When you are at the helm of running a small business, the one thing that is constantly on your mind is pricing for profit.

Am I pricing for profit, but also competitively?

Will people pay this much for this service?

Will I be able to turn a profit & match my corporate salary with this income?

These questions were at the top of my mind when I started my first business.

In this post, I’ll be talking about the 3 key things to consider while setting prices.

1. The price should cover your costs, overheads & profit

Your price should take into consider all costs of your service and of running a business. This is the key step while pricing for profit. Make sure you leave nothing out. Consider costs associated with things like hosting a website (sure, it might be a small amount, but things like this pile up), the cost of printing stationery, the time-cost of doing emails (which are necessary in every single business these days), etc.

First, account for fixed costs of the service/project.

Fixed costs for a particular project are costs that you will invariably incur. For example, for a family photography shoot, some fixed costs of each session are travel costs (taxi fare), per-use cost of equipment (whether you are renting or have bought your own equipment, each piece has a limited life), cost of that thumbnail drive you will use to share your photos, per-use cost of an internet based proofing service… you get the picture.

Next, cover your variable costs.

Variable costs are costs which occur on a particular assignment, but need not be the same or need not even occur for all assignments. Let’s take the same example of a family photography session. Will you be hiring an assistant for this shoot? Are you going to be using particular props for this shoot? Is this shoot going to take place at a venue where you need to pay for access? All of these should be considered – and an average taken, while thinking of a fixed pricing structure.

Then, cover your overheads & cost of doing business.

This is where you take into account all the various things that enable you to run your business but are not for just specific shoots. Do you rent a space? Do you work out of cafes (hello, random coffee bills which pile up)? Do you use a co-working space? Your computer, your internet plan, electricity bill, your Adobe software subscriptions, your bookkeeping software, that Instagram scheduler that you get charged for every month, that dropbox or Google Drive subscription – put all of that in here. Now, remember that your overheads may increase or decrease through the year, so keep some breathing room here. It’s good practice to try to keep your overheads as low as possible while starting a business because these things (especially subscriptions) add up very quickly.

Next, it’s time for profit.

Technically there is another cost before getting into profit – and that is labor cost. That is, your time & talent. But since we are trying to keep it simple, we will club your time & talent into profit.

Your profit should therefore do two things. One, it should be good enough to allow you to draw a regular salary, and two, it should provide a good cushion for growing, and also have a little extra to invest back into the business.

Profit is the most subjective part of the pricing, and it should be so. Because you will want to increase your profit margin with experience & improved skill sets. You will also need to price in accordance to what you consider is a good salary for yourself. Everybody will have different prices. Do not try to copy somebody else’s price, because first, you don’t know what their costs are, and second, you don’t know what kind of profit they expect for themselves!

So while pricing your profit, you can use the next two rules as your guiding light.

2. The price should be a “fair price” – not too high, not too low

Setting a fair price is what is called the perfect balance between consumer surplus and producer surplus in economic terms.

Without going into technical terms, it is a price point at which you feel good about your pricing & don’t feel like you are being cheated or are slaving away for nothing.

This same price point is the point at which your target customer feels like they got a “fair deal”. Now, the key here is that it should feel fair also like a deal to them. Price your service too low, and your client feels they are getting a “cheap service” which may leave them feeling like they aren’t worthy enough, or that the USP of your service is that it’s cheap (if this happens, the first thing they’ll tell their friends while talking about you is “she’s so cheap!! you should totally hire her!”). At the same time, your pricing should feel like a good valuable deal to them, i.e. they are receiving value for their money.

A fair price is a price at which both you and your target customer walk away happy with the transaction.

Often times, we might set a price which we may be wondering is either too high or too low in our market. This is when, the third rule comes in handy. Use this next third rule to assess whether your price is a fair price & to tweak it so that it sounds more like a fair price.

3. The price should be competitive in your market

The price should be competitive in your market. Note, I did not say in your “industry”. I said in your market. Those are two different things. Here’s the difference:

In our example of a family photographer, your industry is the industry of family + lifestyle photographers in your country. But your market is a mix of your city or area + young mothers in the age ground 25-45 with children below the age of 10 + who are interested in story telling based photography (assuming you’re into lifestyle story telling shoots). Your market is very specific.

While assessing whether your price is fair & competitive, see what other family photographers in your market and business niche are charging. Second, and more important is to see what is your target audience spending on services like yours. Before you consider $1000 per shoot to be too expensive, check if your target mom is spending $1000 on a couple of weeks worth of daycare? If she is, then may be she would feel your price is a fair price. And, what’s best is that you could be charging way more for your service than your competition, while still booking way more clients because your pricing fits with the lifestyle of your target client and is a fair price.

A common mistake

A common mistake while people make while setting prices is that they follow Rule 3 before following Rule 2. That is, they look up other people’s prices and get thoroughly overwhelmed and end up setting a price which doesn’t work.

What happens is either you’ve set a price too low that your target audience feels its a “cheap service” and don’t end up booking you – and the ones that do are only looking for a bargain, so you feel dissatisfied serving them or constantly have to keep worrying about your next client.

And the flip side is that you know you’ve set your price too high when your conversion rate is too low. That is, people vanish after asking for your prices. There could be many causes for this, but one major one is pricing.

If you look at competition first, you are doing yourself a great disservice. First and foremost your pricing should be able to allow your business to thrive so that you can keep offering your services.

So make sure you follow the first and second rules before going “price shopping/snooping” :) It can be tempting, but I urge you to hit the reset button and price from a place of originality.

In summary,

Here are the 3 things to consider while setting prices:

1. The price should cover your costs, overheads & profit
2. The price should be a fair price – not too high, not too low
3. The price should be competitive in your market

Follow these steps and I’m sure you’ll see your calendar booked with your target clients soon enough! And yes, allow those prices to stay the same for a while so you can truly test if they are working or not. At least 6 months.

I hope this article was helpful to you! I’d love to hear your thoughts in the comments section or shoot me a message here.

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