The Importance of Getting the Pricing Right as a Small Business

We need to talk about your prices.

If you think I wrote this just for you, then you are right. 🙂

This conversation has come up again in our membership hub this week, it comes up in my power hours, it comes up with my clients. It comes up ALL the time. Pricing of products and services is a BIG topic and I want to address it.

There isn’t one answer when it comes to the question of what formula to use to set prices. Your target audience and competitiveness of the market will have some influence in your pricing strategy. Your product & service and its perceived benefits is another aspect, and your marketing and sales strategies yet another. 

However, unless you are a multi-national organisation who is using loss-leading pricing as a strategy to buy market share and squeeze out competitors (it’s a shitty short term strategy anyway and only works with high volume sales) there is one aspect of your pricing strategy that MUST take into consideration and that is a solid understanding of your costs. 

Cost plus profit has to be the starting point for your price setting formula. You cannot run your business at a loss – that’s called a hobby. 

I’m not going to give you a money mindset workshop here, there are plenty of people better qualified for this kind of work. What I am going to do is ask you to go through a very practical process of identifying some costs and working out – in this example – a minimum hourly rate for your services. 

Cost Pricing Formula

List out your costs: business set-up costs, internet, computer, phone, website hosting, internet domain, subscriptions, website costs, advertising costs, rent & utilities (or a portion thereof if you work from home), legal costs, plus any other costs you incur to run your business and service your customers. 

Most of these will be recurring or set up costs so let’s simply split them over 12 months and then amortise (write off) your set-up costs over the first year.

Now I want you to put down a figure for your salary. A good place to start is your last job before you started your business. For some comparable figures: The average UK salary in 2019 was £36,611 that’s £3050.11 per month before deductions. Taken at an hourly rate, the average was £14.80 by 2019. The UK living wage in 2020 is currently £8.72. 

Here’s a super simplified calculation based on working full time hours. To do this properly you need to interrogate your costs and working hours.

Now look at the amount of time it takes you to fulfill a service to a client. Take my power hours for example:

• Preparation time: 20 mins
• One to one time: 1 hour
• Follow-up time to write and send notes: 20 mins

I charge out a power hour at £125 plus VAT. I’m not just charging for my time (1hr 40 mins), I am also charging for my qualifications (a Post-Grad Diploma in Sales & Marketing accredited by the Chartered Institute of Marketing, my experience (22 years in marketing with small businesses and a few big ones) and my expertise (in the trenches every day with numerous clients using a variety of marketing strategies tools and tactics), as well as continued professional development to stay on top of changing platforms and industry updates (google Ads, Facebook Ads, social media platforms). Does £125 seem like a fair exchange for all this plus customised advice and follow up notes? I do.

What Do You charge?

OK, so I am going to ask you to interrogate your existing thinking a bit and look at your pricing from another perspective:

Now, what are you currently charging for your services? How does that work out to you per hour (excluding the costs)?

• Would you pay this rate to an employee? 
• Do you feel excited about offering your time for this amount of money?
• Does it feel fair? Or do you resent it?
• Can you put money away to cover emergencies? Reinvest in your business? Treat yourself?
• Are you paying yourself enough to be off sick? Take a holiday? Work less hours?
• Do your prices make you feel professional? Successful even?

Changing Your Perspective

I’m not advocating that you wildly increase your prices overnight. I’m not suggesting that you cannot offer discounts, special offers, freebies or scholarships. But I am telling you that you have to know what your costs are before you can make an educated decision on any of these factors. 25% off as an early bird price is all well and good if you are sure you are covering costs (including your salary) – you aren’t big enough to use a loss-leading pricing strategy. You have to know your figures.

And, this may come as a bit of a shock to you… you are allowed to make a profit. You are supposed to make a profit so you can become a wildly successful business owner, provide employment opportunities, contribute taxes to your community, and be generous with your wealth. And enjoy it too! Life is for living and whilst so much of what brings us joy doesn’t cost a penny, financial insecurity stops us from smelling the flowers because we live in fear and frustration.

Even if you have some uncomfortable feelings about capitalism, you can use your success to be a force for good and lift others up. You cannot do any of this if you are not fully aware of your own costs and operating from a place of fear and financial insecurity.

To be clear, I don’t want you to fiddle about with hourly rates and cost plus pricing formulas forever. People pay for solutions and experiences (not to mention quality and luxury) – not just time for money. But that feels like a different conversation for a different day. This is aimed at you if you are struggling to move forward with sensible pricing that values your time. The cost formula exercise will force you to confront some realities and help you to realise that you are grossly undervaluing yourself as the main resource in your business and therefore massively undercharging.

I want you to start appreciating the value of your time and respect yourself for your expertise, experience, qualifications and service, because until you do, no one else will.

Ps. If you are uncomfortable telling someone what your prices are, then here’s a little tip: Put your pricing on your website. When a potential client contacts you, they will have already checked out your pricing and pre-qualified themselves to be comfortable moving forward.