Whether you’re a freelancer or a small business owner, figuring out how much to charge for your products or services can be tricky. There’s plenty of math involved, in addition to knowing your customers and anticipating their emotional response to your pricing. Here are some simple resources to help you answer the question, “How much should I charge?”
Product pricing: a quick overview
How much you charge for a product depends on a number of factors, including how much it costs to make the product, expenses related to marketing the product and your customer’s willingness to pay. There are three models that are useful in determining how much to charge for your products.
1. Cost-plus pricing: Price = [Cost + Expense] + Profit.
Sometimes known as markup pricing, this model builds a profit into your product pricing strategy. Cost-plus pricing is simply that: a price that covers your costs (e.g., the amount of money it takes to have the product for sale) plus some markup for profit. Using cost-plus pricing allows you to plan for financial success; however, there is a downside. If you’ve overestimated your sales for one month, and fewer items are sold, you may not be able to cover the costs to produce your product.
2. Demand pricing: Profit = Price - [Cost + Expense].
Demand-based pricing takes into account the demand for a particular product, adjusting prices to fit how a customer perceives value. A common example of demand pricing is the airline industry. A ticket price will change based on the holiday season or during spring break, for instance. This type of pricing works well with services, too: For instance, if a particular stylist is booked months in advance, the salon may raise the price per service.
Demand pricing can be very sensitive, but if you notice that you can’t keep up with demand for your product, you may be undercharging. Try raising prices incrementally and observing how sales numbers and profits are affected.
3. Competitive pricing.
Competitive pricing is the least complicated option, as it involves seeing what other, similar retailers charge for their products. Keep in mind, however, that if your product is of higher quality, the price should reflect that — and vice versa for a lower-quality product. Make sure that, in addition to looking at market prices, you price to cover your costs and expenses. Many product verticals regularly provide Manufacturer’s Suggested Retail Pricing (MSRP) to guide merchants on a pricing strategy. This is another great resource that you can use to calculate your unique pricing model.
[Read more: How to Price Your Product: A Step-by-Step Calculation]
The benefit of flat-rate billing for clients is that they know the amount that they have to pay for the project beforehand so there is little room for dispute.
FreshBooks
How to charge for a service
Freelancers and service-based businesses can use the above pricing models to price their services, too. While it’s often less straightforward to calculate your service expenses, there are costs you will need to cover in addition to making a profit. A freelance designer, for instance, may need to cover expenses such as an InDesign subscription, printing costs and a portion of their health insurance and self-employment taxes. These expenses will form the basis for what you charge, plus more depending on your time commitment or level of expertise.
Most service providers use one of the following pricing schemes to determine how much to charge.
1. Hourly rate.
The service provider charges per hour, with a rate that’s determined by your level of expertise or seniority. The SBA suggests including travel time as an extra charge; the main benefit of this model is that you are compensated for the amount of time and effort you spend on a particular project. This option works well for long-term projects rather than short or irregular jobs.
2. Flat fee.
Flat rates work well for projects with definite deliverables and well-defined scope of work, or projects for which the time commitment required is difficult to estimate. In this scenario, the service provider charges a set fee that can be paid up front or at regular intervals until the project is finished. “The benefit of flat-rate billing for clients is that they know the amount that they have to pay for the project beforehand so there is little room for dispute,” wrote the experts at FreshBooks.
3. Variable pricing.
Finally, variable pricing is a model in which different customers are charged different rates. Bargaining and negotiation help set the price for each customer, where you may wish to reward bigger contracts with a small hourly discount or create a loyalty pricing tier for your best customers. If you choose this option, make sure you are able to justify why different clients are charged different prices.
[Read more: How to Price Your Business Services]
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