The Relationship Between Value & Price
Figuring out the financial aspects of running your own business is a multi-faceted poop show. Trying to think through what money you need to spend before you’ve earned it, or even just figuring out how to earn all this money you’ll need to make this side hustle worth it is all just one scary, frustrating challenge…. at first. The good news is that as time goes on it doesn’t have to remain that way. You’ll figure out your expenses, and about how much you make in a month to gauge how you can be spending your money, and you’ll come up with all new kinds of products and offerings to start earning you even more income. The question is: how do you figure out how much to charge?
I want to start by clarifying that the price you charge is not always going to be equivalent to the product or offering value. Just think of the housing market: how often does a home sell exactly for how much it appraises for? There are a bunch of other factors coming into play allowing the house to sell either above or below its actual cost. Today, I’d like to share my method for accommodating all the little factors that come into play for my business to help you see how you can be pricing your things purposefully and accurately.
This is totally based on my unique take on things, but it’s a method of understanding something that I knew nothing about, and ultimately finding my own perfect little happy medium for my business. So I encourage you to try to work through these suggestions on your own and see what sort of rates they turn out for your side hustle!
how do you define value vs. price?
Let me take a minute to explain how I’m seeing these two terms differently. To me, price is very technical. It’s what you need to sell your product at in order to bring in enough income to cover your expenses and the cost of materials, and still of course make a profit. The factor that I believe truly drives just how big of a profit you earn is value. This isn’t such a technical term as it’s really all about how your customers see your product. It’s made up of additional factors like quality, style, functionality, etc.
The way I arrive at my prices for all my products, services, and offerings is by establishing a simple formula of actual cost + expenses to equal my price, and then applying the perceived value to reach a final price, or the amount at which I list the product/service to sell.
cost + expenses = initial price
initial price + perceived value = final price
the freedom in being a business owner
The beauty of running your own business is that you can run it (almost always) in pretty much any way you want. As long as you’re maintaining standards and abiding by the rules and regulations of your industry and laws of the land, you can come up with your own business practices and strategies to suit your needs!
I found that a lot of the pricing structures I was learning about in both college and in my online research as I started my own business didn’t really apply to my work. I was in a relatively “new” industry, offering virtual assisting and online marketing services, and there wasn’t really a good formula I could relate to since my offerings weren’t tangible products and because my ability to market myself and my services relied entirely on the quality of my portfolio.
I came up with this new strategy simply because I could, and it’s worked SO well for me as I’ve gone on to start new ventures, and expand my product offerings into workshops and digital download products.
how exactly does it work?
Let me walk you through the process that you can use to figure out pricing structures for your own product offerings. First, figure out how much it costs you to create one version of a product you sell. If you can batch produce this product, choose a typical batch size at which you’d be producing, and for the sake of this exercise, pretend you only produce one batch a month.
Let’s say you can produce 100 thingamajigs for $2 each. That’s your cost part of the above formula. Now think through all your expenses for the month, including marketing, overhead, subscriptions, etc. Divide those expenses by 100 (the total number of products you’re producing in a batch) and you’ll arrive at your expenses portion of the formula. Let’s pretend that your expenses are about $3 per product. Your initial price for each product would be $5, meaning you only need to sell it for more than $5 to make a profit.
However, without taking a closer look at the perceived value of your products, you could be making a lot of mistakes in pricing AND advertising, and missing out on so much more potential revenue!
I’m a work at home mom, and any time I spend away from my kids or working is time that I value for my business, and I need to make the most of it to stay efficient and make it worth the sacrifice of saying “no” to family time. The same theory applies when I’m pricing my products and services. I need these offerings to sell at a rate that compensates me well for my time spent producing them, and a $1 profit (or any small incremental profit) isn’t going to cut it for me! I need to figure out a way that I can make a big profit, over and over again. That means that what I deliver needs to match the final price so well that people continue to see value in what I offer.
the final piece of the puzzle
The key to making a solid profit on your offerings is by figuring out exactly how your customers will value your product, and to understand and make sure you’re marketing to the right audience. For example, if you use our pretend product above and list your products at $6, then you’ll make a $1 profit on each sale. Maybe this product though is highly sought-after, and kind of a unique take on a current trend, so you’re consistently selling out and having to turn away dissatisfied customers when you’re unable to meet demand.
Instead, I’d suggest you do some market research and determine an amount equal to the perceived value of your product, and add that to the initial price. Maybe your product is SO interesting that you add $22 to the initial price, leaving you with a final selling price of $27, and allowing you to sell out of exactly your 100 products every month, with happy customers who were willing to pay that price and value the heck out of your product. Or maybe you only increase it by $14, so your final selling price is $19 and you can still stay within that “impulse purchase” threshold for most people. Those are pretty significant profit margins per product, and a sure way to make back the cost of your time in earned revenue.
As you can see, this is where your freedom as a business owner comes into play, where you can determine your own strategy for pricing your goods and services based on countless different factors: the market, your industry, the ease of distribution for your product, the likelihood of repeat customers, the quality of your materials, the necessity of this product for your customers, your investment in your own education to allow you to be able to produce a product or offering like this, etc. etc. etc. You know better than I can what’s going to make your products sit pretty on shelves or get snatched up and used right away at the perfect price.
Alternatively, if you’re committed to selling within a certain threshold and you’re just not finding success pricing your specific product that way, then you need to find ways to encourage more sales through upping that perceived value. You can cater to trends in the materials you use, like maybe testing out some new patterns of fabric or different colors of paint. Or you can try to market to a new audience, maybe a crowd who doesn’t understand that the actual cost of your products is much lower than the price they pay.
Here’s the formula again:
cost + expenses = initial price
initial price + perceived value = final price
I’ve found a lot of happiness with my current pricing structure after taking almost a year to grow it to exactly where it’s at. I’ve tried this pricing strategy in retail, digital offerings, events, and boutique services and goods, and found great success in being able to manipulate the formula to suit my offering and my audience. I hope you’re able to apply this to your service or products and experiment to find the perfect final price for each of your offerings to make you lots of moolah!
PIN THIS POST!
free business & marketing tools
Take your hustle to the next level! Subscribe to our
email list today to download your free copy of
5 WAYS TO RUN A MINIMALISTIC BUSINESS