If I charge $x...

“How should I price my product?” It’s a question I hear quite often, and no wonder: pricing is one of those things that is super important, has no obvious answer, and also brings up a lot of our fears and insecurities. (“My workshop costing £10,000? I can’t possibly charge that much! What would people think?!”)

So how should you go about it? The first step is acceptance. There is no such thing as a single perfect price point for your products. Very helpful, I know.

Instead of chasing a specific number straight out of the gate, let’s think of the right price as a sensible range first. Anything outside of that range is a dire place to be: too low, and you’re losing money; too high, and no one buys.

At the low end of your price range, you should still be able to cover the costs of goods sold (COGS), aka the stuff and time that goes into making each unit of product or delivering each unit of service, and have a healthy margin. If you’re selling a SaaS subscription, and you spend $5 per unit per month on making it happen, and you know that a healthy gross margin for a SaaS product is 80%, your monthly price should be at least $25 (calculated as 5/(1-0.8) where 5 is your COGS and 0.8 is your gross margin). If you’re selling dresses, and making each of them costs you $30, and a healthy gross margin in fashion is 60%, the price should be at least $75.

Notice that I’m not recommending that you sell at a price that results in anything less than a healthy gross margin – yes, you could sell for less, but it always makes your unit economics worse, not better; it’s a more difficult place to be as a business, and therefore should be avoided if humanly possible. Don’t go there unless you absolutely have to.

So that’s for the lower end.

What about the high end?

The higher end can simply be thought of as ‘the most people are willing to pay’, which depends on how valuable they perceive your product to be. And – here’s the catch – you won’t know until you try. Forget about an expert telling you what the right price point is, forget about asking the customers how much they would, in theory, be willing to pay (as people say one thing in surveys and then do a completely different thing in real life, especially when it comes to parting with their money). The only thing that’s fully reliable as an indicator of a customers’ willingness to buy is them actually saying yes to the price. This is why many big companies A/B test their prices – and why you should too. This A/B testing doesn’t need to be perfect and can be as simple as giving a higher quote to the next customer you talk to and seeing where that leads.

You know that you’re starting to hit a pricing ceiling when you start getting nos – and that’s a good thing, because now you know your maximum price! Once you’re getting too many nos (too many nos = the point where you’re not getting as much business as you’d like), you have two options – either decrease the price, or increase the perceived value, for example by communicating the value in a clearer, more compelling way; adding features that your customers value highly; or maybe rebranding, making the whole thing feel more premium. Increasing the perceived value almost always makes more sense than decreasing your prices.

And that’s your range. On the low end, you make a sensible margin after taking into account all your COGS; on the high end, you’re charging as much as possible given the perceived value of your product. If you’re somewhere in this range, you’re in a good place, and you can tweak and evolve as you go.

Maybe customers think you’re awesome and your workshop is worth £30,000.

Love and cash flow,

Jana