You are close to landing your first customers, and that is when the problem appears. What should you actually charge? Many new business owners get very nervous when they have to tell a customer what something costs. Here is a simple, straightforward guide to setting your prices in a way that keeps everyone happy.
The first mistake almost every entrepreneur makes is setting the price based on how much work the assignment requires. By charging for the value you create, you build a much stronger and more sustainable foundation for your business. That is where we will begin.
Charge for the value you create
I have heard this repeated endlessly, often by people who do not understand what it means. It is not something vague, nor is it about the idea that “creators must be able to make a living from what they create.” They do not have to.
It is about estimating the actual value as accurately as possible so that you can charge for as large a share of that value as possible. What is possible depends on the type of business you are building. If your plan is to attract large numbers of small customers, the amount you can charge is limited by your ambition to remain extremely affordable. You cannot be both affordable and expensive.
This may sound complicated, but you do not need to conduct an in depth analysis for every customer. It is primarily a useful exercise that helps you understand your product.
When you meet your next potential customer, you can bring those figures with you. If you know that you previously generated one million kronor in value from an investment of one hundred thousand kronor, you have a much clearer idea of the available pricing range.
Venn diagram showing long term and sustainable value in sales, the value you create, what it costs you, and your minimum charge.
Find your sweet spot
There are several factors to consider:
- How important is the problem to your customer?
- What will the problem cost if it is not solved?
- What financial value can the solution create?
- How difficult is it to find someone with comparable expertise?
- How much risk are you taking?
- How quickly does the customer need results?
An example
I want to sell SEO services to Bosse’s Call Center, and we both agree that it is a good idea. Bosse currently gets all his customers through cold calling, but he has noticed that the channel is producing weaker results. He wants to reach more potential customers and has realised that SEO could be the solution.
The problem is fairly important. It may even be important enough for Bosse to make an investment that does not immediately pay for itself. He knows that he needs to add at least one more customer acquisition channel.
The cost of the problem is difficult to calculate, but we know that Bosse is receiving fewer leads from cold calling every year. At the very least, the decline in new customers represents a cost to Bosse if he cannot find another channel.
We can estimate the financial value of the solution by looking at how many people search for his services. We can then calculate how many of them might become leads if his website reached third place in the search results for those terms.
Finally, we can apply Bosse’s lead to customer conversion rate. Just like that, we have an estimate of how much revenue those search rankings could generate for him.
It is not particularly difficult to find another SEO consultant today. There is considerable price pressure in the market. The alternatives Bosse finds may not be as skilled as you, but proving that difference can be difficult.
You are taking a relatively limited risk because you do not need to make any major investments to deliver the SEO work.
The final question is how quickly the customer needs results. In this situation, Bosse can afford to wait for the results, which is helpful because we are talking about SEO.
Calculate the minimum you need to charge
Once you have an idea of how much your customer can earn from your work, you need to determine the minimum amount you must charge.
While the previous exercise establishes the maximum you can charge, this one establishes the minimum. The customer must be profitable for you. Regardless of how small their budget is, what other providers charge, or how pleasant the customer is to work with, you must be able to make money. Otherwise, you should simply turn down the assignment.
Include the following costs:
- Salary
- Employer contributions
- Holiday pay
- Pension
- Insurance
- Office space
- Software
- Administration
- Sales
- Marketing
- Time that cannot be billed
- Risk of late or missed payments, which many people forget
- Profit margin
An example
I estimate that it will take one month to deliver results for Bosse. This means I need to cover the following costs. This table is based on Swedish taxes and benefits, make sure to adapt to your country. For example, maybe you don’t want to calculate as much Holiday pay or you don’t have employer contribution. Maybe you need to add VAT or Health Insurance:
| Expense | Cost |
|---|---|
| Salary, meaning what you need to live on | $3,500 |
| Employer contributions, 31.42% of salary | $1,099 |
| Holiday pay, 12% of salary | $420 |
| Pension, 4.5% of salary | $157 |
| Insurance | $30 |
| Office space | $0 |
| Software | $350 |
| Administration | $30 |
| Sales | $300 |
| Marketing | $150 |
| Time that cannot be billed | $ 0 |
| Risk of late or missed payments | $517 |
| Profit margin, which you need to decide, 4% in this example | $262 |
| Total minimum payment | SEK 6,817 |
Once you have completed this calculation, you can see that the minimum you can charge Bosse is SEK 68,171. Even at that price, you are only making a profit of 4%.
Four ways to charge
There are essentially four pricing models commonly used for online marketing today. They all have different advantages and disadvantages, which we will examine below.
- Hourly pricing
- Fixed price per assignment
- Recurring retainer
- Performance based pricing
Hourly pricing
In many industries, hourly pricing is the standard and something customers actively request. If it makes your sales process easier, it may be worth choosing this model.
However, hourly pricing creates several problems, which is why I avoid charging by the hour whenever possible. It makes it impossible to increase your earnings by delivering the work faster.
It also creates the wrong incentives. Many agencies that charge by the hour eventually start delivering work that does not actively contribute to the customer’s goal.
Fixed price
When you are delivering something with a clearly limited scope, such as a website migration or setting up a Google Ads account, a fixed price can be a good option.
It gives the customer a clear sense of control and can be relatively easy to sell. However, several things must be clearly specified in the proposal:
- A clearly defined deliverable
- A fixed scope
- A clear division of responsibilities
- The number of revisions, if any
- A timeline
- What is not included
- How additional work will be charged
Remember that the price should not simply be the estimated number of hours multiplied by your hourly rate. You must also charge for the risk that the assignment takes much longer than expected.
Recurring retainer
This model is very common within SEO, Google Ads and paid social media advertising. Its main advantage is that you know approximately how much money you will earn each month.
Personally, I am usually willing to charge less for the same work when it is delivered through a recurring retainer because of the stability it provides.
Remember that selling a retainer is different from selling what is essentially just a monthly pool of hours. Important things to include in the proposal are:
- What is included each month
- What level of availability is included
- How work beyond the agreed scope will be handled
- The commitment period
- The notice period
- How the price will be adjusted over time
You need to include some form of annual price increase.
Performance based pricing
Charging exclusively for results can attract a large number of customers, and we made a serious attempt to use this model.
We did not succeed with it. If I remember correctly, we gained almost 140 customers, but the majority were not the right customers for us.
SEO in particular requires effort from the customer as well as from the consultant. My assessment is that customers did not see it that way when they did not have to pay if the results failed to materialise.
My recommendation is therefore to use some form of hybrid model if you want performance based pricing. This could combine a fixed base fee with an additional payment linked to the results.
Minimum charge
Regardless of how much you earn per hour or per project, you need to set a minimum charge. Even if you make a 50% margin by selling one hour of your time, completing 160 one hour projects every month is not sustainable.
Taking on small projects can be tempting when you are starting out, but small projects may require just as much administration as large ones. Once you include the cost of sales and marketing, these expenses become an unreasonably large share of the total cost.
Selling something for SEK 1,200 is not necessarily easier than selling something for SEK 12,000, at least not in terms of the time required.
You therefore need to decide on the lowest amount you are willing to charge. Over the years, my minimum recurring fee has varied between SEK 6,500 and SEK 13,000 per month. This was possible because I had junior employees who could deliver those assignments.
Personally, I would not take on an assignment for less than SEK 50,000 per month.
How does this work in practice?
Once you have chosen a pricing model that matches what customers are willing to pay, you can move forward.
You have a floor based on what you need to charge and your minimum fee. You also have a ceiling based on the value you create for the customer. You now know the range within which the price must fall. After that, I actually think the decision should be up to the customer.
We will not explore sales in depth here, but the price should be established during the needs analysis. This is the first thing you do when you have your initial meeting with a potential customer.
Ask questions and find out:
- What results the customer wants
- What matters most in the delivery
- When the work needs to be delivered
- How much the customer is willing to spend
Do not move on from the needs analysis until you have received answers. Do not start presenting possible solutions. Stay with the questions until you understand the customer’s needs and budget.
Here are a few practical examples.
The easiest situation is when the customer answers your budget question directly:
What is your budget for this project?
I have a total budget of SEK 250,000.
This happens occasionally, but it is not particularly common. Do not stop asking just because the customer avoids giving you a figure. I often say:
I need some kind of limit on the scope before I can prepare a proposal.
Some customers still refuse to provide a number. They may believe that setting the price is entirely the seller’s responsibility. In the most difficult cases, I have said something like:
When I worked with Betsson, they spent SEK 650,000 per month on SEO. Does that sound like the kind of solution you have in mind?
Most people are shocked by that figure and quickly suggest an amount they consider more reasonable.
If you have not worked with Betsson or charged that much, you can use another version:
What are you imagining? Should I reorganise the entire agency and work exclusively on your project, or are you thinking of something smaller, perhaps around SEK 40,000 per month?
Prepare the proposal
Once you have obtained these facts from the customer, you can move on and present your proposal.
As long as it is something you are capable of delivering, something you want to deliver, and the price falls within the range you have calculated, your proposal should be simple:
Give the customer what they want, in the way they want it, at the price you have agreed on.