Alright, let’s go there… let’s talk money! Discussing finances can be an uncomfortable topic, which is probably why so many small business owners struggle to appropriately price their products and services. Breaking down where each dollar goes is an important first step in your small business pricing strategy. I’m going to open my books and share some of my personal insights, coming from someone who has made income in a variety of ways.
I have been a small business owner for over a decade, with both online and in person sales. I’ve sold embroidered baby items locally, digital products on Etsy, educational resources on TeachersPayTeachers, affiliate beauty items on social media / vendor events, and websites / logos online.
No matter what I’m selling, for my small business pricing strategy I consider three major factors: expenses, value, and time. Let’s dive into each of those.
1. Consider Your Expenses
Before we ever talk profit, you need to consider your expenses. This will help you work backward to determine the amount of money running your business costs. I’ve seen new business owners actually lose money because they don’t factor in their expenses! Your unique business expenses will vary, but here are some categories to consider in your small business pricing strategy.
I don’t know anyone who loves paying taxes, but they’re coming out of your pocket whether you like it or not.
As a small business, you’ll pay a variety of taxes: self-employment taxes (social security, Medicare), federal income tax, state income tax, local income taxes, and unemployment to name a few.
A general rule of thumb is to factor roughly 30% of your income into taxes. This means if you “make” $1,000 you get to keep roughly $700 to move on to the next step.
It can really add up, but finding a local tax professional and possibly an attorney (to set up an LLC, S-corp, etc.) can help you maximize your savings when it comes to taxes.
Okay, so you aren’t feeling too bad. You’ve begrudgingly written your tax check and are ready to head straight into profit! Nope, not so fast. Fees can be a sneaky business expense that also adds up, just likes taxes.
Payment process fees (credit cards, PayPal, Stripe, Square, etc.) come off the top of your income too. I pay about 3.5% to PayPal for all purchases on this website. If we’re working off that same $1,000 from earlier, it means $35 goes straight to PayPal.
If you’re in a brick and mortar, you’ll need to consider your location fees like rent and insurance here too.
So now that $1,000 I’ve “made” so far is actually $665 that I get to take home. Except I have a huge category of material costs to consider too. Oof.
Material Cost (PHYSICAL and Digital)
This is a quick list to get you thinking about the types of expenses you may have. Some of these will be one-time costs, annual costs, or costs per sale.
- physical product costs (fabric, ink, blanks, etc.)
- license fees (fonts, graphics, stock photos, etc.)
- subscriptions / software (Canva, photo subscriptions, Adobe tools, etc.)
- tools / equipment (laptop, printer, camera, sewing machine, etc.)
- shipping (materials and actual postage costs)
- communication fees (internet, phone, email, etc.)
It’s important to carefully track your material costs over time so you accurately set your prices. Remember, the goal is to make money not lose money in expenses!
When I was selling and shipping handmade items, material cost was a much larger portion of my business expenses. Now I typically spend around $150/month on material cost. That means the $1,000 is now down to $515 take-home pay.
This is optional, but you can spend a pretty penny on your initial website, email lists, ads, text messages, print ads, banners, business cards, etc. This is the very definition of “it takes money to make money” sometimes. Spending around 7-8% of your income on marketing is a general rule of thumb.
I run lean here! My biggest marketing expense is my website ($30/month). As a new business owner, I relied heavily on free marketing efforts and word of mouth… and I still do! Referrals are my #1 source of new business.
My $1,000/month is now $485.
Training is another factor to consider in your small business pricing strategy, especially if you’re in an industry that’s constantly changing. Conferences, courses, books, licenses, etc. all go here. I typically take 2-3 major courses/conferences a year to stay fresh.
Prices on these can vary, but my most recent courses have been around $100 each. That’s $25/month. My $1,000 income is now $460 in my pocket.
Tip: You can often find free training, especially as a small preview of a larger course. These help you determine if the more expensive course is a good fit for you.
Finally, don’t forget your personal expenses as a business owner. When I made the leap from a small “hobby” business that I worked alongside my full-time teacher job, it also came with more expenses. When you don’t have an employer, you need to consider:
- retirement / savings / investments: As an example, I walked away from a pension and 403b retirement contributions from my school. As as small business owner, you’ll likely set up a 401k and / or Roth IRA. This is another area where hiring a professional can really help.
- health insurance: You may be able to join a spouse’s plan, but if not expect to pay quite a bit more for private insurance.
- sick / vacation days: As a small business owner in many lines of work, you’re only making money when you’re actively working. If your physical shop is closed for a week at the beach, your income that week is probably $0 and yet you’ll still have expenses coming out for that same period. In my case if I take time off I have some passive income from digital sales and retainer packages, but I also lose a chunk of my income by not taking on clients that week.
- childcare: While my husband and I equally benefit from childcare, the reality is that going full-time in my small business meant putting my daughter in childcare. This is $1,000/month, so I need to make sure I’m factoring that cost into my prices to make the tradeoff worth it.
For those of you keeping track, my $1,000/month is now officially overdrawn and I’ve lost money. This is why it’s so, so important to track your expenses in order to profit month over month with your small business pricing strategy.
2. Set Your Prices
As you can see, that $1,000 we started with doesn’t go very far! Now that you know how much your business costs to run, it’s time to set your pricing. I consider two main factors for my small business pricing strategy, value and time.
In value-based pricing, I’m looking at how my client or customer benefits from my product or service.
As an example, when I sold handmade baby blankets embroidered with the sweet new baby’s name, they were worth more than a similar blanket you’d find at Target because of their quality and sentimental value.
The same concept applies to my current services as a WordPress and digital marketing expert. A client might purchase one website and spend only a short time working with me, but that client will receive tremendous value from the website for years to come. In turn, the client will likely generate income from that website too. When you look at it that way, the longterm value of my work really starts to add up.
I’m also looking at the value of my extensive background knowledge and range. I can be one point person who helps with branding, logo, website design, copy, email marketing, etc. This ultimately saves my client money and time from hiring and consulting with numerous other professionals.
I typically do not work for a set hourly rate and suggest that you don’t either. This is for a few reasons, but a major one is that I work quickly. I’ve spent years becoming more time efficient with systems and knowledge. I’m sure we’re all familiar with the $10,000 Picasso napkin art tale, but it’s true!
I’ve had clients confess to spending hours trying to fix something “simple” on their website before contacting me. More often than not, I can fix that “simple” issue quicker than they could because it’s something I learned to do previously and can repeat as-needed. Again this plays into value pricing too… my knowledge is valuable, no matter how much time it takes, because it’s something they couldn’t do on their own. The same concept applies to those handmade baby blankets. The value is far more important than the hour.
Having said that, I do track my time as a small business owner in order to attach a rough hourly rate to my profits. This helps me set pricing and determine if I’m making “enough” hourly for my standards. Having passive income products or services also helps with this area.
Give yourself permission to change your prices. I evaluate my pricing annually at a minimum and have both raised and lowered my prices over the years.
My first Blogger website was $25. Yes, $25! I now charge $500 or $800 as my entry-level price points. The quality and scope of work is larger now than it was 10 years ago, but looking back $25 was far, far too low! I had no idea as a new business owner how to value and price my work, and I had feelings about charging my true worth.
I’m a big fan of “own lane, own race” but being aware of how others price similar work can help you price yours. I’m not the most expensive provider in my niche, but I’m not the least expensive either.
If you’re a brand new business owner, looking at pricing in your niche as a place to start. With less experience, you’ll likely charge less. Likewise, if someone is charging quite a bit more than you are for similar products or services (and being successful!), it’s a sign you can probably raise your own prices.
Resist the urge to cut your prices far below others in your niche just to get more clients! Instead consider your messaging, advertising, etc. to see how your own products or services can be repositioned to accurately reflect their value.
quantity of work (supply / demand)
Supply and demand also plays a roll in pricing. If your products or services are in demand and selling easily, consider a small price increase. Then track your sales to see if the price change slowed down your sales more than new profit margin.
If your products or services aren’t selling (and you’ve already looked at your messaging to make sure they’re well represented!), then you may want to consider a price drop or sale.
“Worth It” Factor
There isn’t a calculator for this one, but the “worth it” factor is something always in my mind. In addition to my bottom line, am I happy doing the work? Do I get added benefits from the freedom and flexibility of my own small business compared to working for someone else? Maybe I make less on XYZ, but enjoy it more so there’s an extra value to it beyond the profit margin alone.
Is a specific client too stressful? Is there one handmade item that always causes a headache? Does a specific service make me groan each time someone purchases it? Those are signs that I either need to raise my prices to make it worth it, or consider a change in my offerings.
At the end of the day, only YOU can decide your small business pricing strategy. Considering all of the factors above can help, but there isn’t a set rulebook. That’s the beauty (and sometimes challenge) of being a small business owner. YOU know your business best.
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