections from clients in order to shield our egos.

The truth is that as long as there is alignment between the value of the item and the value of the money for a particular individual, people will buy what you have to offer if it matches their needs.  No matter what the price.

This is what makes Louboutins hold their place in the market beside bargain alternatives.  Some people would never shell out $800 for a pair of shoes.   For others it’s a no-brainer.

Now I know you’re reading this and thinking “Ok Heather, that doesn’t help”.  At this point you may be more confused than ever or you’re thinking you can just pick a price out of thin air and roll with it.  Not quite… but I’ll break it all down for you.

Here is my 5-Step process for setting your pricing:

STEP 1:  CALCULATE THE OPPORTUNITY COST.

Serving a client means taking time away from working ON your business and taking time away from your personal life.

Depending on the product or service you may have a limit to how many clients you can take on.

Opportunity Cost is an economic term for the loss of a gain you could have benefitted from had you taken a different opportunity.

My friend Nicole is a photographer.  She once told me that she will not do a shoot for less than her price because that’s how much it cost to take her away from her kids for a few hours.  I don’t remember the price, but let’s say the family shoot cost $300. To her, the opportunity cost of being away from her kids for a few hours to do a photoshoot is $300.  That’s the value she places on that time.  Any less and it’s not worth it.

We can also look at it in terms of business activities.  Say you own a hair salon and you typically charge the equivalent of $40 an hour for your average clients.  You wanted to branch out and offer a Blow Dry Technique class for clients and potential clients.

You estimate that the class would take you 2 hours to plan, 10 hours to market and 2 hours to teach for a total of 14 hours.

You plan on creating and running the class during normal business hours so the alternative to running it is just filling your chair as normal at an average of $40 per hour.

So your opportunity cost – the amount you lose by not taking action on the alternative – is $560 (14 hours X $40 per hour).

When figuring out what to charge for your Blow Dry Technique class you’ll want to ensure that you price it high enough to recuperate the $560 opportunity cost.  If you expect to have 10 students enrol then you may choose to price the class at $56 ($560 opportunity cost / 10 expected students).

STEP 2:  DETERMINE THE COMMITMENT.

Money is a Vehicle of Commitment.

Let’s go back to the Louboutins and the Walmart shoes.  If you were given a $20 pair of heels from Walmart and an $800 pair of Louboutin heels would your level of commitment to caring for those shoes be the exact same?  Or would you treat one with a little more care?

Chances are the Louboutins would stay off the grass, get cleaned regularly and be stored in their dust cover neatly in a closet where the inexpensive pair is far more likely to be abused, get dirty, and just get kicked off at the door.

When an investment is a stretch for someone they are far more likely to be committed to the value that investment brings.  They will not let themselves fail on their end because the money held such a high value for them.

On the flip side, a higher investment also requires a higher commitment from YOU as the product or service provider.  The quality and consistency of service needs to be present.  Your contracts need to be in tip-top order.  And systems should be in place should you fall ill or otherwise unable to meet the commitment to ensure your end of the deal is still met.

When pricing your products and services always consider both the level of commitment you require from the other party for the exchange to be successful AND the level of commitment that you are willing to devote.

STEP 3:  DETERMINE YOUR THRESHOLD FOR NO.

The higher you price your products and services, the more No’s you need to be willing to collect before you will find a Yes.

Let’s go back to the hairdresser example.  Say you decided you were going to charge $100 for a haircut.  Many people, in fact probably the majority of people you speak to, will say that’s too much and move along to find someone else.  Some, though, will see the value in what you do feel that this is a ‘no-brainer’ price to pay for something that is a part of their everyday look.

On the flip side if you decided to charge $20 for a haircut some will still say this is too much since they could do it at home for free or head over to the beauty school to get a $5 haircut instead.  But it’s likely that you’ll receive far fewer price objections then if you were charging $100.

Many more at the $20 price point will feel that this price is a ‘no-brainer’ and say yes to your offer. The more you charge, the harder it is to find people who will value your product or service at that level.  This is not because your product is worth any more or less – it’s just a game of simple economics.  The lower the price, the higher the demand!

This is also why we tend to raise prices when we want to slow the demand for services that take up a lot of our time.

STEP 4:  DETERMINE THE LIFETIME VALUE OF WHAT YOU PROVIDE.

Now this step can be a bit tricky because the value will be different to everyone.  Most people see this as being the value of your time but this simply isn’t the case!

I’m going to repeat that because it’s SO important:  THIS IS NOT THE VALUE OF YOUR TIME.

In order to demonstrate how you might consider the lifetime value of your product or service let me draw out an example:

One of my services is business coaching.  I work with clients for a minimum of 4 months using my 5X5 system to strengthen the foundational areas of their business like marketing and offerings, distribution, finances, operations and people. Over these 4 months we spend 16 hours involved in coaching and another 32 hours or so prepping and researching.

In return my clients learn to build a business that will earn them thousand of dollars for life.

Often when people make the decision on whether or not to invest in coaching they tend to look for “how much money will I make during these 4 months together”?  But that’s not the entirety of the value that I bring since what they learn will continue to pay for as long as they are in business for themselves (no matter what business they choose to be in).

My clients learn how to evaluate their business performance and create feedback loops thereby minimizing money wasted on error and maximizing potential profits.

How much is that worth?

They learn to create products with built-in demand.

How much is that worth?

During our 4-months and beyond my business coaching clients will learn how to create systems and automate processes to maximize returns and profits for the lifetime of their business.

How much is that worth?

They’ll learn how to accurately predict cash flow and how to ramp up their marketing and leads strategy to scale their business and revenues.

How much is that worth?

They will learn to avoid bad business decisions potentially saving them thousands in lost income.

How much is that worth?

There is no right or wrong answer here.  Ultimately YOU have to feel like the value you provide is equal to or greater than the price you settle on.  This part of the exercise will help you test this.

STEP 5:  DO A GUT CHECK.

By going through the steps above you should have a number that is starting to feel good to you.

Once you’ve settled on it, say the price out loud and see how it feels in your gut. Does it make you feel anxious and stressed? Or do you feel excited? Your intuition and gut will tell you if it’s the right decision.

Do you sound confident when saying your price aloud?  Or is there uncertainty?  It’s incredibly important that you are 100% confident in the price and value you provide so if it makes you feel uncomfortable, adjust the price and practice saying that out loud paying attention again to how it makes you feel.

There is zero chance that you’ll price yourself out of the market (within reason, of course).  So don’t worry about what the competition is charging or what you think people will pay – that’s all irrelevant.

No matter what price you choose, if the value is there and it’s something people want there will be people willing to pay it.

And no matter the price you choose there will be people who think you are completely out of your mind charging that much.

Once you settle on your price it’s just a matter of finding your audience and making the sale (which will be an exercise for another day).

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Heather Prestanski has a gift for unlocking the power within your business that you didn’t even know existed.  She works with SMB's (Small and Medium-Sized Business Owners) through her 5X5 Business Performance Growth Systems to help them perfect their products and pricing, leverage their marketing (both organic and paid), maximize their organizational efficiency, hone in on their financials, and lead their people with strength.  She has a background in finance and digital marketing that not only helped her to grow four separate business ventures but also helps her leverage this expertise with clients to maximize results and improve your bottom line.

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