Last updated on May 21, 2017
On a recent trip to Australia, I stopped by Brisbane to have a drink.
At the bar, I started chatting with the locals. We talked about their love of rugby. They bought me a couple of pints. I asked what the hell was up with all the scary insects in Australia.
You know, the usual conversations.
Then, we started talking about business.
I was blown away when my one my new friends said he prefers NOT to charge for his work.
“I feel guilty when I charge people for my time.”
He’s not alone.
Tons of people — including successful entrepreneurs — struggle with pricing strategy. For example, six-figure copywriter Neville Medhora recently told me he hesitated to raise his rate.
In this article, I’m going to share a pricing strategy which has allowed me to stop feeling guilty about charging people.
(In fact, it even helped me QUADRUPLE my hourly rate.)
You’ll learn about the various pricing strategies ANYONE can use for freelancing, consulting, or project work. Plus, I’ll show you how to charge what you’re worth without feeling guilty.
Let’s do this.
|Get the same pricing strategy six-figure consultants use|
As employee #4 at Mint.com, I was in charge of growing the user base from 0 to 100,000 users in six months (here’s how I did it).
When they hired me, they paid me a salary of $100,000. I thought they were crazy, and I truthfully didn’t think I deserved it.
After I quit Mint.com and started AppSumo, one of our first deals was a one-hour talk with me for $250.
It sold out.
A few months later, we did it again — this time with a $500 price.
That sold out, too.
Then, we raised the price to $1,000 for a one-hour call with me…
Yup, all gone.
EVERY TIME my team at AppSumo wanted to push out a new deal for an AppSumo customer to buy a consultation with me, I resisted.
I had tons of guilt about charging these prices, and I went back-and-forth with my team about lowering the price or offering “discounts.”
Why did I feel this way? Why do we feel guilty charging for our time?
In my experience, there are 3 main reasons people feel guilty charging money for work:
How can you get away from this negative thinking? How can you charge even more money, knowing you fully deserve it?
The first step is to understand the intricacies of how to price. When you’re prepared, you feel less nervous and guilty.
Let’s dive into the strategies to price your work and charge people for your knowledge and help.
Part of the reason so many people are scared of setting their rate is because there are so many options.
It’s overwhelming to think about where to begin:
If you just started a business I’m going to show you the most commonly used (and easiest) pricing strategy.
If you’re an expert in your niche or industry you’ll learn how to break from the shackles of hourly work and level up your cash flow.
If you’re trying to maximize growth and revenue, I’ll share how to boost your revenue when you have diverse, proven, and in-demand skills.
The most common pricing strategy for freelancers and consultants is an hourly rate.
One way of determining your hourly rate is to reverse engineer your last salary.
For example, let’s say you made $70,000 last year. There are roughly 2,080 working hours per year, which means your hourly rate is about $33.
Sounds easy, right?
Not so fast. There are a couple things to keep in mind…
First, many first-time consultants and freelancers forget their rate assumes a 40-hour workweek. What if you can’t find enough clients to fill up all 40 hours? What if you get sick? Or what if you just want to work less?
Second, many people don’t consider total comp and benefits (like health insurance) in their pricing. You’re going to pay for those on your own, amigo. No company to help you out now.
This doesn’t mean you shouldn’t use the hourly strategy. It just means you should be careful.
A good rule of thumb: If I don’t expect to work the full 40 hours, and I have to pay my own benefits, I take my hourly salary rate and double it. In the example above, an $33 hourly rate would turn into about $65 per hour.
If you’re just starting out, an hourly rate is an easy and effective pricing strategy. And remember: It’s often better to take the easy route and just get started. Refine later.
When you productize your services, you start to free yourself from the shackles of time.
Instead of being locked into an hourly rate, you charge based on the value or results you create. Typically, you charge project-based fees as you become more familiar with the results you give your clients.
If you’re a web designer who knows your web redesigns get a 10% revenue lift for your clients on average, and this usually equals about $30,000 more revenue for your client, you can price accordingly.
When consulting, I like to deliver 10x what I charge — so $30,000 average increase in revenue for a client would mean I charge about $3,000.
Free yourself from the shackles of time. Charge your clients for projects, not hours. (Tweet this)
To start billing project-based fees, ask yourself: What value do you give?
Remember, it doesn’t always have to be pure bottom-line revenue. If you help your client save 10 hours per week, it could be worth tens of thousands of dollars to them in saved time.
But before you dive into project-based pricing, be careful setting your price based on the time you think you’re going spend.
It’s easy to set your price too low and work 2-3x more hours than you priced. This is why I recommend you start with hourly until you’re more familiar with your industry and client project requests.
Before getting into how you can develop pricing tiers for your business, let me run you through why you should test pricing tiers as you grow your freelancing or consulting:
With so much opportunity, how to do tier pricing RIGHT? No sweat, I’ve got you covered. #fistpound 👊
Step 1: Create base features you want to include for every tier
The first step is to start organizing the base scope of benefits you want to provide to every customer.
At my 8-figure company Sumo (here’s what I learned while growing the company), all customers get access to apps, A/B testing, and all design templates.
What are your “base” features?
If you’re not sure which base features to use yet, that’s OK. As you become more familiar with client needs, you’ll be able to fill in the gaps.
Step 2: Develop a buyer persona for each tier
Tier pricing widens your audience by helping you target different groups of people with different needs.
An individual who just needs you to write an email funnel vs. a client who wants you on a monthly marketing retainer to help them send emails and optimize their opt-in forms every week have different needs.
For example, MailChimp has three pricing tiers for three different customer personas:
Step 3: Include additional features and benefits
The final step is to add unique features and benefits to each tier. Here are three questions you can ask yourself to develop higher tier products:
At Sumo, we learned our biggest clients have a lot of different tools they use for their businesses.
With our “established” business owners this means supporting email providers like Mailchimp, Aweber, and Zapier.
And for our massive enterprise customers, this mean supporting enterprise products (like Infusionsoft and HubSpot).
And if you need more advice on how to price, here’s a recent podcast on building a six-figure business and pricing your services accordingly.
|Get the 3 best pricing strategies in a PDF to go|
Even after reading the EXACT proven steps I’ve used — and hundreds of my consulting friends and readers have used — it’s easy to feel nervous.
But I want to make sure you don’t quit now.
With your pricing strategy picked, here are four ways to feel confident in whatever pricing you decide.
It’s easy to start feeling guilty when you can’t directly see the value you bring to your client or customer.
The best way to overcome this type of guilt is to understand the problems you help solve.
To gain clarity on the value you create, talk to your clients or customers about their goals. Then, break down metrics or key performance indicators you can quantify and measure success.
The key to remember: Value isn’t always created with a dollar sign. When you map out the metrics or key performance indicators, recognize the value you’re charging and price accordingly.
Some amazing products and services which have gained huge market acceptance over the past few years do ONE thing really well: Save people’s time.
Time is a finite resource, and everyone values their time.
Even if the financial ROI is cloudy, many business owners will buy your product or service if it means they’re able to free up their time for something else.
If your service doesn’t help customers generate direct revenue, think about how much time you can help your customer save.
If your product or service helps save time, you win. (Tweet this)
This is exactly why I created Sumo as a way for business owners to increase their traffic and email subscribers — without wasting a lot of time.
And, it’s why I’ve hired a digital editor even though I know how to write. Having someone help me with writing means I can create better content at a faster pace for you.
What happens when your friends give you their “great” advice?
Even if their advice is really, really good… most of us (including myself) don’t listen to it.
People ignore valuable insights when they’re free.
Now, think about getting advice from someone like Tony Robbins, who charges $2,000 for a seminar. Thousands of fans will do exactly what he says with strong determination because of the cost.
(Speaking of Tony: learn why I recently walked out on a $2,000 Tony Robbins event.)
Most of us value what we pay for over what we get for free. So do your customers.
Another example: I recently gave a friend a few free AppSumo products. Three weeks later, I hit him up to see what he implemented in his business.
He didn’t do a DAMN thing with the products I gave him for free. On the other hand, thousands of customers have paid for these products, implemented them in their businesses, and received crazy results.
Money is a truth-teller. When you trade your money, you’re automatically more invested.
“I’ll just be nice and give this away for free.”
How long will “free” pay your bills?
When you charge nothing, you’re undervaluing yourself. You have a solution for someone else’s problem and you asking for money is fair.
If you’re scared about charging too much at first, even simple pricing strategies can work: charging $1 is better than giving it away for free.
Some examples of the price point you can start with:
Start small. Then, gradually increase your price as your business gains traction and provides significant value to your customers. (You can also add more benefits and features as you increase your price.)
With Sumo, I used to do a 10% price markup on every product
As the business grew, I start experimenting with the pricing. I tried marking up 100% because a few of my friends kept nagging me to charge more.
Guess what happened when I 10x’d my markup?
If you’re feeling guilty charging for your time, just start small and experiment.
Pricing strategy can be confusing, complicated, or scary — but with my four tips above, you’ll be ahead of the pack.