How Much Should I Charge for My Product or Service?

Whether you’re a freelancer or a small business owner, figuring out how much to charge for your products or services can be tricky. There’s plenty of math involved, in addition to knowing your customers and anticipating their emotional response to your pricing. Here are some simple resources to help you answer the question, “How much should I charge?”

Pricing models explained: cost-plus, value-based, and competitive pricing

The price you charge for a product depends on several factors, including the cost of production, marketing expenses, and your customer’s willingness to pay. Four models are useful in determining how much to charge for your products.

1. Cost-plus pricing: Price = [Cost + Expense] + Profit

Sometimes known as markup pricing, this model builds a profit into your product pricing strategy. Cost-plus pricing is simply that: a price that covers your costs (e.g., the amount of money it takes to have the product for sale) plus some markup for profit. Using cost-plus pricing allows you to plan for financial success; however, there is a downside. If you’ve overestimated your sales for one month, and fewer items are sold, you may not be able to cover the costs to produce your product.

2. Value-based pricing

Value-based pricing accounts for how much a customer perceives a product to be worth. This model is ideal for unique or luxury goods that convey status. “Companies that offer unique or highly valuable features or services are better positioned to take advantage of the value-based pricing model than companies that chiefly sell commoditized items,” wrote Investopedia.

Convertibles are a great example of goods with value-based pricing. These cars are perceived as status symbols in ways that traditional cars aren’t. As a result, luxury car brands can set a price based on the perceived value rather than the production costs of the convertible.

Value-based pricing requires deep customer research to be successful. A strong feedback loop and transparent communication are essential for customers to continue seeing the value in any product developments, add-ons, or changes as the company grows.

3. Demand pricing: Profit = Price - [Cost + Expense]

Demand-based pricing considers the demand for a specific product. A common example of demand pricing is the airline industry. A ticket price will change based on the holiday season or during spring break, for instance. This type of pricing works well with services, too: For instance, if a particular stylist is booked months in advance, the salon may raise the price per service.

Demand pricing can be very sensitive, but if you notice that you can’t keep up with demand for your product, you may be undercharging. Try raising prices incrementally and observing how sales numbers and profits are affected.

4. Competitive pricing

Competitive pricing is the least complicated option, as it involves seeing what other, similar retailers charge for their products. Keep in mind, however, that if your product is of higher quality, the price should reflect that—and vice versa for a lower-quality product. Make sure that, in addition to looking at market prices, you price to cover your costs and expenses. Many product verticals regularly provide Manufacturer’s Suggested Retail Pricing (MSRP) to guide merchants on a pricing strategy. This is another great resource that you can use to calculate your unique pricing model.

[Read more: How to Price Your Product: A Step-by-Step Calculation]

How to charge for a service

Freelancers and service-based businesses can use the above pricing models to price their services, too. While it’s often less straightforward to calculate your service expenses, there are costs you will need to cover in addition to making a profit. A freelance designer, for instance, may need to cover expenses such as an InDesign subscription, printing costs, and a portion of their health insurance and self-employment taxes. These expenses will form the basis for what you charge, plus additional costs depending on your time commitment and level of expertise.

Most service providers use one of the following pricing schemes to determine how much to charge.

1. Hourly rate

The service provider charges per hour, with a rate that’s determined by your level of expertise or seniority. The SBA suggests including travel time as an extra charge; the main benefit of this model is that you are compensated for the amount of time and effort you spend on a particular project. This option works well for long-term projects rather than short or irregular jobs.

2. Flat fee

Flat rates work well for projects with definite deliverables and well-defined scope of work, or projects for which the time commitment required is difficult to estimate. In this scenario, the service provider charges a set fee that can be paid upfront or at regular intervals until the project is finished. “The benefit of flat-rate billing for clients is that they know the amount that they have to pay for the project beforehand, so there is little room for dispute,” wrote the experts at FreshBooks.

3. Variable pricing

Finally, variable pricing is a model in which different customers are charged different rates. Bargaining and negotiation help set the price for each customer, where you may wish to reward bigger contracts with a small hourly discount or create a loyalty pricing tier for your best customers. If you choose this option, make sure you are able to justify why different clients are charged different prices.

[Read more: How to Price Your Business Services]

How to adjust pricing over time without losing customers

Even if you nail your pricing model, there will likely come a time when you have to adjust your prices to account for inflation, higher cost of living, or a business expansion. Communicating a price change without losing customers is a tricky task.

It helps to be transparent about your price increase. “While it’s harder for retailers and restaurant owners to hide higher prices, especially from regular customers, some service businesses try to sneak price increases into client bills hoping they won’t notice. Don’t do this,” wrote SCORE. Tell your customers or clients why, when, and by how much you plan to raise prices.

If you’re worried about customers abandoning your brand, offer new deals, add-ons, or temporary discounts to soften the change. For instance, you might extend free shipping offers or free gift wrapping to help customers feel like they’re getting more value with the price increase.

Bundling products or services together can also be an effective way to keep customers. “You can soften the pain of price increases by offering new bundles of products or services. For instance, if a nail salon owner needs to raise the price of manicures, pedicures, and foot massages, they can offer a bundle with the services discounted,” wrote American Express.

[Read more: Inflation Driving Up Prices? How to Communicate a Price Increase to Customers]

Using market research and customer feedback to inform your pricing

Customer research is vital, especially so if you choose to use value-based pricing. Learn about your customers’ preferences, buying behaviors, and paths to purchase before you set your price.

There are plenty of resources to help you start building a plan for pricing. Start by defining your target audience if you haven’t done so already. Build a customer profile complete with demographics, buying habits, geographic location, and more. Consider how you will segment your customers into different buying groups.

Then, use surveys to understand the price sensitivities of your different target segments. There are four main approaches to researching your pricing strategy:

• The Van Westendorp Price Sensitivity Meter: This survey asks four questions and is best bringing a new product to the market.
• The Gabor-Granger survey: This methodology is best for predicting your customers’ willingness to purchase at a certain price point.
• Conjoint analysis: This approach can help you assess how much influence various features have over someone’s willingness to pay.
• Brand-price trade-off: This tool identifies the impact of price on brand
  awareness, revenue, and profitability, among other metrics.

There is a time and place for each of these methodologies; no matter which one you choose, make sure your survey or feedback form is grounded in customer insights.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.