You're Probably Getting Bad Advice on PricingJan 19, 2021
This is one of those areas of your business that sounds simple, ends up being tricky, and about which everyone (including your mom’s friend on Facebook) has an opinion.
One of our newer courses at One Mill School is called Fix My Finances. We look at how to understand and plan your money, bookkeeping, tax issues… and we look at pricing.
We orient the pricing part of the course around tools and frameworks, not advice and formulas. I kept hearing from creative small business owners that there is so much noise when it comes to pricing. It’s something that is easy for people to have an opinion about but not something there’s a lot of strong guidance on.
So today I want to pull out two pieces of advice you may have heard -- and give you some tools to know whether and how to apply this kind of advice to your business.
"Just raise your prices.”
I’ve heard advisors say with a straight face, “Every business owner would benefit from doubling their prices.” And makers tell me they’ve been told they can charge any price they want; if they feel resistance to that, it’s because they have a shrunken sense of their self-worth.
You may need to raise your prices. You may need to reenvision the relationship between your sense of worth and money. But it’s very possible that raising your prices isn’t the answer, and here are three reasons why:
- Your gut is probably right.
Most business owners have valuable instincts when it comes to their customers. You help people fasten necklaces in front of a mirror, answer question after question, and watch people glance at a price and wander away at craft markets… and eventually, you develop a strong sense of the right price for your product. It’s likely that when you set your prices, this instinct played a key role -- and it’s unwise to discard that.
- You can charge a higher price when you tell a better story.
This is a concept we explore in our “Fix My Story” course. But the general idea is that we choose to pay more for something because we feel invested in the story being told: about the quality of the product, the role it will play in our lives, the bigger ethos behind it, etc. So many business owners worry about price when really they should be worrying about story. And you can’t successfully raise your prices until you are more effective at telling that story.
- Growth solves all problems.
There is a Silicon Valley adage that growth solves nearly all problems in a business. Because if you have money coming in, it makes everything else (hiring, improving your products, fixing your systems) easier to do. But here’s the thing: sometimes, by raising your prices, you make growth much harder to achieve. Sometimes, yes, by raising your prices you actually grow more. But it’s up to you to decide whether this will be the case for you. (Or to do some experimenting and find out.)
- Pricing should be based on costs and value, not your desire to charge more.
As we’ll look at below, pricing is a bit of an art that requires looking at your costs (yes, all of them) and the value of what you sell. Your price should holistically reflect these realities -- not simply be guided by what you’d like to charge.
“This is the formula to use.”
Usually, people tell creative business owners that there is a pricing formula -- and the formula they point them to is a cost-based formula. We look at this formula in detail, along with other approaches to pricing in our course.
It’s certainly comforting to have a set formula. You put the numbers in and out comes the price to put in your product listing. But the truth is that pricing is an art, not a science. And to do it well in a small creative business, it’s often necessary to get a little bit creative with how you price.
Fundamentally, there are two approaches to pricing:
- Cost-based pricing.
In this approach, you take the costs needed to produce a particular thing and work “up” to arrive at a price. This is the typical way product companies tend to think about pricing.
- Value-based pricing.
In this approach, you start with the value of the product (what you think you can charge for it) and work “down” to arrive at a price, double-checking that your costs are covered at the end.
There are a few reasons you can’t simply use the cost-based formula and call it a day:
- Both costs and value matter.
Your best price generally comes from a combination of both the cost-based and the value-based approaches, with plenty of room for your gut instinct and experiments to see how customers react. Both the perceived value of your product and your costs are crucial to consider -- and an over-emphasis on one or the other will make it hard to run a profitable business.
- A formula may not work for your particular situation.
So many business tools are developed for large corporations and are then applied to small, flexible, creative businesses as if they’re sure to work. But small businesses take many shapes. Maybe you work from home and never intend to hire or rent space. Maybe you have extra costs because of your sustainability choices. Maybe your products cost almost nothing to produce but are magical because of your art. All of these things can make it so a traditional formula doesn’t work. The formula is a good source of information; it just can’t be the only source of information.
- Pricing evolves.
Pricing is not something you should set once, or create a formula for once, and never revisit. It should be an ongoing consideration, an ongoing curiosity, and exploration within the practice of your business. As you grow, the way your price “acts” in the marketplace changes. Your costs also change as you buy higher volumes and your overhead shifts. The price you need 3 months in is almost assuredly different from the price you need 3 years in. To use a single formula obscures this more nuanced and long term process.
To be clear: you may want to raise your prices or learn about a new pricing formula. These are tools available to you. I’m not suggesting you ignore these tools; just that you be thoughtful about what’s right for you. And to prioritize your instinct, experience, and observations over any advice you may receive.
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