Pricing for Creatives
Pricing your products and services can be a daunting and stressful task. It’s one of the most common concerns I see with business owners and one that raises its head again and again.
So, how do you tackle this? I hate to say it, but there is no one right answer. Pricing can be subjective, but there are key things you should do before settling on your initial price. Pricing isn’t a decision that you make once and then you are done. All business owners should be reviewing their prices at least once a year and making changes when they need to. Changes will be based on outside factors like costs but also on value perception and client base.
A client of mine works in the wedding industry. She was recently trying to justify her prices to a potential client who’s budget didn’t suit what she was typically charging. She could complete the project quite quickly but my response to her? “You’re supposed to be fast, you’re the professional. You need to charge based on the value they will receive, not the amount of time it takes you.” When you are tempted to devalue your work like this, remember, it becomes easier for that to become a habit and that can be detrimental to your business.
“Charging what you’re worth” is a common expression and for creative, small business owners it can be one you need to be reminded of from time to time.
Service based providers
Creatives and freelancers providing services have a few options when developing their pricing:
Charge by the hour. The typical equation for this is: (Amount you want to earn annually) / 50 weeks / 5 days per week X 2 (factoring in expenses) = per day / 8 hours = your hourly rate.
Charge a flat rate based on the project. This is the most common way to charge. But, how do you determine this fee? Often based on local industry standards, estimating how much time a project will take and then calculating a price based on your hourly rate, or developing package prices based on how many projects / clients you take on annually that will help you sustain and grow your business.
Some creative small business owners work on commission, or based on a percentage of a client’s budget.
Given the methods of determining pricing, how can you increase the value of your work to help increase your prices?
Evaluate your client experience. Luxury pricing should be accompanied by a luxury experience. This doesn’t necessarily mean expensive client gifts, but refers more to curating positive ways of communicating, anticipating client needs, being responsive, and expressing your brand thoroughly and clearly. Your brand should make your clients feel like they know you, they trust you, and they value your opinion and time.
Build credibility. This can be done through expert features on related blogs, being published in print, sharing reviews from past clients, being referred by trusted people in your industry, and having a social media presence that shares your knowledge and inspires.
Get personal and really get to know your client and their goals. This works in any creative industry because it helps show your clients that you genuinely care.
You need to think about where you are positioned in your market and how you compare against your competitors. Someone starting out with limited experience is unlikely to have success charging the same as another provider with years more experience.
Product based business
If you’re trying to find the retail price of your product, there is a relatively quick and straightforward way to set a starting price. Remember, just because it’s the price you use to launch doesn’t mean it’s the price you’ll use forever.
To set your first price, add up all of the costs involved in bringing your product to market, set your profit margin on top of those expenses, and there you have it. This strategy is called cost-plus pricing, and it’s one of the simplest ways to price your product. But if it seems too simple to be effective, you are almost right. It’s a great place to start but what should your profit margin actually be and how do you price in value to this?
Calculating Your Price
The most important thing to remember about price is that it needs to sustain your business now and in the future. If your price is set too high, you could lose potential clients, if your price is set too low, you might be selling at a loss or lose clients who devalue your product/service. Remember, the price you set now is not fixed, you can review and adjust whenever you want. You might also want to start experimenting with different pricing strategies as your business changes.
The first thing to do is find your sustainable base price:
1) Calculate your costs
This refers to your Cost of Goods Sold- the costs of producing your product or service. Includes:
Cost of Materials
Cost of Add ons for service providers (eg. Website elements, templates etc)
Packaging
Freight/Delivery
Cost of Labour to produce the goods or service (staff and contractors)
At the bare minimum, your price needs to cover these items otherwise you are losing money. For example imagine we have these two businesses, one producing bracelets and one providing web design services:
This might seem like a lot of work to figure this out, but it is ESSENTIAL for your business. This is the baseline for your pricing, and the foundation for adding on your additional costs and profits. It takes the guesswork out of it and stops any unfortunate surprises when you review your business performance. Putting the work into calculating this at least once a year will ensure you are building a business that will be self-sustaining. It’s worth the effort!
2) Calculate your overhead percentage
Overheads are costs that are NOT directly linked to producing your product or service. They are your operating expenses such as rent, insurance, software, admin staff etc. If your own time is used in the making of products or delivery of client work then your salary should be included in Cost of goods sold. However, if you are not included directly in these activities, your salary cost would be an overhead. While they do not contribute directly to your sales, overheads are essential and need to be covered by your sales price. The trick is to keep your overheads as low as possible so you can afford a higher profit margin.
Make a list of all of the expenses in your business that fall into this category on an annual basis. Then use your gross sales (or budgeted sales) to work out your overhead percentage:
(Annual Expenses / Annual Sales)= overhead percentage
For example, assume our overheads for the year are €30,000 and our sales for the year are expected to be €100,000, then our overheads percentage would be 30%. This means that for every sale we make, 30% of that needs to go to cover the operating expenses of our business.
3) Choose your profit
The next step is to add on your profit. Think of your profit as future proofing your business, it pays for future investments, bonuses for yourself or staff and as a buffer for leaner months if you have a drop in sales.
Your have two options here:
Choose a fixed amount for each product or service, so for example, for every web design project we take on, €500 is added as profit.
Or, add a percentage mark up to your costs to arrive at your price. This is helpful if you have multiple offerings and you want to have a standard across all of them.
Both options are difficult to arrive at, but a good guide is to research prices in your industry. And remember, this figure can be tweaked and changed until you find what works best.
4) Calculate your price
Your final price will be:
Cost of Goods Sold + MarkUp= Baseline Price
Baseline Price + Overhead Percentage= Final Price
Using our example above, and assuming we would like a MarkUp of 20% per offering:
Best Bling Ltd - 1 Bracket
Cost of good sold €7.08
Mark Up (20%) €1.42
Baseline Price €8.50
Overhead Percentage €2.55
Final Price €11.05
Let’s round it to €12.00 per bracelet to keep it even.
Our Profit would be:
Sales Price €12
COGS €7.08
Overheads €2.55
Profit €2.37
For our website service provider, it would look like this:
Best Website Ltd - 1 Project
Cost of good sold €1,600
Mark Up (20%) €320
Baseline Price €1,920
Overhead Percentage €576
Final Price €2,496
Let’s round it to €2,500 per website project to keep it even.
Our Profit would be:
Sales Price €2,500
COGS €1,600
Overheads €576
Profit €324
5) Adjust your Price
The last step is adjusting your prices to meet the needs of your market and your business.
First, see if the price is realistic for your clients and the level of competition in your market. You don’t want to be underpricing consistently as it will create a race to the bottom in your market. Adjust your mark up if you need to!
Adjusting your prices is a process of experimentation. Once you do this piece of work, you should refine your numbers as you have more information as your business trades. Perhaps your labour hours are larger than you thought, maybe a supplier increases their prices, which will all eat into your profits. Maybe you create a more valuable offer and you can easily increase your markup and your clients are happy to pay the increased price. Either way, once you take control of the pricing for your business in this way, you need to maintain and review it. You will feel more confident and in control which will enable you to take quicker action to grow your business for the future.
If you would like help with this side of your business, reach out to me on edel@accelerateaccountingsolutions.com to talk about how we can work together on a 1:1 basis to tackle your pricing or any other areas of concern in your business!