Determining whether your prices are too high, too low, or just right is a challenge every business owner faces. But the key to finding the right balance is more straightforward than you might think. It comes down to understanding the frameworks that drive effective pricing. In this post, we'll explore the relationship between productization and pricing. While productization is about creating value at scale, pricing is about finding the right compensation for that value. Together, they form the foundation of a successful strategy.
To be clear, pricing is more than just choosing a number. It’s about clearly expressing and quantifying the value you offer. The good news is that after you have done this exercise once, it only requires minor tweaks going forward. If you missed last week’s post, I recommend you read Mastering Productization, before you continue.
By the end of this post, you'll have a framework to determine a fair price and know when and how to adjust it.
5 Step Framework for Effective Pricing
Step 1: Productize Your Offerings
The first step to develop a robust pricing strategy is productization. This involves standardizing your services to enable scale while consistently delivering value to your customers. Last month in Mastering Productization, I explained how you can define your products or services into a "front-end" and "back-end", to make it easier to standardize and communicate the value you offer. Before that, in Decoupling Time & Value for Scalable Growth, I explained my mental model for finding your domain and building a product strategy. Each of these will help with Step 1.
Step 2: Estimate the Value You Provide
Understanding the value you deliver to clients is crucial in determining how much to charge. Begin by measuring the problem you solve for your clients and be sure to be specific. Start by assessing how severe the issue is faced by your customer—whether it’s a minor inconvenience or a catastrophic crisis—and consider the financial, operational, and emotional costs of the problem.
To stress the importance of this often-missed step, let me clarify with an example. Imagine you run a legal consulting firm. Through your research and conversations, you find that startups typically spend $25K annually on legal fees and 100 hours of founder time managing documents. Offering a solution that reduces this to $10K and 10 hours per year would be a compelling and measurable value proposition. If the founder values her time at, say, $120 per hour and you set your price at $12K, you are saving her $13.8K per year. Depending on your circumstances, you could easily increase this price, because you understand and can communicate the value you provide.
Sometimes it’s hard to measure the value we offer. So, to assist with this, you can analyze your value through four quadrants: money, time, quantity, and quality. Do you help your clients save money, increase revenue, save time, boost productivity, or improve the quality of their products or services? I guarantee that you fall into at least one of these quadrants. If you’re a graphic designer, you might argue that your designs lead to higher conversion rates in marketing campaigns, which directly contributes to increased sales and revenue i.e. money.
Finally, remember that value varies for different stakeholders. Middle management might see value in resolving operational efficiencies that create repetitive work, while executives may focus on the financial impact. Tailor your value propositions to resonate with each audience and ensure your pricing reflects the full spectrum of value you provide, be it money, time, quantity, and quality.
Step 3: Set Clear Pricing Goals
When setting your pricing goals, your focus should be on capturing an "appropriate" portion of the value you provide. But what does "appropriate" really mean? It involves striking a delicate balance between several factors: sustainability, competitiveness, fairness, and perceived value.
Sustainability
First, consider the sustainability of your pricing. Ask yourself if your current rates allow you to maintain a healthy profit margin while also covering your costs and enabling future growth. Pricing should not only sustain your business today but also position it for long-term success. If your prices are too low, you may struggle to keep your business afloat, let alone invest in growth. On the other hand, if your prices are too high, you might drive potential clients away, especially if they perceive your offerings as overpriced relative to the value they receive.
Competitiveness
Next, think about competitiveness. Your pricing should reflect where you stand in the market. Are you offering a premium service that justifies a higher price, or are you aiming to compete on cost by offering more affordable solutions? It’s essential to understand your market position and how your pricing aligns with or differentiates you from your competitors. If your pricing is significantly lower than the market average, it could unintentionally signal that your service is of lower quality. Conversely, pricing too high could alienate budget-conscious clients who opt for more reasonably priced alternatives.
Fairness
Fairness is another critical aspect. Your pricing should feel fair both to you and your clients. Fairness from your perspective means that you’re adequately compensated for the value you provide, including the time, effort, and expertise you bring to the table. For your customers, fairness means that they feel they’re getting good value for the price they pay. This perception of fairness is vital in building long-term relationships and customer loyalty.
An example of how consumers navigate pricing can be seen in everyday purchases like coffee. We often see the price of coffee beans rise at the grocery store, yet most of us continue to buy it because we believe the value exchange—enjoying good coffee in the morning—is still reasonable (especially for us Aussies 💙🇦🇺). However, there is always a tipping point. If the price of coffee rises too much, we might start considering alternatives, such as switching to a different brand or reducing our consumption.
Step 4: Define Your Pricing Structure & Level
Pricing has two fundamental components: structure and level.
Price Structure
Your price structure is the way you charge for your services—whether through a retainer, hourly rate, project-based fee, or another model. Each structure has its advantages and trade-offs. For instance, a retainer model provides steady revenue and allows for better business planning, while a project-based fee might offer flexibility but less continuity. I think a better way to summarize the pros and cons is through a table.
Price Level
The price level is the actual amount you charge within that structure, which should reflect the value you create, your competitive position, and your brand strength. For example, a well-established brand with a strong reputation can command higher prices compared to a new entrant in the market. Ensure that your pricing level aligns with your costs, brand positioning, and the perceived value in the eyes of your customers.
Step 5: Embrace Iteration and Continuous Improvement
Pricing is not a set-and-forget task; it requires continuous refinement. As markets evolve and client needs change, your pricing strategy should adapt accordingly. Regularly gather feedback, analyze your wins and losses, and be willing to adjust your pricing structure or level when necessary. For instance, if you’re consistently closing deals without any pushback on price, it might be an indicator that your prices are too low. On the other hand, frequent losses due to pricing could suggest that adjustments are needed to better align with client expectations.
By embracing iteration, you ensure that your pricing remains competitive and reflective of the value you deliver. Invest time in developing a robust sales process that supports your pricing strategy, and be open to experimenting with new approaches that can drive better results for both you and your clients.
Common Pricing Mistakes
When the time comes to work on your pricing strategy, avoid these common pitfalls:
- Failing to connect price to value (⚠️)
- Not understanding the competitive landscape
- Changing prices too quickly or too slowly
- Ignoring feedback and not iterating
Final Thoughts
I used to feel uneasy quoting my prices, especially when they were on the higher side. But after putting in the effort and understanding my value, I became confident in the worth of my services and the prices I set. Now, when a client inquires about my pricing, I genuinely look forward to the conversation. I’m eager to explain my rates and share the research and case studies that demonstrate the impact of my work. With this framework, I believe anyone can experience the same results.