Especially self-employed people who are still in the early stages of their start-up are often uncertain how much they can charge for a certain service. As a rule, self-employed people in creative professions, in particular, sell themselves below value. Information on how to set prices correctly is particularly important for them. For this reason, it is worthwhile for the self-employed to make fundamental considerations regarding pricing.
Components for professional pricing
How to set prices correctly requires consideration of the components that make up a price. Because the price does not exclusively reflect the raw value of your goods or services. Rather, your pricing also takes into account all the costs you incur in running your business. This includes not only your expenses for materials, labour and distribution costs. Your costs for renting business premises, for your car and for the ongoing advertising activities are also included in your pricing. In addition, there are expenses related to your self-employment, such as income tax, the taxation of your business, trade tax, but also your social security contributions, private pension plan, health insurance and reserves for lost time in case of vacation or illness. As a basis for your pricing, all business expenses and working hours as well as taxes and duties should be summarized in a list and compared with your sales potential.
Pricing with price comparison
Furthermore, you can only set your prices correctly in the long term if you constantly compare your offer with the prices of your competitors. Only the intersection of the two items’ business expenses and price comparison results in reasonable pricing for your offer.
Setting prices correctly – and enforcing them
The pricing of service providers requires further consideration. Because in addition to operating expenses and price comparison, the hourly rate also plays a decisive role. To determine project-related offer prices, you multiply the expected expenditure by your hourly rate to arrive at a fixed price. When setting prices, service providers should not forget to include two or three correction loops. In addition, you should present your general terms and conditions to customers. The terms and conditions should contain clearly formulated specifications regarding the acceptance deadlines for a completed project and the type and scope of correction loops. The terms and conditions accepted by the customer ensure that a project will not be left in the correction loop after completion and that you will not be able to enforce your pricing.
Getting competitive pricing right – five basic observations
What customers are willing to spend has less to do with the “real” value of a good or service than with the good feeling that comes with the purchase. What influences are decisive for your pricing to be accepted as a “good price”?
Observation 1 – Low prices do not automatically lead to high sales
The common opinion on the question what a “good price” actually is may sound quite simple: high prices result in low sales and low prices in high demand. But that is not quite true: high prices can lead to the target group associating high quality with the product. Once customers associate a good image with a product or a service provider, they tend to choose the higher-priced brand rather than the competing offer. This also applies when the direct comparison does not justify the higher price. How strong the connection between quality perception and prices actually is has been proven in exciting studies: Test persons were offered placebos at different prices. The more expensive placebos had a stronger effect on well-being than the cheaper placebos. It can be deduced from this that a higher price can lead to the product being rated higher than it actually is.
Observation 2 – Prices are valued in relation to other prices
It is easy to prove in experiments that the absolute price is less decisive for a purchase decision than one would assume. This is because customers rarely decide on the most expensive offer, regardless of the price. Rather, they tend to choose offers in the middle price segment. Example: If one offers any product, for example a piece of clothing, in copies for 10, 20 and 30 Euros, most test persons decide to buy the offer for 20 Euros. However, they are just as willing to spend 30 euros for the same product if there is a comparative offer for 40 or 50 euros. In many industries, the product that is to be brought to the people’s attention has long been positioned in the middle price segment – cheaper and more expensive purchase alternatives usually serve primarily as decoys.
Observation 3 – Special offers create a feeling of well-being
Regardless of how much money is spent, one of the most satisfying feelings when shopping is the knowledge of having saved. If a product is reduced by half, the purchase has the effect of a good purchase. For example, customers are often willing to spend 100 euros on a pair of shoes because it would have cost 200 euros before they bought it. Spending the 100 euros is also perceived as a profit even if they previously had the firm intention of investing no more than 70 euros.
Observation 4 – Flat rates make sense – as long as the need has natural limits
“All-you-can-eat” buffets are basically classic flat-rate concepts. And they work because people can only eat a certain amount of food. The feeling of “being able to draw from the full” makes buyer groups willing to spend more than they would pay without a flat rate. It is not uncommon for individual dishes on menus to be cheaper than the buffet offer and they would be sufficient to satisfy. “Flat rates” can help sellers achieve higher profits than they would with conventional pricing. But beware: the model only works where there are natural limits to the consumption of the offer.
Observation 5 – Interesting: Germans are particularly sensitive to pricing
The price study of a strategy consultancy has brought an interesting fact to light: Germans react much more sensitively to price increases than other consumers. While in many other countries consumption is simply lower when prices rise, Germans are quick to consider changing providers.
Instruments for competitive pricing
Pricing is an issue that the self-employed and companies must deal with on an ongoing basis. Apart from the fact that prices have to be constantly adjusted over the years, there are good reasons to calculate different prices for different target groups. In order to be able to set their prices correctly, the self-employed and companies have various instruments at their disposal.
Regular customer discount
Granting long-term customers a bonus for their loyalty will bind them even more closely to the company.
It is true that serious customer loyalty is not primarily about prices, but about quality and personal relationships. On the other hand, however, long-term customer loyalty means that you save time and effort on advertising or acquisition. You can give your savings back to your customers through an accommodating pricing policy and thus ensure continuous sales.
You can include the guaranteed purchase of minimum quantities of your goods or services in your pricing. The quantity discount for “major customers” is a proven means of setting the right prices. Because the bulk buyer ensures considerable savings in processing, administration, logistics and advertising costs.
Granting discounts for prompt payment of your invoices stabilizes your liquidity and helps you to keep your outstanding accounts manageable. As a price reduction, the cash discount is an attractive aid in pricing.
Surcharges due to more difficult conditions
If the circumstances of the order are particularly difficult, then you should take your additional expenditure into account in your pricing. Special circumstances can be: night work, weekend work, or even work outdoors or under special physical stress. But you can also set your prices correctly for work under time pressure by calculating an express surcharge or express surcharge.
Assistance with pricing
With the Billomat accounting program, you can store your individually designed prices. You also have the option of assigning different price groups to different customers. You can find out more about this topic under the menu item Help.
Offers and invoices to private individuals – always with gross prices!
Communicate price increases: How do I tell my customers?
Pro and contra: Price lists on the website