How to price without worrying about your costs

How to price without worrying about your costs

All too often, we end up mixing up our pricing and our costing.  The thing is, your clients don’t really care what anything costs you.  All they care about is what it costs them (in other words, the price you are charging).

Tying the two together (your cost and your price) can lead to some nasty consequences for your business - not least a ceiling on your income and an incentive to work slowly and get worse at your job.

So instead, we are going to look at two alternative pricing models.

First up is value-based pricing.

The basic idea is that you vary your charges based upon the impact that you have for your client; if you make them a ton of money then it's only fair that they should pay more.  If you only make them a small amount of money, then it's only fair to reduce your fees.

Let's say your potential client is a huge company, MegaCorp.

When you write a blog post, your writing prompts a spike in visits to their website and they sell an extra £25,000 worth of products on the day that the blog post is published.  So over a month, you are increasing their revenues by £100,000.  Do you think, given the impact that you are having on their sales, it is fair to ask for £10,000 per month from them?

What about if your potential client is a medium size company, Big Industries.

When you write a blog post, your writing prompts a spike in visits to their website and they sell an extra £1500 worth of products.  So over a month, you increase their revenues by £6000.  Do you think, given that impact, it is fair to charge them £600 per month?

Finally, what if your potential client is a one-person consultancy who's just starting out; TinyCo.  They have revenues of around £4000 per month, and when you write a blog post, you bring a spike in visitors that probably results in maybe £1000 in extra sales over the course of a month.  What would be a fair price to charge for that?  £100 per month?

Notice how what we charge (pricing) is completely separate from what it costs (the £50-£200 per post which we calculated the other day).

There are three major issues with value-based pricing.

Firstly, how do you calculate the impact of your work on the client?

Secondly, how do you decide whether it's worthwhile taking on a client - you know it costs you between £200 and £800 per month to write those 4 posts; which of those three clients should you accept and which should you reject?

Thirdly, it takes real balls to ask for £10,000 per month.

One other alternative is to use fixed pricing.

We know our costs - it's between £50 and £200 per post.  We know that most of our clients want 4 posts per month - so the cost is between £200 and £800 per month.

The next thing is to select who our ideal clients are.  What sort of revenue level are they at, and what sort of impact can you produce for them?

And then we pick a price that fits with those clients.

Let's say Big Industries are the perfect client for us - and we know from working with similar companies that we can probably make about £6000 per month of impact for them.

So we choose a fee of £2000 per month for our "done-for-you content marketing service".

That's £500 per post.  The cost is between £50 (existing clients) and £200 (new clients) - so the profit is between £450 (existing clients) and £300 (new clients).

So for new clients, you have a margin of 60% (£300 from £500).  For existing clients you have a margin of 90% (£450 from £500).

Note that the longer you keep the client, the more your margin increases - you are being rewarded for getting better at your job.

If you charge £2000 for 4 blog posts, no matter who your client is, then all you need is one client per month to break even.  If you have two clients then you've also got money in reserve.  It means that you can easily afford to spend 16 hours on each blog post and do an amazing job on every single one.

It's important to realise that we're not doing Cost-Plus pricing here.  We didn't say "it costs £50-£200 per post, so I'll add a bit on top of that".  Instead, we looked at Big Industries, decided what would be a sensible price to charge them, then made sure that the margin would be OK for us.  Choosing the price and calculating the costs are two different tasks.

Now the big advantage of this being a fixed price service is you can publish it on your website.  No "contact us to get a quote" - instead "here's what you get and here's what it costs" - which most people absolutely love.

So when TinyCo goes to have a look, they will know immediately that you're not the right person for them.  And that saves you time as you don't have to go through the whole discovery and sales process only to find out that they can't afford you.

Likewise, Big Industries can look at your price and decide, is the £6000 they will make worth spending £2000 on?  It's not your decision, it's theirs - but those numbers stack up nicely (which is completely by design).

And as for MegaCorp - in all likelihood, they'll look at your price, think "this person is too small to work with us" and move on.  Which, again, is probably a good thing, as working for a company that size comes with its own set of pressures and politics.

This is a perfect example of the way in which some really simple assumptions (that your prices are directly linked to your costs) can have massive far-reaching consequences for your business.  If you use hourly billing and are struggling for time, you’re stuck.  All you can do is raise your rates (making you look expensive compared to those people on Fiverr and Upwork) or try to find more hours in the day (spoiler: no).

If you want to get more from your time, you need to approach things differently.

Get more from your money.  Get more from your clients.  Get more from your time.

Rahoul Baruah

Rahoul Baruah

Rubyist since 1.8.6. Freelancer since 2007, dedicated to building incredible, low-cost, bespoke software for tiny businesses. Also CTO at Collabor8Online.
Leeds, England