Don't undervalue your services or products
Business lesson 3.
Continuing with the deep dive into each of the “10 business lessons to learn sooner rather than later,” we’re on to…
Lesson number 3 - Don’t undervalue your offerings
TL:DR - summary from the roundup article
Please, please, please don’t do this. Yes, I said triple please. If you’re not pricing your services or products in a way that allows you to make a Iivable income (whatever that is for you), then you don’t have a business. It’s not going to work. I say this with love, but also a kick in the pants.
You need to charge for your services or products based on the outcome you’re delivering AND what it costs you to deliver that service or product so that there’s money left at the end of the day to support yourself in the lifestyle to which you have been (or want to be) accustomed.
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Why pricing your services is so damn hard.
For those of you with physical product-based businesses, setting your pricing is an equation with a markup based on a multiple of the cost of goods sold (COGS). You choose the multiple based on your operating costs (not included in COGS), how much money you want to make, and the number of units you need to sell to reach your revenue and net profit goals.
With a service-based business (consulting, coaching, programs, memberships, digital courses), you don’t have the benefit of having hard costs to mark up. You’re left “floating in the wind” a bit when it comes to charge. And in my experience, female founders tend to undercharge for their offerings. Not everyone, of course. But with almost every client I take on, part of the work is to help them rethink and restructure their offerings and increase their prices.
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What most people do.
Most business owners start by looking at what other business owners in their vertical market are charging. Then they:
Assess where they fit in the range of fees that they’re seeing
Try to determine what can the market bear
And estimate what their potential client or customer afford
In the process, they underestimate and undervalue themselves and their work. They compare themselves to everyone they see on Instagram or LinkedIn and discount their experience and expertise. And I use the word “discount” figuratively and literally. Their lower estimation of what they have to offer, especially when starting out, causes them to lower their consulting fees or the price of the 1:1, group, and membership offerings.
And for those in the consulting and coaching space, this often leads them to base their fees on an hourly rate.
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Why the hourly rate game is a loser for your consulting and coaching business.
The hourly rate. Almost everyone starts here in one way or another.
A straight-up hourly rate for your services, e.g.$75/hour
A per session rate, e.g. $175/session
A monthly retainer directly tied to the number of hours you’re working on behalf of your client. e.g. $1,000/month
The first challenge with this model is the rates I see business owners charge often don’t account for all of the prep and follow-up work involved in delivering the service or sessions. An hour of your time is often really three hours of work.
Then there’s this… in all three scenarios, you’re “trading time for money.” And with that trade, you’re capping your income. There are only so many hours in the day and of those hours, only so many are “billable.”
Many business owners make the mistake of thinking they have 40 hours in the week to work and bill clients, but this simply isn’t the case.
Think about it. If you’re a solopreneur, in addition to working on/delivering your client work, you have to market yourself (whether that’s on social media, an email newsletter, your blog, your podcast), do business development (hosting webinars, networking, speaking, writing, doing discovery calls, preparing proposals), prepare and send agreements, get yourself paid, do your bookkeeping, etc.
Maybe you pick up a few hours to put back in the “billable” bucket if you have a VA/EA, some marketing support, an intern, or a bookkeeper. Regardless, in most cases, billable time amounts to 15-20 hours per week, assuming you want to have a life.
This approach to pricing caps your income and, all too often, at an amount much lower than you intended.
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Group programs, memberships, digital courses, oh my.
While the discussion regarding hourly rates may not apply, comparing, estimating, trying to fit in the market does.
As does the tendency to under-value your offerings based on the outcome, results, or transformation you’re delivering.
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What you should do instead.
First, stop looking at what other people are charging. They’re not you. You’re not them. Then adjust your thinking (and confidence!) and price your services or programs/memberships/courses based on the value you’re delivering.
To adopt this approach, you need to be clear on:
Who your ideal client is
The problem you’re solving
The outcome you’re delivering
The structure of your offering
The time to deliver the outcome
Yes, all of this goes into setting your pricing (more on knowing your client/customer next week). This knowledge will give you the confidence to decide on your fees based on the value you know in your bones you’re delivering AND what you need to make your business work.
Yes, this last piece is key. What do you need to charge to have a thriving, sustainable business?
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A counter-intuitive approach to pricing — from the top-down.
It may take a second to get your head wrapped around this, so bear with me.
I want you to start your pricing exercise with the endgame in mind. How much money do you want to take home at the end of the year (12 months)? I mean after taxes, money in your bank account.
Now with that number in mind, let’s say it’s $150,000, let’s do some math (by way of example only):
Add $25,000 for taxes
So we’re at $175,000 in revenue
Add $30,000 for operating expenses (rent, utilities, health insurance, marketing, phone+internet, online services, subscriptions, training, coaching, etc.)
Now we’re at $205,000 in revenue
With that revenue number in mind, get a Google sheet going with:
Your offering (or offerings)
Your planned fee for each, let’s say it’s $5,000
Take your revenue target ($205,000) and divide it by your planned fee ($5,000)
To get your number of clients/customers/sales = 41
How does that number feel? Doable? Out-there bonkers? Now you have a sense of what you need to adjust. And maybe you’re thinking, “Katherine, you’re nuts. My fee per client is at least $10,000.” Great! Pop that in the equation above and you end up with 20+ clients.
Go with the price that makes your business work and gives you the life you want to be living. And create the value for every client/customer where they’re thrilled to pay you that amount because they know you have the solution to their problem and the outcome they want in their life.
It’s your business. Charge what you know you’re worth.
#ICYMI
Business lesson 1 - Know your numbers from the start
Business lesson 2 - Choose your clients and customers wisely