What is the best pricing strategy for a small business?
Does figuring out your offer pricing take you down a rabbit hole? It certainly can feel that way. The fact that there is no one “right” way to price offers means that the options are endless, and that can create confusion. We’ll cover six pricing strategies for small businesses in this article and dive into the pros and cons of each to help you better determine which options you should consider.
Before you get to pricing anything, however, you need to know your numbers!
Pro Tip #1: Before Pricing Offers - Know Your Numbers!
Know Your Client Acquisition Cost
The best pricing strategy for small businesses begins with a solid understanding of what the business expenses are. Do you know what your total cost per client is for attracting and delivering your services or product? If not, this is step one!
To calculate this, you need to determine your client acquisition cost. First, calculate your total sales and marketing costs. Your total sales and marketing costs include all program and marketing spend, salaries, commissions, bonuses, and other costs associated with attracting new leads and converting them into customers.
Once you have that dollar amount calculated, divide it by the number of clients you have. To ensure accuracy, make sure to calculate all costs and the number of clients within the same time frame. You don’t want to calculate costs on an annual basis and then use the number of clients over a six-month period - the time frames need to match by start and end date.
We need to know the cost of client acquisition to ensure that cost is covered and then some when we go to price our offers.
Know Your OVERHEAD EXPENSES
Overhead expenses are what it costs to run the business. Things like your rent, utilities, insurance, legal fees, office supplies, payroll, and accounting fees.
Know Your revenue and profit
Revenue is the total amount of money brought in, and profit is what you get to keep after all expenses have been paid. (Revenue - Expenses = Profit.)
Know Your REVENUE GOALS
Aside from “I want to earn more money,” what specific goals do you have for yourself and your business? You need to be clear on this so you can incorporate reaching your goals into the pricing of your offer.
When setting goals, we need to be realistic and develop a plan that allows us to achieve them. If you’d like to double your revenue within the next two years, that’s achievable. You need to know what your revenue is now and develop a plan to increase it. This can include things like increasing prices, adding on another offer or offers, leaning into a strategic marketing and lead generation campaign, or a combination of things.
Check out our Profit Predictor online calculator to get a better idea of what your numbers are and how, with incremental changes, they can change significantly.
Pro Tip #2: Hourly Pricing
Hourly pricing, in its simplest form, is selling a one-hour service for a specified amount of money. For instance, we sell strategy sessions by the hour. Attorneys and therapists charge by the hour.
Hourly pricing is also common when hiring service providers such as virtual assistants, graphic designers, etc. It comes into play when the client needs ongoing support.
The hourly pricing model is pretty straightforward. Make sure that you clearly specify what the client will walk away with.
Hourly Pricing Pros: This is a very clear offer. The client receives a predetermined amount of your time to solve a specific issue for a specified price.
Hourly Pricing Cons: Scope creep is real! You need to be very clear about how long your service(s) take and price accordingly with the correct number of hours.
If you’re a helpful person, and most female entrepreneurs are, it’s going to be very easy to go over time. To avoid this, develop an agenda or action plan. This allows the client to know what to expect, and it keeps you on track.
Pro Tip #3: Package Pricing
We’re all familiar with package pricing. When you join a course or a program, you are paying package pricing. When you hire an agency, such as a marketing agency, a copy-writing firm, or a social media agency, you’re also most likely going to purchase a package.
Here’s a list of the most common types of packages:
HOURLY PACKAGE - Leverage the hourly pricing model by selling blocks of hours up front. Make sure you track your time, and keep clear channels of communication open between you and your client. Your time is limited, and your clients need to reserve their spots. Charging for hourly packages up front is a best practice to ensure sustainable revenue. Ideally, you will sell your blocks of hours in three to six-month packages; six months being preferred as it builds stability into your business.
Your terms should indicate the number of hours being purchased along with the duration of time and stipulate that if the hours are not used, they are lost. This helps to ensure the client will be intentional about the work they’re hiring you to do and they understand that they’re paying to reserve your valuable time.
If you use up the predetermined time for the month and the work is not complete, you’ll need to be able to inform the client of where you are with the work, how much longer you need, and the added cost. They may choose to have you add to the current month, or they may want you to hold off and complete the work in the next month.
To ensure you’re matching the right number of hours with the needs of the client, stipulate that extra hours cost extra. For instance, if you charge $100 per hour as your base price, you can let them know that extra hours are billed at $125. This is because when you go over the specified time, your schedule is impacted, and there is a cost for that. They can avoid the extra cost if they defer the work to the next month.
SERVICE PACKAGE - The service you provide will dictate the package contents and price. The benefit of selling your service as a package instead of hourly is that you have the ability to sell at a higher price as long as you’re clear on the length of time it takes to deliver the service and the scope of service you’re delivering.
PROGRAM/COURSE - When you develop a program or a course, you are deciding what information you’ll cover that will get your clients the promised results. This results in an automatic package. The client purchases the program or course and receives what they need to achieve the promised transformation or result.
BUNDLES - Bundles can be created to entice people to make a purchase. If you have several courses that, when you put them together in a bundle, give your clients additional value, that’s enticing! It ramps up the value in the mind of the customer and creates an incentive to buy.
We hired Northstar Messaging & Strategy to write our website copy when we re-branded in 2022, and they have an excellent package pricing model whereby we were able to choose the level of service we wanted at a specific price and then build the package from a menu of services, or units, to equal that price.
Our contract was for six months at a time, and each month, we were able to choose what we needed most from their service menu. This menu approach was one of the reasons we chose to work with them over other copywriters. It was clear, and it was flexible, which we loved. They do exceptional work, and we highly recommend considering them when you need copy-writing help.
Package Pricing Pros: You develop your package once (i.e., the course, program, or service package), and you sell it over and over again. This builds efficiency in your business. It’s also the most versatile pricing model.
Package Pricing Cons: Creating a package that has a scope that is too broad. As experts, we know so much more about our area of expertise than our clients do that it’s very easy to pack too much into your course or program.
Scope creep is also a con. It’s imperative that your package spells out exactly what the client will receive for the price. That it’s a complete service and that anything above and beyond is delivered through an alternate package or add-ons.
Pro Tip #4: Project Pricing
If you create proposals to send to clients in order to get work, you are working under a project pricing model. The project pricing model typically allows you to thoroughly get to know your client’s needs ahead of time so that you can prepare a comprehensive proposal.
Project Pricing Pros: You’re able to customize everything to each client’s needs.
Project Pricing Cons: Creating proposals can be very time-consuming.
The time spent up front getting to know the needs of your client should be accounted for in your client acquisition cost, which we want to ensure we cover (and then some) in our pricing. This is why knowing your client acquisition cost is so crucial.
To help streamline your proposal process, create section templates or blocks that are pre-written and that you can mix and match to put a proposal together quickly. This might look like having pre-written proposal template sections that only need to be changed slightly to customize for each client.
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Pro Tip #5: Membership Pricing
Memberships are one way to create recurring revenue but they aren't for everyone! They concept isn't as easy to successfully execute as most people believe it is.
Membership Pricing Pros: Memberships help create revenue stability in your business by creating ongoing recurring revenue.
Membership Pricing Cons: You need a large audience to make this work. You also need to make sure that your members are receiving value each and every month. Depending on your business, this can require a lot of effort.
Pro Tip #6: Combination Pricing
As business owners, we’re able to sell whatever we want in any manner that we want to as long as what we're selling is something that our prospective clients desire. You can mix and match any of the pricing models above to create the offers that your clients want most and that allow you to serve them best. We use package pricing for our signature programs and also offer hourly pricing for strategy sessions. This allows us to serve our clients to the best of our ability.
Combination Pricing Pros: You get to create combinations that allow you to serve your clients at the highest level possible while also earning what you're worth.
Combination Pricing Cons: None that we can think of!
Pro Tip #7: Differential Pricing Strategy
According to the small business section of Chron.com, differential pricing is the practice of charging different prices for the same product based on a variety of factors, such as the time of purchase, the use of a loyalty card, age of the customer, and the number of items being purchased.
There are many ways to use this strategy, and Chron.com outlines them nicely.
Differential Pricing Pros: Differential pricing creates an incentive to get your prospects off the fence and purchasing what you have to offer.
Differential Pricing Cons: Be careful of discounting your offers too often and too much. You don't want to undervalue yourself in the eyes of your ideal clients.
Pro Tip #8: Determine Your Audience’s Buying Type: Value-Based Versus Cost-Based
Your audience’s buying type also factors into your pricing strategy. When you serve an audience that’s concerned with cost— a cost-based audience—you’ll need to offer discounts and incentives to get them to buy. When you serve a value-based audience, their main concern is getting the most value possible, and they’re willing to pay for it.
While everyone loves a good deal, cost-based buyers are typically a harder sell than value-based buyers. Your small business pricing strategy needs to match your audience type.
Pro Tip #9: Increase Prices On A Regular Schedule
Boosting revenue for your small business is done through implementing intentional and strategic actions over time. One of those is increasing your prices on a regular schedule. We serve service-based entrepreneurs, and as a service provider, you can build annual price increases into your pricing strategy to ensure your revenue gets a boost every year. Being transparent about this can boost sales for you, too.
At mid-year and beyond, when you promote your offers or services, you can add a statement about the fact that prices go up next year and your prospects should get in now. On your invoices or other client communications, add a note at the bottom that a price increase of “X%” will take effect on “X date.” This gives your existing clients a heads-up and informs prospects that waiting will cost them.
Pricing Offers Strategically Is Part Of Your Marketing Plan
There are many different pricing strategies for small businesses. While you can try them all out to see what works, it’s better to develop a strategic plan, collect data after implementing your plan, and adjust your process as needed.
Before you’re ready to sell to anyone, however, you need to attract the right people to your business through your marketing. We help you do this through our Marketing Methodology Workshop. Register now!