How to set a fair price for your offers

If you are a freelance merchant or engaged in any other professional activity, you have probably gone through that phase where you had to define a price for what you have to offer. And it’s likely that you faced significant challenges during this process.

Balancing the fear of asking for too much and potentially losing clients with the risk of undervaluing your work and overexerting yourself for minimal returns can be a daunting task. Finding the right equilibrium is not always straightforward. This article will give you valuable insights on this delicate process by guiding you through the various strategies and considerations to set a fair price that is both profitable and competitive.

Why is it so difficult to set a price?

Setting a price may seem simple to some, but many fall into common traps. One of the most frequent mistakes is underestimating your real costs. We often forget to include elements like working hours, indirect costs, or even the safety margin needed to deal with unexpected events..

Another mistake is trying to mimic the competition without taking your unique circumstances into account. Simply replicating others’ pricing without assessing what sets your offering apart can result in undervaluing your services or losing your competitive edge. Setting a price based solely on market demand without considering the profitability of the business can quickly lead to bankruptcy.

Emotions also play a significant role in pricing, often unconsciously. Doubt or fear of scaring away clients sometimes leads to setting a price that is too low. On the other hand, some may be tempted to overvalue their product or service based on emotional attachment rather than a rational evaluation of the perceived value.

Personal biases like imposter syndrome or overconfidence can also distort judgment. Therefore, the key is to step back and adopt a more objective approach, based on facts and concrete data rather than feelings. This is the whole point of this article.

Quality is remembered long after price is forgotten.

Aldo Gucci

What factors should be considered to set a fair price?

Setting a fair price for your products or services involves a preliminary analysis of costs, demand, and the market. It is a delicate balance between covering your expenses, making a reasonable profit, and offering your clients a price they are willing to pay. Let’s break it down.

1Direct and indirect costs

The first step in setting a fair price is to clearly understand your costs.

  • Direct costs include all expenses directly related to creating or providing your offer. For a product, this could be the cost of raw materials, manufacturing, packaging, storage, or transportation. For a service, these direct costs generally translate to the time spent providing the service as well as specific resources like tools or software needed for the execution of the service.
  • Indirect costs, on the other hand, are more general expenses that apply to both products and services, regardless of the volume of activity. These include, for example, rent for your premises, insurance costs, software subscriptions, administrative expenses, or the costs related to the maintenance of your equipment. These expenses must be included in your calculations; otherwise, you run the risk of setting a price that fails to cover your actual costs, ultimately impacting your profitability.

2Perceived value

In addition to your costs, you must evaluate how your clients perceive the value of what you offer. What a client is willing to pay does not always correspond to the actual cost of the product or service.

  • Perceived value for a service: the perceived value here is mainly based on personalization and expertise. A standardized service, even if it is of high quality, will often have a lower perceived value than a customized service specially tailored to the specific needs of a client. As for expertise, if you have extensive experience in your field or specialized skills that few people possess, this justifies charging a higher price. Therefore, the more unique, specialized, and tailored your service is perceived to be, the more you can increase its price while maintaining high client satisfaction.
  • Perceived value for a product: here, the quality of materials and design influence the perceived value by your clients. A product made with high-end materials is generally considered more durable, more aesthetic, and offering better value for money. Regarding design, a well-designed object, both functional and aesthetically pleasing, catches the eye and can justify a higher price. This reflects the desire of consumers to acquire products that are not only useful but also beautiful and enjoyable to use.

Lastly, the impact of your brand’s reputation should not be underestimated. An established brand that inspires trust and resonates with certain values or a particular lifestyle can significantly enhance the perceived value of the product. Brands like Apple or Louis Vuitton, for example, can command high prices not only for the quality of their products but also for the image they convey.

Therefore, clients buy much more than just a simple product; they invest in an experience and a status. Cultivating a strong brand image can thus allow you to significantly increase your prices, as the reputation itself becomes a differentiating factor.

An image containing Apple's flagship products, whose reputation justifies a higher price than the competition. Apple was quick to understand the importance of the concept of perceived value, associating its products with innovation, design and prestige. Each device embodies a lifestyle, justifying prices that are often far higher than those of the competition.

3Market demand

It is essential to adapt your pricing to market demand because you cannot always impose a price that your clientele does not consider justified. To do this, you need to understand your clients’ expectations and identify the amount they are willing to spend. This requires conducting market research to comprehend the purchasing behaviors of your target audience. By analyzing the competition, industry trends, and consumer preferences, you can adjust your prices to stay competitive while meeting your clients’ expectations.

This logic is simply that of the law of supply and demand. It governs how prices fluctuate based on the availability of products or services and customer interest. If your offering is unique or highly sought after, you can justify a higher price because demand exceeds supply. Conversely, in a saturated market with abundant alternatives, you will need to adjust your prices to remain competitive. Understanding this dynamic is important as it allows you to align your pricing with market realities.

4Check competitors’ prices

It is essential to know where you stand compared to the competition to avoid overvaluing or undervaluing your products or services. However, it is not just about applying roughly the same prices as them. Each business has its own costs, perceived value, and unique positioning. To effectively analyze the competition, start by identifying companies that offer similar products or services.

Then compare their prices, but also the quality, level of service, customer experience, and benefits they offer. This will allow you to understand how to differentiate yourself while remaining competitive. Adapt your strategy based on your strengths and the specific expectations of your target clientele, and set a price that reflects the true value of what you offer rather than simply following the market trend.

5Include a profit margin and contingencies

It is also essential to add a safety margin to cover contingencies and ensure long-term profitability. This allows you to cope with sudden fluctuations, such as a rise in the cost of raw materials or unexpected expenses. This margin should also include a reasonable profit to reinvest in your business and reward your efforts.

There is no perfect mathematical formula for pricing a business.

Warren Buffett

How to calculate this price in a simplified manner

As we have seen, there are many factors to consider when setting a fair price. But isn’t there a simpler and more direct method? Well, yes, and there are actually several. One of the most commonly used techniques is the “multiplier coefficient” method. It involves calculating your direct and indirect costs, then applying a multiplier that includes your profit margin.

For example, you might decide to multiply your total costs by 1.5 or 2 to get a price that covers your expenses while ensuring a profit. This method is particularly useful for products but can also be adapted to services by taking into account the time spent and the resources used.

Another simple approach is to use the “hourly rate method” for services. You determine how much you want to earn per hour, then multiply that by the number of hours required to provide the service. This, of course, includes preparation, execution, and follow-up time. This method allows you to set a price that accurately reflects your time and expertise, without forgetting to add a margin to cover overhead costs.

Finally, “market comparison” remains a quick method. If your costs are close to those of your competitors, you can set a similar price, then adjust it based on the added value you provide. However, be careful not to fall into the trap of simple imitation, and always keep in mind the profitability of your business.

Infographic: The three main pricing strategies for adapting your prices to your objectives and conquering your market. The three main pricing strategies for adapting your prices to your objectives and conquering your market.

How to test and adjust your prices

Rather than setting a price definitively, it is often wiser to adopt a flexible approach that allows you to evaluate the market’s reaction and make adjustments if necessary. Here are some simple methods to test your prices and refine them over time.

  • A/B testing: This method consists of offering two versions of a price for the same product or service to different segments of clients. The goal is to compare the results and see which price generates more sales or profitability, allowing you to adjust your pricing based on market reaction.
  • Observe customer feedback: Comments and satisfaction surveys can help you understand the perception of your prices. If your clients find your prices too high or, on the contrary, very attractive, this feedback will give you valuable insights to refine your pricing strategy.
  • Progressive revision strategy: This involves adjusting your prices gradually by slightly increasing or reducing rates. This allows you to observe the impact on your sales and profitability without unsettling your clientele with sudden changes while adjusting progressively according to the results obtained.

In short, your prices must remain dynamic and evolve with the market, client expectations, and the costs you incur. Pay attention to feedback and trends, and do not hesitate to reassess them regularly to ensure they remain in line with the reality of your business and the needs of your clients.

Customers are willing to pay a little more for the assurance of quality and reliability.

Tony Robbins

Special offers and other discounts

Offering special deals or discounts is a commonly used pricing strategy to attract more clients or clear stock. There are many forms, and here are some common examples:

  • Loss leader pricing: Offering a product at a very low price, or even at no profit, to attract clients. This works well if other co-dependent products (such as printer cartridges) generate more significant profits.
  • Strikethrough pricing: You lower the price of a product while leaving the old price visible. This gives the client the impression of getting a good deal by emphasizing the perceived value of the discount.
  • Penetration pricing: Offering a very low price to penetrate a new market. This technique is used temporarily, just to get known, without aiming for immediate profit.
  • Volume discount: The more the client buys in large quantities, the lower the unit price. This is an effective method to clear larger stocks.
  • Skimming pricing: Trying a high price to see if the market is willing to pay. If it doesn’t work, you can adjust the price based on the results.
  • Discount pricing: Using discounts, offers, and coupons to attract price-conscious buyers.
  • Everyday low price: Constantly offering low prices by relying on purchasing old stock or unsold lots.
  • Honeymoon pricing: Setting a low price for a limited period, often used to introduce a new product or service and encourage clients to try it quickly.
  • Lifetime deal (LTD): If you offer a service with a monthly or annual subscription, temporarily or permanently offering lifetime access for a one-time payment. This technique attracts clients quickly by making them save money in the long term.

Can promotions affect the perception of your product?

Yes, promotions, if poorly managed, can alter the way your clients perceive your offers. If you offer discounts too often, your products risk being perceived as lower quality or having a real value lower than the initial price. Moreover, some clients might choose to wait for the next promotions rather than buy at full price.

Promotions should, therefore, be used sparingly to avoid devaluing your brand or making your base prices less credible. Sometimes, it is better to offer non-financial advantages like a free additional service or an extended warranty rather than a purely monetary discount.

Using promotions strategically

Limit the frequency of your promotions and offer discounts only during specific periods, such as when launching new products, at the end of the season, or during special occasions (Black Friday, summer sales, etc.). Also, consider targeting your offers: an exclusive discount for your most loyal clients or new newsletter subscribers can create a sense of exclusivity and strengthen loyalty.

Why do we use prices ending in 9?

The use of prices ending in 9 like $9.99 is based on several psychological concepts, including the “threshold effect” and the “left-digit bias.” The idea behind this technique, often called “psychological pricing,” is that consumers perceive a product priced at $9.99 as being much cheaper than one priced at $10.00, even though the difference is minimal. We tend to read numbers from left to right and thus give more importance to the digit on the left, giving us the impression that the price is lower.

However, studies on the effectiveness of this strategy (*) are often contradictory. Some researchers show that these prices promote impulse purchases and increase sales, while other studies find no significant difference between rounded prices and those ending in 9. A recent meta-analysis that compiles several studies on the subject suggests that, in reality, this effect may be much smaller than imagined, or even non-existent.

In other words, prices ending in 9 are used more out of “habit” than proven effectiveness. Companies continue to apply this technique because it is part of modern marketing conventions, without the impact being as strong as is often thought.

* source: Sciencedirect, Thepricingconundrum, sagepub

What can you do if your clients find your prices too high?

It is possible that some of your clients may find your prices too high, and this can be a delicate moment for any business. However, this does not necessarily mean that you should immediately adjust your rates. Before making a decision, it is essential to understand why your clients perceive your prices as high. Sometimes it is not the amount itself that is the issue, but rather the perception they have of the value you provide. In this case, your task will be to clarify this value and show how your product or service stands out from the competition.

This topic could easily be the subject of an entire article, as there is so much to say. However, I have found a video that explains it quite clearly and concisely. I invite you to watch it if this subject interests you.

Should you always negotiate or lower your price?

Negotiating or lowering your price is not always the best option, and it can sometimes even be counterproductive. If you reduce your prices too often, you risk giving the impression that your initial rates were not really justified or that you have excessive room for maneuver. Additionally, this can lead to a downward spiral where you are constantly forced to lower your rates to attract or retain clients, which can harm your long-term profitability.

However, in some cases, it may be wise to offer “flexible adjustments” without necessarily lowering your prices. For example, instead of reducing the price, you could add extra services or offer payment facilities, which allows you to maintain your prices while increasing the perceived value. Another strategy is to offer “occasional discounts” or promotions on a limited basis, which allows you to make a commercial gesture without compromising the value of your offer.

Finally, it is important to understand that not all clients are necessarily your target. If, after clearly explaining and justifying your prices, a client continues to find them too high, it may be that this client is simply not aligned with your market. This is part of the game, and it is sometimes better to maintain your rates and positioning rather than lowering your prices at all costs.

Conclusion

Setting the right price for your products and services is a delicate balancing act between profitability, competitiveness, and client satisfaction. It is not just about covering your costs but also thinking about the perceived value, your market positioning, and the strategies that can influence purchasing decisions.

Whether you use promotions, psychological pricing techniques, or face skeptical clients, the key is to remain consistent and not devalue what you offer. Every business and every offer is unique, and it is crucial to adjust your prices according to your specificities while staying attuned to your clients’ feedback.

Lastly, remember that your price should reflect not only what you bring to your clients but also the vision you have of your own value. It is by finding this balance that you will be able to develop a solid pricing strategy capable of supporting your business’s growth in the long term while maintaining client trust.

This article could be completed or improved with your help. Feel free to leave a comment below if you have any question, a relevant remark, a feedback, additional information or spotted any error.Go to comments

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