setting your strategy AS A SOLOPRENEUR
Don’t you wish you had a crystal ball or some other magical thing to help you when it comes to setting your prices. I mean, honestly, is there anything tougher? Setting our pricing strategy is far too critical to the success of our businesses to use one of those magic eight balls.
But perhaps it can be a bit easier than we think… especially when we remember that small changes in our strategy can produce big results.
written by: Andrea hubbert
reading time: 15 minutes
best practices + pitfalls to avoid
For instance, we may find that we’ve been undercharging for our products and services and that our peeps are willing to pay a higher rate because of the extreme value they’re getting from us. Score!
Alternatively, we could find that we’re losing sales because we’re not priced for the market where we’re selling. Ouch. We’re going to want to adjust this strategy as soon as possible.
Either way, properly aligning our prices with our audience will have the biggest impact to our bottom line. It's the most important thing we can do.
At the time of this writing, we are in the midst of a global pandemic that has shaken all business of all sizes across all industries. And, as we think about what the potential recovery will look like, especially for us solopreneurs, we have to keep certain pricing fundamentals at the forefront because what we do today will absolutely impact our profitability over the long-term.
Effectively setting our prices helps us:
HERE ARE ten BEST PRACTICES WHEN
Pricing Your Products + Services
Create a detailed profile of your kindreds with as much detail as possible.
Have a clear understanding of what your customers are willing to pay.
Decide from the beginning whether you prefer high sales volume or high profit margin.
Use your personality-drenched marketing messages to explain the unique value you offer.
Keep an eye on the competition
Watch your competitors and use their pricing to help you set yours.
Test different prices and pricing strategies to see what’s most effective for your audience.
don't forget costs
When setting prices, figure in all of your costs to make sure that you're making enough profit.
If customers feel your prices are too high, it's much better to add value and keep prices high than to decrease them.
Avoid dropping prices
Only reduce prices permanently when you really need to... and always explain to kindreds why you're doing it.
Keep listening to your peeps and stay flexible because pricing is an ongoing concern.
"ANYONE CAN SELL PRODUCT BY DROPPING THEIR PRICES, BUT IT DOES NOT BREED LOYALTY."
– Simon Sinek
HERE ARE TEN
Pitfalls to Avoid
Not being realistic
Pricing your products based on what you think they're worth rather than what your audience does.
No due diligence
Failure to research your target market well.
Raising or lowering your prices without giving any reason to your peeps.
NOT KEEPING AN EYE ON THE COMPETITION
Ignoring competitors and failing to understand the competitive landscape.
Setting prices too low, thereby, giving your customers the feeling that your product is low quality.
LACK OF GROWTH ANTICIPATION
Basing prices completely on cost, which depends on sales volume and will scale as your business grows.
Thinking that all customers and markets are the same when it comes to prices.
Too much automation
Setting it and forgetting it, rather than staying in tune with market changes and changes among your audience.
Picking the wrong battles
Trying to compete with major retailers who buy in bulk and can afford to offer lower prices.
Not putting your best foot forward
Failing to convey your product's unique value to your audience.
Monitoring Your Pricing – It's difficult for any of us to get our prices right the first time... no matter how well we know our customers, understand market conditions and calculate our own costs. As you roll out your pricing strategy, monitor your profits regularly and evaluate whether the prices you chose are appropriate or not.
Financial Statements – Keep a keen eye on sales and examine your financial statements carefully. Make sure that you're reaching the sales target you expected when you set your prices. In addition to looking at your overall sales results also consider each product individually so that you can see whether its sales are lagging... potentially due to inappropriate pricing.
Costs and Your Bottom Line – Consider each fixed and variable cost to determine how it affects your bottom line. See if there are ways to manage costs so that you can offer the right price that will earn enough profit. One of the largest costs to consider is labor, yours and others, which you'll want to watch to see if it's increasing or decreasing. Ideally, it should remain stable over time.
Customer Feedback – Get regular feedback from your customers about your prices. Take every opportunity you have to interact with your customers and get their feedback on every aspect of your business, especially pricing. Make it an ongoing part of your business operations.
Watch Competitors – Even after you've set your prices, keep an eye on the competition and look for changes in their pricing and marketing. Monitor what your competition is selling and at what price; try to glean what kind of sales they're having. Also try to gain feedback from your competitors' customers. One way to do this indirectly is to read online reviews and comments written by customers about your competitors'.
Continued Testing – Whenever you have an idea for a new product or service, test it. You can test new offers and prices on new customers, as well as using A/B split testing. This is where you offer the same product at two price points to two different markets to see which performs better.
Remember that pricing your products is one of the biggest decisions you’ll make – with a great deal of impact on your business. It's also something that's ongoing. Once you set prices, continue monitoring and experimenting with adjustments.
Looking for advanced guidance on estimating your break-even and return on investment (ROI) numbers? Or, perhaps, formulas for calculating future revenue? You've got it!
BREAK-EVEN AND POTENTIAL RETURN
I was told there would be no math. Remember that Chevy Chase bit from Saturday Night Live during a mock presidential debate back in the day? (You don’t remember it? Watch it here.)
Well, friend, as a business owner there absolutely is math involved... . Once you have looked at the details involved in implementing your pricing strategy, it's time to calculate your break-even point and potential return on investments (ROI).
The break-even point tells you how much income you need to cover your expenses, while the ROI can give you an estimate of the actual profit you can expect to make.
STEP no. 1
estimate your costs
Start by estimating all costs involved in your business — fixed and variable. Remember, some of your costs may be spread across more than one project (ie: office supplies, software, online sites), which means you can either divide the total cost by the number of projects you have or leave it as one lump sum.
- Fixed costs = expenses that you have on a regular basis: weekly, monthly, or annually.
- Variable costs = expenses that are one-off or only occur periodically.
step no. 2
estimate your revenue
There are two ways you can estimate your revenue. The first is any income you have received in the past and expect to continue receiving – project retainers, installment payments and automatic renewals are a few examples.
The second way is to estimate the amount you’ll earn from new business. This is the most difficult to estimate, especially if you don’t have historical data. Workarounds include gathering information from others in your niche as a starting point or by looking at the estimated size of your market and the average conversion rates for your business model.
step no. 3
estimate your time investment
How many hours a day or week do you think you’ll spend on your business? For past projects, you can look at the time you put in (billed and unbilled) against the profit you made. This will show you exactly what your return was for your time. For future projects, estimate the time you think you’ll spend based on historical data.
Calculate your time as an actual expense if you want to put a specific number value to it.
For example, let’s say you typically earn $50 per hour per project. Multiply that amount by the number of hours you expect to put into your new project and add that to your total expenses. That would look like this: $50 per hour x 100 hours of project work = $5,000 in expense for your time.
step no. 4
calculate your break-even and return on investment
The final step in figuring out whether your business will be profitable is to compare your estimated revenue against estimated expenses (aka subtracting expenses from income).
Look at your expenses each month compared against anticipated income. How many weeks or months will it take for your revenue to cover your expenses? That’s your break-even point.
To calculate your annual return: Divide your total profit for the year by total expenses. For example, if you earned $20,000 in sales and spent $5,000 to make it, then your profit was $15,000. Your ROI was $15,000 divided by $5,000 which equals $3 earned for every $1 spent.
Even a rough estimate of how profitable your strategy will be can help you avoid a major investment mistake.
Many solopreneurs get so excited about their great idea that they rush in without carefully considering the monetary risks. However, by estimating your break-even point and estimated ROI, you can determine which of your business goals and plans are worth the effort and expense before you’ve invest too much time on them.
Want to learn how? Keep scrolling...
estimating future revenuE
Estimating future revenue is one of the most difficult things to do after setting your price. Especially as a solopreneur that’s just getting started. We get it. We’ve been there… and taken all the lumps so that you don’t have to.
So, grab a cocktail and let us help you through this.
If you’ve already earned money on projects, you’re ahead of the curve because you’ll be able to look at that cash influx (yep, even if it was $10) to predict the future. Yahoo… sip!
If that’s not you, it’s ok. You’ll simply need a different approach. Here’s what to look at:
REVENUE – Money from sales before you pay your expenses..
AVERAGE SALE – Calculate your average sale by taking your total revenue divided by the number of sales. So, if you have received a total of $1,000 for 50 sales, your average sale is $20. It doesn’t matter if one sale was for $100 and another for $10. You just need the average of all of them.
AVERAGE REVENUE – Your average revenue is the average amount you’re paid for each sale (your expenses to get the sale) times the number of sales. For predicting future revenue, you can take the average amount per sale as your standard. Then estimate how many sales you think you can make each week and month. Multiply your estimated number of sales by your average revenue per sale to get the average revenue each month.
For example, say your average sale is $40 and you think you can make 20 sales your first month, 60 the second month, and 100 the third month. That means your average revenue for each of your first three months is $800, $2,400, and $4,000 respectively.
TARGET MARKET SIZE – This is the number of peeps who are picking up what you’re putting down… your potential buyers. The size of your target market is the number of people who would be interested in buying what you’re selling. If you’re selling dog training services, your target market size will be the number of people who’ve recently bought, adopted or rescued a puppy and not all existing dog owners.
CONVERSION RATE – This is calculated by looking at the number of people who purchased your offer vs. the number who simply saw it. For example, perhaps you have a sales page that invites your kindreds to purchase your art. Let’s say 100 people visit your page in a day; however, 10 actually click the buy button and give you their money. You now have a conversion rate of 10% for that day.
In order to do your actual revenue estimate, you need to multiply your average estimated revenue per sale times the number of sales you think you can make each month. Depending on your marketing plans, that number would hopefully go up. Plot out your estimated revenue each month for each project and you’ll have your estimate for the year.
Take a look at your estimates on a regular basis, quarterly is just fine, and update them. Don’t worry too much about being exactly spot on with actual numbers. No one needs to see these numbers but you.
Phew… let’s not talk numbers again for a while. Would that be ok with you?