Selling a product is so much easier. You have a fixed cost at which you buy (called wholesale), so you figure out how much profit you’d like, and mark it up according. There’s even the MSRP (Manufacturer’s Suggested Retail Price) to make your life easier. But everyone who decides to sell their services will agonize over this question: “How much should I charge?”
There are many ways to answer that question. Let’s look at four to avoid.
Many of us used a formula to answer that question:
- How much do I want to make a year?
- How many hours a week do I want to work?
So if it’s your dream to make $60,000 a year, working only 20 hours a week (including a two-week vacation), you do this:
$60,000 / 50 weeks / 20 hours = $60/hour
Next, determine the time it takes you to create a “basic” website (for me, that was a 5-10 page custom-designed static site, no programming). If that takes 35 hours, your pricing would start at $2,100. Or you could simply charge by the hour and the client pays what he pays.
Sounds great, except for one problem. Clients don’t care about your formulas.
Pricing your product is actually simple, as long as you consider it from the buyer’s point of view. How much it costs you to make something is irrelevant. They don’t care …
- Seth Godin
Your formula has no bearing on what a client is or isn’t willing to pay. How would you justify $60 an hour if the client thinks that’s too expensive? Telling him you’re worth that because you want to make $60k a year working 20 hours a week isn’t going to convince him to hire you. Neither is telling the client “how long” it will take.
The second method to avoid is basing your price structure on what you “deserve” to make. I’ve read books that claim we’re not charging what we’re worth because of low self-esteem. If we improve our self-esteem, we’ll charge what we’re worth, what we deserve—and our clients will gladly pay it. Pardon me if I’m not quite convinced.
Your clients don’t care if you think you “deserve” $60 an hour because you have a computer science degree, 15 years of programming experience, hundreds of hours of formal web training, $10,000 worth of hardware and software, and a $50,000 student loan to repay, or because some self-help guru told you that you do. Clients buy for their own reasons, not yours.
Comparison-based pricing is when you set your prices based on what you think is too expensive. It usually happens after you arrive at some semblance of a price, but then you start thinking, “I don’t know, $1,000 is a lot of money; maybe I should charge $900 …” You might think $1,000 is a lot of money, but what are you comparing that to? Your car payment? Your rent? Your monthly income? I once suffered from this malady, but the first time a client paid three times above what I considered “a lot of money,” I was cured.
Researching the competition is generally considered valuable when starting a business. But I found that to be a tall order in the web industry. First of all, who’s your competition? ABC Interactive Agency, or the teenager with a cracked copy of Dreamweaver? Sure, you can scour the web or post a newbie “How much should I charge?” question on SitePoint’s forum, but most of us keep that pretty close to the vest. And the prices I have found are all over the map. Even fellow web designers can’t agree. Although I did look at others’ prices when I first started out, it wasn’t a determining factor when setting my own.
So what should you base your pricing on? The answer lies in why people buy. Even established companies don’t always know why their customers are their customers. Remember, people buy for their reasons, not yours. If you don’t know what those reasons are, you’ll have a difficult time determining what to charge.
Former owner and partner of web firm Jenesis Technologies, John is currently Director of Digital Strategy at Haines Local Search, a company providing local search marketing solutions to SMBs, including print and Internet Yellow Pages, web design, and local SEO. When not working or spending time with his family, John offers great sales and marketing advice on his blog, Small Business Marketing Sucks.