Notes on Setting and Raising Prices

Lifestyle and Marketing

If you think you need to live large to attract business, think again. What attracts business is a valuable offer delivered to the right prospect with confidence, integrity, and consistency. On the other hand, it is almost impossible to attract business when you are desperate for work.

Your lifestyle choices can underscore your commitment to an authentic and connected life, one lived in awareness and respect of the well-being of others and of the planet. Living these choices and letting them inform how you show up in the world can be a compelling aspect of your personal marketing formula. They can distinguish the offer you are in your chosen niche.

Insurance, Taxes, Retirement, and More

Other considerations for the self-employed are medical, dental, life, and disability insurance. In addition, you may need professional liability insurance, insurance on your equipment and records, and insurance to protect you in the event of accidents on your premises.

Self-employment taxes can take the unwary by surprise. Check with your accountant (you do have one, don’t you?) and find out what your tax liabilities are likely to be.

How do you plan to fund your retirement? There may be tax-advantaged plans available to you as a small business owner. Again, check with your accountant. (Have you noticed that one of the expenses you will need to plan for is accounting?)

It is easy to overlook hidden costs such as depreciation. Think about the furnishings and equipment you use and how often you will need to repair or replace them. Where will you get the money for these expenses? How will you pay for software upgrades or for a technician to debug your computer?

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The following outline from a talk I gave on Setting and Getting the Right Fees for the Right Work can help you understand how to set your own rates and why there is no “one size fits all” formula.

How Much Do You Want to Take Home?
Net Income Versus Gross Income

Here’s a partial list of expenses you may incur in your business.

• Taxes
• Benefits
• Medical insurance
• Disability insurance
• Dental insurance
• Retirement
• Overhead
• Depreciation (it’s not theoretical!)
• Replacing furnishings
• Replacing equipment
• Upgrading software
• Administrative overhead
• Clerical help
• Bookkeeping
• 25-50% of your time to manage and market your business
• Vacation, Holiday, and Sick Pay

Where Does the Time Go?

Hint: Keep a running list of everything you do for thirty days. Not a “to do” list, but an “I did” list. This will help you to understand where your time goes.

• Sales and marketing
• Service (email, phone, troubleshooting)
• Email
• Proposals, Prospects
• Phone Calls
• Meetings
• Administration (bookkeeping, correspondence, contracts, reports)
• Training

Variables Affecting Prices

• Geography
• Demography
• Niche
• Experience
• Perceived value
• Skills
• Client capacity to pay/realize value from your work
• Cost of delivering services
• Competitors’ fees

Is It Time to Raise Your Fees?

• Full calendar
• Reputation as leader or expert
• Turning away work
• Recognized author or speaker
• Prestigious affiliations or awards
• Advanced training/certification
• Improved services
• Increased costs

Strategies for Raising Prices

• Annual incremental increases
• Business cycle increases
• “Going rate” increases
• Be sure the going rate is set by going concerns!
• Do going rates reflect your costs and services?
• More work to justify rate increases of more than 10%
• Keep clients informed of how great you are
• Training and skill development
• Concern for their well-being
• Improvements in service and capacity
• How you saved them time or money
• How you made them money
• How you solved problems for them or for others
• How much you are in demand
• Create a mood that supports your declaration of value
• The body of confidence

What Clients Want to Know When You Raise Prices

• What are the new rates?
• When do they go into effect?
• Give reasonable notice
• Consider giving current clients a grace period to adjust
• Why are they going up?
• What value will the client receive for the higher fees?

Adjust Prices to Manage Work Type and Work Flow

• Projects you don’t really want
• Rush work
• Difficult clients
• Profit is commensurate with risk (and distaste!)

Setting and Negotiating Prices and Fees

Setting and negotiating prices and fees is an integral part of authentic promotion. This is true in part because of the stewardship relationship you have with your business. In addition, naming your price with confidence is part and parcel of embodying your offer.

Doing the right work for the right client at the right price requires a bit of homework. Let’s start with setting fees and prices. (Artists: this section is tailored to the needs of consulting and service professionals. While the principles pertain to you, the nuts and bolts of pricing creative work are not covered in detail. For an excellent discussion of pricing artwork, see Caroll Michels’ book How to survive and prosper as an artist.)

Setting prices and fees is a function of several variables:

• Your desired income and the costs of earning it
• The amount of time available for you to earn that income
• The value (perceived and actual) that a client places on your services
• What the market will bear
• What your competition charges

Setting Prices / Fees and Hidden Costs of Stewardship

Calculating fees based on what you want to earn and what it costs you to earn it is relatively simple. However, if you are accustomed to earning a paycheck, there are some refinements to this simple notion that may have escaped your notice.

Many businesses are vulnerable to changes in the marketplace. Depending on your profession, it is wise to plan for times when work is scarce. By building reserves for these times, you can use them not only to support yourself when work is scarce, but also to enjoy a long-desired vacation or to take advanced training. If you are in a vulnerable industry, you will need to earn enough to eventually save one to two years’ living expenses.

This lesson was vividly demonstrated to thousands of dot-commers during the recent boom and bust. Contractors (and employees) earned unprecedented incomes and quickly evolved spending habits to match. When the bust came, many were caught in a double bind: loss of income on one hand and high living expenses on the other.

If you are just starting out, make a plan to save part of your income until you have built up this cushion. Be open to supplementing your income from other sources until your business can support you and allow you to save at least 10% of your income. Don’t let the thrill of collecting a high hourly billing rate seduce you into living an expensive lifestyle that prevents you from building reserves.

How to Set or Get the Right Prices …

Which feature of your product does EVERY buyer ask about? Which sales tool is your best closing device? Which feature immediately differentiates you from your competitors? You guessed it, your price.

Yet, I’m always a bit surprised at how little time businesses spend on their pricing. Since this is a key marketing variable for any small business owner, here are some thoughts on setting (and getting) the right prices.

Price is a promise

Let’s say you are grocery shopping, and you come across two brands of cereal. One is a well-known brand of flakes that comes packaged in a 20 oz. box, contains a toy and is priced at $4.99. The other is a store brand of flakes, packaged in a non-resealable plastic bag and sells for $2.99. Which one would you buy?

If you based your purchase decision on price alone, you’d pick the 28 bag for $2.99 and be on your way. But there’s more to price than just that, isn’t there? There are the promises involved. In this example, the $4.99 brand promises you the highest quality ingredients and taste, an extra toy that could occupy your kid while you watch reruns of The Dick Van Dyke Show, plus the convenience of a re-sealable package.

Although this example deals with cereal, similar decisions are made by buyers in your market. Each time a buyer chooses a product, they match up a price with its promises. So, as the marketer of a small business, it is your job to understand what are the price and promises for your service.

Determine your promises

As you set your prices (or consider raising them), take stock of all the value factors that go into your price. What attributes of your product or service are noteworthy? Below are some examples of value factors that go into a product’s or a service’s price:

For a product:

• Quality of the raw materials
• Finished product performance
• Packaging
• On-time delivery
• After-sale service

For a service:

• Experience level of the service provider
• Bottom-line impact of the final deliverable
• Appearance of the service provider
• Turnaround time on phone calls/emails
• Ability to meet deadlines

As you can imagine, your ability to deliver various factors, over and above your competitors, directly impacts the prices you set…and get. If you promise certain factors, yet fall short on delivering them, your price will be challenged through customer complaints, delayed payments or customer defections.

Pricing Strategies for Small Business

The pricing strategy of your small business can ultimately determine your fate. Small business owners can ensure profitability and longevity by paying close attention to their pricing strategy.

Commonly, in business plans I’ve reviewed, the pricing strategy has been to be the lowest price provider in the market. This approach comes from taking a quick view of competitors and assuming you can win business by having the lowest price.

Lowest Pricing Does Not Win

Having the lowest price is not a strong position for small business. Larger competitors with deep pockets and the ability to have lower operating costs will destroy any small business trying to compete on price alone. Avoiding the low price strategy starts with looking at the demand in the market by examining three factors:

1. Competitive Analysis: Don’t just look at your competitor’s pricing. Look at the whole package they offer. Are they serving price-conscious consumers or the affluent group? What are the value-added services if any?

2. Ceiling Price: The ceiling price is the highest price the market will bear. Survey experts and customers to determine pricing limits. The highest price in the market may not be the ceiling price.

3. Price Elasticity: If the demand for your product or service is less elastic, you can then have a higher ceiling on prices. Low elastic demand depends on limited competitors, buyer’s perception of quality, and consumers not habituated to looking for the lowest price in your industry.

Once you understand the demand structure in your industry, review your costs and profit goals as set in your business plan or financials. The low price strategy is best avoided by small business but there are conditions such as a price war that can drag a company into the lowest price battle.

Avoiding a Price War

A price war can wreck havoc in any industry and leave many businesses, out of business. In the early 90’s, I observed the competitive exercise equipment market enter a price war in a large city market. Profits were plentiful but a price war took the gross margins from 42% to 12%. In less than 18 months, over 60% of the retailers were out of business while my division went national. Take these tips to evade a deadly price war:

Enhance Exclusivity: Products or services that are exclusive to your business provide protection from falling prices.

Drop High Maintenance Goods: There may be products or services in your business that have high customer service and maintenance costs. Drop the unprofitable lines and find out what customers don’t want.

Value-added: Find value your business can add to stand out in the marketplace. Be the most unique business in the category.

Branding: Develop your brand name in the market. Brand name businesses can always stand strong in a price war. Leave the price-cutting and price wars to big business. Small businesses with solid pricing strategies can escape a price war and low price position. Carefully, consider your price decisions. Your business depends on it.