Since most people, even business owners, read price tags more often than they write them, pricing is still one of the most underrated challenges of running a business. Our experiences as consumers often affect, usually for worse, how we set our prices. For instance, while people are excellent at setting prices for themselves or others with similar income levels to themselves, they will have a much harder time coming up with anything that approaches the ideal price for anyone pulling in a significantly higher or lower income than their own.
While pricing is challenging across all industries, it is especially more so for the creative ones. This is because, in most creative businesses, the bulk of the value of the service/ product on offer is usually intangible. This means that in this industry pricing has fewer anchors e.g. a manufacturer’s prices are usually heavily based on the cost of inputs such as raw materials as opposed to musicians who can charge premiums which are based solely on how popular they consider themselves to be. In this article, I will share some strategies on how creative, or any other type of entrepreneur for that matter, can find their way around the difficulties of charging for the fruits of their (creative) labour.
Ask for client’s budget
If your products or services are valuable enough, you can ask any potential clients what their budget is to avoid undercutting yourself. I say “valuable enough” because asking someone what their budget is for a product or service which costs only a few dollars is more likely to just come across as annoying. This strategy will work best with a serious customer who is as familiar with the market for your product/ service as well as you are or even better. However be warned—when used on chancers this approach will backfire; reserve it only for those potential clients who genuinely appear to be more interested in quality than price. This approach to pricing is also useful because many times if you offer a price which is too far below what a client had budgeted for, rather than thanking their lucky stars for stumbling upon a bargain many will instead continue their search for someone who is more “reassuringly expensive”.
Copy other people’s pricing
As you will discover today, there are a countless number of ways in which you can come up with prices for your products or services. However, out of all these, the simplest approach is to just copy other people’s. Also known as rent-seeking because of how rental prices in areas are usually based on surrounding rental prices. One advantage of this approach is that, unless you copy from outliers, you will already have avoided two of the most common pricing pitfalls which chase off customers i.e. setting your prices either too high or too low. Of course, there is the glaring disadvantage that this approach requires that you completely ignore all the expenses, costs and overheads which are specific to your business.
Let demand dictate pricing
The relationship between supply and demand is one of the more straightforward and easy to understand concepts in economics. It simply states that in markets, increased demand is usually accompanied by increased prices and vice-versa. The keyword here is “markets”; many legitimate businesses shy away from openly increasing prices in response to spikes in demand (one of the most prominent exceptions is Uber which patented “dynamic pricing” and now tout it as an innovative feature of their service). However, if you are just starting and are uncertain about how you can charge for your creative products/services you can certainly take the amount of demand you are getting into consideration when deciding a price on which to settle.
You can also come up with prices by starting with something along the lines of how much you want to earn per month. By doing a reverse calculation from this figure and factoring in things like how hard you are willing to work and throwing in a few choice assumptions, you can come up with prices for your products/services.
For example, suppose that you make wood statuettes of animals for a living and always have a ready market for these. If you want to earn around $1500 each month and are only willing to make two of these animals each week then you know that your profit from each statuette has to be at least $125. By adding your costs and overheads to this figure, you would have come up with a price figure. Of course in the real world how well this will work, if at all, will depend on your industry and how realistic your calculations and assumptions were.
Derive pricing from costs
This is one of the most popular and recommended methods of coming up with prices. Its popularity is probably the result of the somewhat formulaic way in which the prices are derived, unlike most of the other pricing methods discussed here which demand that you heavily depend on your judgement.
Prices can be derived from both direct and indirect costs. It is much easier to factor in direct costs (like raw materials) into the price of a product than indirect ones like overheads. As it happens, this method is much simpler for less formal businesses which have virtually no overheads. The final price is usually derived from just adding the desired profit margin atop the total calculated cost of each product unit or service performed.
Remember price can affect customer perception
In conclusion, you must always remember that price plays a huge role in how customers perceive the products or services which you offer. That is why you may sometimes notice that some local shops appear to have constantly running discount promotions or clearance sales. Despite the questionable ethics behind such kinds of practices, you have to admit that an expensive product on sale is more attractive than one which is bluntly advertised as cheap.