When you've just started your own business or even when you’ve been busy for a while; you might not have thought about your pricing. Even less about how your pricing affects your brand and how the two of them are linked.
A lot of startups just pick a price for their products or services that seems to work and be done with it. Sooner or later, they run into a problem they earn too little because they don't ask enough or ask too much. Sometimes the price is right, but their clients still aren’t buying it. What is going on?
We can divide the basics into 2 groups, the numbers, and the market. First, we must look at our numbers. How many costs do you have to stay in business such as utilities, loans, office tools, production recourses, insurance, wages, fuel, marketing budget, taxes, etc?
Your sales have to cover those costs, preferably be even higher to be able to grow and expand your business. If you have 10.000 Euro costs per month, you need to make sure to at least earn 10.000 Euro per month as well to get breakeven; if not sooner or later you’ll be bankrupt.
A lemonade stand example:
If we would sell fresh lemonade we need to find out how much it costs us to make 1 cup of lemonade.
10 Fresh lemons: 7,- Euro
500g sugar: 0,5 Euro
3l Water: 3,- Euro
That’s a total of 10,5 Euro for roughly 3L of lemonade, which is approximately 12 cups. That’s +- 0,87 Euro per cup. If we want to make a profit we could sell a cup for 1,- Euro and earn 0,13 Euro cents per cup, when all 12 are sold we earned1,57 Euro. We can do better right?
The most basic rule in business says to multiply your production costs by 3 to get your sales price. So, 0,87 x 3 = 2,61 euro. If we would sell 12 cups, we would have 20,88 Euro profit. But who would buy a cup of lemonade for 2,61 Euro? It has to be really good lemonade….
This is where the market comes into play. When we would sell that lemonade at an exclusive event for Hollywood stars, they wouldn’t mind paying 2,61 Euro for a cup… even 3 or 4 Euro and they’ll still pay. That same lemonade sold at a local fair though, and you won’t sell much for 2,61 Euro… probably have to lower your price to 2,- or even 1,5 Euro.
Your target market determines if your price is high, low, or just right; not you.
We now know that the market decides if something is cheap or expensive. It also means the market decides if your brand is cheap or expensive. Thus, we must align our brand with the market we’re selling to, aka our target audience. Even if we would make our brand visuals look high-end and expensive but our price isn’t, our target audience will think we’re a cheap knockoff. The same is true if we have a high price for a white-label brand.
Your price ultimately influences how people will see you, and your brand/business. That’s why figuring out what your target audience is willing to pay is an important step in your Brand Strategy. Brand strategy helps you to make sure your brand messaging, visuals and pricing match your target audience or vice versa.
We expect brands such as Louis Vuitton, Porsche, or Lamborghini to be expensive but when walking into a Walmart, cheaper is better. The difference is that different people buy different things. Not everyone can afford what you offer, and that’s fine. The same is true that some people will think “it’s too cheap for my standards or taste” and that’s fine too.
Your pricing is also a tool we can use. It can help to exclude parts of the market from your target audience. I experienced it myself when I started as a freelance designer. My pricing was rather low, sometimes even free. I had quite a lot of clients, however, they expected a lot from me for little or even no compensation. As a result, I couldn’t cover my costs and had to rethink my pricing strategy. After I learned financial planning through some amazing workshops together with other startups & scale-ups I understood their needs and struggles. I even made it part of my process to ask potential clients during the first free talk what they are willing to pay, how much they think my services are worth to them, and what their budget is; if any. This is also a part of my strategy to exclude people that aren’t part of my target audience.
The goal is to align your pricing to your needs while keeping track of what your audience is willing to pay.
Thanks for reading! See you in our next blog post!