Not Sure How To Price Your Work? Try This Formula.
The 15 factors to consider when you set a price.
Pricing is not a one-size-fits-all exercise.
No matter what pricing model and strategy you choose, there are 15 different factors to consider when you set a price.
If you overlook these factors, the chances are you’ll undercharge your clients and customers. This is a disservice to yourself and them.
While the specifics of what you offer and charge for it will always be unique, there’s a universal framework you can use to come up with the “right price” for your products or services.
Here’s a formula you can use to figure out your right price…
The PRICE Formula
To help you remember the 15 factors that go into setting your price, I’ve aligned them with the acronym PRICE.
The price you charge should reflect the sum total of the following:
“P” reflects your planning, productivity, and performance level (e.g., novice vs expert).
“R” reflects your (public) recognition, (business) relationship and (industry and/or professional) reputation.
“I” reflects your influence, intelligence and impact with respect to results.
“C” reflects your capability, competency and consistency of product/program/service delivery.
“E” reflects your efficiency, effectiveness and excellence of execution with respect to the finished product and throughout the pre-sales, sales, and post-sales support process.
Examine your current pricing through the filter of this framework and see how it stacks up.
Does it reflect what you bring to the table in value that directly benefits your clients and customers?
If not, it’s time to change your prices!
Speaking of which, you should conduct an annual pricing review using this formula as well because your value will increase over time and your prices should too.
Adjust for Val-YOU
The rates your market is familiar with will vary depending on industry, skills required, and services offered, but most are dictated by the demand for your level of experience, expertise, reputation and credibility.
When pricing services based on an hourly rate as a starting point for your calculations, don’t penalize yourself for getting better and faster at what you do as you gain experience and develop highly skilled expertise.
As far as experience goes, here’s a rough guideline you can follow:
Beginner: 0–3 years of experience
Intermediate: 3–6 years of experience
Advanced: 6–9 years of experience
Expert: 10+ years of experience (or minimum of 10,000 applied, dedicated hours in a leading role)
While it’s possible to achieve advanced and even expert status in less time than outlined above, in general those timelines can be a helpful guideline.
Next, compare your target price range to similar offers and services in the market to get a sense of how to best position yourself — but don’t let what others charge dictate your pricing.
They are not you.
Right pricing requires you to understand what you actually sell.
Every customer buys more than your time — they’re buying your years of experience, the investment you’ve made in developing your skills and talents, and your resulting expertise.
If you base your price solely on the time it takes to complete a creative or technical task, develop a product, or deliver a program, you turn what you sell into a commodity.
Don’t define your value simply by the hours required to accomplish something.
That’s unfair and demeaning to you.
How To Customize The Framework
Once you think through where your offering lands within the 15 PRICE factors, the next step is to customize the framework by weighting each factor differently to reflect specific customer situations.
For example, if each category contributes equally to the buyer’s total satisfaction and benefit from what you sell, the contribution would be 20% per category.
However, you could have situations where one or more of these categories has a greater impact on delivering results or is more highly valued by your client or customer.
In such cases, you can assign a different weighted value to reflect that reality before running the numbers and charge accordingly for those variances.
This is quite common in practice. I’m sure you’re familiar with seeing equivalent services such as speaking, coaching and consulting being offered at widely varying price points.
Consider What Your Market Values
To be fair, you do have to know and understand the industries and companies you’re serving to determine the economic value of what you’re selling.
This helps you quantify and justify the basis for your pricing and creates a compelling argument for why buying from you makes good business sense.
Before pricing whatever you sell, think carefully about what your target market values and how you would rate and reflect your unique contribution in each of these areas.
That way you’ll be more assured of charging the right price for what you deliver and the value you represent. You’ll also be more likely to ask for what you deserve with greater confidence.
This exercise is only the starting point for putting the right price on what you sell, but it’s a great place to start because these factors are most commonly left out of pricing entirely.
Think deeply about these 15 qualitative aspects first before tackling the rest of the math you’ll need to do.
The “rest” being the personal, business and ethical considerations your price must also reflect. Along with knowing and aligning your floor and ceiling rates, both of which are critical too for fixed price gigs.
But those are topics for another time. This 15-factor PRICE formula will give you the foundation you need to set the right price. Then, you validate your assumptions with price testing.
Test Your High-Low Price Range
Once you’ve studied your competitors similar offers and applied the PRICE formula to your own work, come up with estimates for the minimum and maximum prices you can charge.
Your minimum potential price is easy — it will always be your cost plus $1. Your maximum price will always depend on your buyer profile.
If your buyer will make money from your product, the maximum price you can typically charge to remain competitive is 25% of the expected customer benefit.
If your buyer will save money, the maximum price you can likely charge to remain competitive is 20% of the expected customer benefit.
In either scenario, take your competitor’s average price and factor in 20% on either end of the range.
With these numbers in mind, you can then test plus/minus 10% to see if it makes any significant difference to sales.
You can also test extreme highs and lows to see if the number of sales
changes so significantly that you can make more at that price point and still optimize your profits.
A few more things to keep in mind:
- The more similar what you sell is to other available options, the more similar your price needs to be to remain competitive. It’s only when you sell a unique, complex product with high demand and scarce supply, and/or when you’re a highly accomplished industry superstar that you have more flexibility in price range.
- Always start your price testing on the higher end of the range unless your brand profile is one of being a low-cost solution or service provider.
- Don’t confuse price with worth — that’s a recipe for disaster. There will always be someone who doesn’t see your value, but don’t let it be you.
Pricing is ultimately a mathematical exercise and your testing should ultimately tell you what price is ultimately right.
Don’t Feel Guilty About Your Price
Everyone regrets pricing mistakes driven by guilt.
No matter what you sell, you must be confident the price you charge for it accurately reflects the value, utility, and benefits provided to your customers.
Otherwise, you’ll be too easily pressured into lowering your prices.
Use the 15-factor PRICE formula to help you separate your emotions from your economics and keep in mind that you can’t do your best work if you’re not properly compensated for it.
Respect yourself, respect your work, let that guilt go, and remember that good stuff created by great people is the ultimate scarcity.
The market for it is infinite.