Let me go out on a limb for a moment and guess…
You’ve probably Googled,
“How do I price my offers?” more times than you’d care to admit.
Trust me, you’re in good company.
HOW TO PRICE is literally the # 1 QUESTION I get asked as a business coach for creatives.
Because what Google spits out often includes answers like…
“Charge your worth” (whatever THAT means)!!
And you’re left scratching your head that is now full of way more questions than answers!
It might as well be a glorified magic 8 ball that tells you, “the future is unclear.”
If you’ve ever wondered if you’re pricing your offers correctly (or even if this is the first time you’re exploring your pricing options), you’re in the right place!
The goal of this blog is to demystify each of these pricing structures and give you the tools you need to assess your choices so that you can price your programs, services, products, and offers in a way that supports you best as a creative entrepreneur.
Before you can even begin to update your pricing, you’ll need to collect a bit of information upfront and learn the pros and cons of different pricing options for your creative business. Not to worry, it’s totally doable with the right support, and I will walk you through the process step-by-step!!
At the end of the day, your pricing speaks VOLUMES about you, your services, and your business. Do you like what your prices are communicating to your ideal client? The best way to find out what exactly your prices are saying is to do a little market research.
Before you set your own prices, it is important to get a feel for the industry standard. It can be risky to price your offers, services, or products in a “vacuum,” aka, without any external information to drive your decisions.
This isn’t to say that just because “everyone else” is pricing a certain way, you should too, but it is important to understand market norms so that you can ensure your pricing makes sense. Plus, this can be a great way to set your initial pricing when you’re first starting out.
Not sure how to get started?
COO TIP: Be careful not to give into imposter syndrome or fall into the comparison trap or copying! Always look for your own take and your own opportunities. Competitor research is simply about getting to know the market.
Depending on the kind of business you run, you will consider the different types of costs that go into delivering your offer. Remember, the costs of doing business can be (and often are) monetary, but they are time and energy-based as well!
All businesses, both service-based and product-based, will need to look at these costs of doing business:
Product-based businesses will typically weigh some other unique costs such as:
Lastly, since these are just estimates, you’ll need to check in on them regularly. Taking time to measure and adjust your pricing will help ensure the numbers really add up once you put your predictions to the test in the real world!
DON’T SKIP THE REFLECTION: Without regular assessment and refinement, many businesses set prices that may bring in revenue but don’t actually allow them to walk away from a sale making a profit. I recommend you add this as a rhythm in your business to help you stay on the pulse of your pricing.
COO Tip: Looking for additional ideas to make (and take HOME) more money as an entrepreneur? Click here to grab my freebie and learn 5 of my best tricks to help you make your business more profitable.
Pricing as a service-based business can come with many unique challenges. Since you are not providing a physical end-product, value is defined by several factors such as the market, your messaging, and your clients’ perceived value of your service. Because of these many factors, it can feel impossible to price your services consistently in a way that is both transparent for your clients and profitable for you.
The key is to understand the difference between fixed fee and variable pricing so that you can select from the most common service-based pricing models: hourly, project-based, and value-based.
An important distinction to make about pricing options is the difference between variable and fixed fee pricing (and yes, it’s just about as important as the difference between a variable and a fixed rate mortgage!).
Many service-based business owners fall into the trap of offering variable prices. This isn’t just a detriment to you as the business owner because it’s harder to sell AND harder to predict your own revenue (and cash flow), but it is actually riskier for your clients!
A variable pricing structure means that you (and your client) really don’t know what the final cost of the project will be until it’s done because it can fluctuate (aka it VARIES)!
People often try to sell this with a positive spin, “You’ll only pay for the time it takes!”, to distract the client from the fact that they aren’t actually committing to what the final number will be (and that ultimately the client assumes the liability with little to no control).
This is most commonly seen with hourly pricing (read on for more details). That’s because when you charge hourly, you track your time and assign a dollar amount or cost to that time. So, until the project is totally finished, you cannot provide a definite invoice and final price.
However, at the end of the day, even with these precautions in place, you simply cannot guarantee how much time or money it will take to get the project done.
This can be problematic for clients because, ultimately, THE CLIENT is taking on the risk for this project. This can make it tough for them to budget their money or time appropriately.
In addition, you open yourself up to a LOT of criticism from your clients when you use a variable pricing model since they’re the ones assuming the risk. This can make YOUR job tougher as you may find yourself needing to justify your time or try to appease a disgruntled client who thinks your project should take less time or resources than it has.
In a worst-case scenario, variable pricing also opens you up to the risk of not getting paid. This is especially common if your client isn’t happy with the end product and refuses to pay you for the time you’ve already spent. This can lead to discounting or writing off your time which may cause you to land on a negotiated price, making your project less profitable (or even sometimes completing work at a loss).
So, what’s the deal with hourly pricing, anyways, Erin?
Hourly pricing (a variable pricing option) is a price model that exchanges time for money.
Most businesses set an hourly rate with a formula like this:
Hourly Pricing = Your time x hourly rate (+ expenses and sometimes a built-in mark-up)
Service-based businesses often use this pricing model to account for the number of hours required to complete a specific project. Usually, a price will be estimated upfront, but then the service provider will invoice the client for the number of hours spent on a project.
While this can be beneficial to you as a business in circumstances where the project’s original scope needs to extend (helping you avoid scope creep), it does have its limits.
Hourly pricing is, to be totally honest, my least favorite pricing model. This is NOT to shame you if you’re using hourly pricing in your business, as it can serve unique purposes in some stages of business. However, overall, I find hourly pricing to be limiting to you as a business owner.
First of all, exchanging time for money, by nature, is limited.
You only have 24 hours a day (and hopefully, you do not intend to work all of them). Even the hours you do plan to work cannot all be dedicated to client projects or deliverables. You will always have admin tasks and things to do that are necessary to doing business but aren’t considered “sellable” or “billable” hours.
In addition, it’s easy to outgrow hourly pricing. Early on, it may take you several hours to complete a particular project or even make a product for your clients. The results will also be equivalent to your experience level.
Once you gain more experience, you will probably be able to complete your project or product faster AND with better results. So, why get penalized for your skill? If you continue to charge hourly, you will actually earn LESS even though you’re able to get your deliverable to your clients more efficiently and expertly. Even if you raise your hourly price to account for your expertise, there is always a limit to the hourly price your clients will accept.
It just doesn’t add up!
I call this the hourly pricing penalty.
You will eventually grow out of the hourly pricing model (if you haven’t already!). That’s why it’s essential to explore some other more profitable and sustainable options instead.
It’s time to level up!
Fixed fee pricing is a big upgrade from variable pricing, especially for your clients!
This pricing model is more transparent than variable pricing. No matter the fine details, when everything’s said and done with a fixed fee, your client knows exactly how much they are paying you for your service, and you know exactly how much you are receiving. You do not need to rely on documenting hours as the scope, investment, and deliverables are clearly outlined from the get-go.
COO Tip: While I recommend moving away from hourly pricing, so you don’t HAVE to track every billable hour for clients, I absolutely DO recommend you track your hours for yourself. This information will ensure you know where your time is going so that you are accounting for your time properly in your business plan and pricing strategy!
While this is a win, there are some things to consider as a business owner. When you remove the risk from your clients by giving an upfront fee and timeline, YOU now assume the liability instead.
No matter what you do or how much time you do or do not put into the project, at the end of the day, you will get paid the same amount as long as you fulfill the agreed-upon deliverable based on the scope of the project.
Fixed fees are found in project-based and value-based pricing structures (read on for more details!)
While the differences between project and value-based pricing may seem subtle, they can be significant. In essence, both are fixed fees, meaning you get paid the same amount to fulfill a deliverable, no matter what.
The difference is simply how YOU arrive at the price you decide to charge.
For project-based pricing, you estimate your time and then give a bit of a buffer to help you manage your assumed liability or risk and then pull your hourly rate into the mix.
It often looks like this:
Project-based Fixed Fee = Estimate of your time + buffer x hourly rate
You’re basically taking the hourly pricing and saying, “I’ll assume the risk” instead of putting the risk on your client like you would in an hourly pricing model.
You are taking on the responsibility and claiming that you are confident in your experience and your ability to get the project done at a specific rate and within a designated timeline.
If you get the project done quicker than you anticipated, you benefit –aka, you have a higher profit margin and more freed up time– wahoo!
The downside is, if you end up requiring more time to complete the project, it begins to hurt your bottom line!
TBH– It’s a bit like hourly pricing in disguise! While this is an improvement, there are still many challenges that come with a project-based model.
This is where value-based pricing steps in!
Value-based pricing is rooted in the perceived or actual value of your deliverable in your client’s eyes. It has NOTHING to do with the time you put into the project.
GOODBYE, HOURLY RATES!
When establishing a fixed fee, you can use a formula like this:
Value-based Fixed Fee = Based on what your clients perceive the value to be or the value they receive from your product or service.
Sure, you still take on the risk since you set the fee, but you set that fee based on what your clients receive in value from your deliverable, which is often significantly higher than anything based on an hourly calculation.
For example, say you are a graphic designer. While you could price out a rate for a logo through hourly or project-based pricing, value-based pricing allows you to focus on the end result. Many clients who VALUE a high-quality logo from an expert graphic designer will be willing to pay for the perceived value you provide.
In other situations, your clients may actually receive a more tangible ROI (return on investment), meaning they are able to earn more or charge more as a result of your product or service.
If you offer an online course for copywriters, and one of your registrants takes the full program, they walk away with new skills that will serve their audience. The value they receive is that they are now able to charge more for their services because of their newly enhanced copywriting chops!
Another way your clients may get an ROI is on their time. My husband is a great example. In his business, he values his time at about $150/hour. If he can find someone to do a task better, faster, and for less than $150/hour, he considers that a no-brainer opportunity to outsource and optimize his time!
COO Tip: I always recommend you double-check your value-based pricing from a project management lens to make sure this fee still covers your time and necessary hourly fee. But, when value-based pricing is done and done well, it has the potential to blow away your project-based pricing by a long shot since you’ll never again cap your hourly rate or profit potential. Value cannot be capped.
As you choose the pricing model that makes sense for your service-based business, know this: it can be a gradual process! Identifying what stage of business you are currently in can make this process much more manageable.
Many business owners feel more comfortable charging hourly at first as they develop their skills and figure out how to communicate their offer value to their ideal clients. People who start with hourly pricing typically graduate to project and eventually value as they establish and grow their businesses.
While product-based pricing follows a similar approach to service-based businesses, one of the perks of product-based businesses is you really don’t have to worry about getting caught up in the fixed fee vs. variable pricing debacle! By nature, and since you’re often selling the product only after it has been made, clients typically only care about the final product in their hands, not the time it took you to make it.
Most product-based businesses will start out with cost-plus pricing. This is determined by assessing the cost of creating the final product including things like time, materials, shipping, and taxes, PLUS the profit margin they require.
Here’s that handy formula:
Fixed Fee = Your cost + profit
Value-based pricing is quite similar for product-based and service-based businesses. Essentially, what is someone willing to pay you for what you are offering?
It all comes down to:
Fixed Fee = Based on what your clients perceive the value to be or the value they receive from your product
To explain perceived value in a more tangible way, I like to think about fine art. The value of a painting is above and beyond the cost of the materials (think: canvas, paint, brushes, etc.) or the time it took for the artist to create that masterpiece. In fact, cost-plus pricing becomes negligible at that point.
The reason people are willing to spend thousands, if not millions, on some of the most impressive paintings in the world is the perceived VALUE of the art and the idea of having that prized possession hanging in their home.
As for received value, consider the ways your product offers your customers an ROI (return on investment). For example, there are many products that help consumers work better or faster. In certain situations, your products or tools may even allow your clients to charge higher rates for their own offerings!
COO Tip: You may also find yourself wondering about wholesale pricing. This is an entirely different pricing model that does affect your overall pricing, and if you are a product-based business it is an option worth considering. If you are curious about wholesaling, please reach out. I am not a wholesale expert but would be glad to refer you to someone who specializes in wholesale strategy.
Each of these pricing structures has its pros and cons and may serve a different role in your creative work at different stages of your business. Which pricing structure you ultimately choose will depend on your current needs and goals.
And remember: NOTHING in business – especially your pricing strategy – is ever set in stone! Choose the option that serves you best now, and know that you can come back and adjust your approach as you grow (in fact, I recommend you do).
Let’s pull it all together!
Pricing can be a daunting task to tackle. But, it’s really important because at the end of the day, if you don’t get your pricing right, your business’ profitability will always be an issue. I hope that you walk away from this blog feeling less overwhelmed and more clear about the path you hope to follow and the next best steps to help you get there.
If you’re looking for even more guidance as you develop your offers and flesh out your pricing, I’ve got JUST the thing! I’m offering a brand new course specifically for creative entrepreneurs to teach you all the things they didn’t teach you in art school! I have an entire module dedicated to pricing with not only information about how to price but the tools, resources, and support you need to actually take aligned action. Click here to join my no-obligation waitlist and be the first to know when the course is live!