When you decide to embark on the adventure of freelancing, one of the big questions concerns the setting of the rates. For many, this point is a trial! With a lot of procrastination and, in the end, often a bad start.
« I’m just starting out, I can’t ask for much because people don’t know me yet, I have to prove myself! » « If I want to win customers, I have no choice but to have a lower pricing policy than my competitors. » « I prefer to start small, at my ease, see it through and when I have enough customers I will revise my pricing upwards. » … Do you recognize yourself ?
A lot of limiting beliefs and especially a source of irritation before you even start.
A low price policy constitutes a great risk for the financial viability of the activity by losing a potential turnover or even by making it lose money. Especially if the entrepreneur is alone. If it is not fully assumed and communicated, a low price policy can be totally counterproductive by limiting the confidence of the customers towards the services.
Let us explain:
Is it a good idea to compare yourself to the cheapest? The popular belief is that the cheaper it is, the worse it is qualitatively. Even if the service is very good, it will not attract the customers that you want to attract.
By positioning yourself in the cheapest category, it directly communicates to the target audience that by its standards, it is of elementary – or even poor – quality, and that everything is « cheap. » No worries, not all customers have the same buying power. Serving a category of customers with limited resources is positioning as good as any other. As long as it is known.
There is a BUT! You’re probably very passionate about your project, you want to offer the best of yourself to your future clients, make a difference, create a buzz,… But in doing so, you create confusion to the target audience because your price does not align with the other components of his value proposition. You will lose credibility with your low price effect and your perfect service: bad strategy! The service will only find a demand among a limited number of customers who only have the price as an element of decision and comparison. And its vulnerability will increase.
When you start with a low price policy, you have to compensate with a volume policy. Volume often means that a larger portion of your life is spent on production and service. This notion of time spent on one’s activity is fundamental because many freelancers work far too much to compensate for low prices and barely make ends meet….
With a low price policy, you will be exhausted, to produce or to provide services without counting your time. Additional, you can not forget about all the strategic tasks that are essential to your management: invoicing, following up the payment of invoices, prospecting, communicating,…
Eventually there is a chance that you will lose the quality of your family and social life, generating constant stress and anxiety, which will lead to a deterioration of your health condition…. Your attention slackens, you become less and less vigilant, you make mistakes and the negative spiral starts. Help! But it’s not over yet…
When you start with low prices with the idea of raising your prices as soon as possible, the « as soon as possible » never happens or happens much too slowly. If you adjust your initial low prices upwards to a more « correct » level, more in line with your value proposition, you risk losing your current customer base, which was easily acquired thanks to low prices. This means either raising prices by an amount almost imperceptible to the customer or reinventing themselves. Redefining positioning, improving or changing the value proposition to offer a new service at a fairer price. It also sometimes means starting over.
What to do in the economic context, where annual inflation has reached nearly 10% (as in 2022)? Responding to rising costs by raising prices is a matter of survival. How do you do this when you start with such low prices? Do you increase your volumes by working even harder to retain your customers, or do you raise your prices at the risk of losing them?
Three simple rules to understand:
- Sales price = cost price + margin.
(cost price = total costs of the activity over a year / volumes to be sold over that year)
- Turnover = quantities sold x selling price
(Turnover must be higher than the professional costs of the activity for it to be viable)
- Turnover = total business expenses + margin
And the margin in all this? When you set your selling price(s) based only on the lowest prices, the margin was simply not foreseen because it was not part of the initial thinking. If you set your selling price without taking an accurate inventory of your costs, you will discover that the selling price is lower than the cost price too late.
No margin in case of a problem (f.e. the work tool breaks and must be replaced), in case of a cost increase, no reserve to invest… and therefore to grow. You walk with your eyes closed and end up against the wall.
Finally, in terms of marketing to complete the obstacle course of the low price policy. No margin, no promotion! Logically, if the selling price = cost price, selling at an even lower price means accepting to make a loss. So you might as well not sell anything!
With prices that are too low from the start, how can you have a dynamic commercial policy? The answer is obvious; you can’t.
Be aware of your finances
None of this really makes you dream and yet this is the obstacle course many self-employed entrepreneurs take. We don’t blame them, but it’s better to avoid going through this crossroads, right?
To launch yourself as a freelancer is a fantastic adventure, rich in diverse tasks and varied experiences, in lessons too, butt requires to have a minimum of financial conscience. If you have decided to embark on this adventure, it is because you want to build a sustainable business with which you can also earn a decent income. So you need to have a profitable approach!
You don’t need a master’s degree in finance or economics to start a business, nor ask high prices. There is a big difference between a price that is so low that you can barely make a living from it and starting to charge extreme prices to its customers. Between these two extremes there is a margin and in these waters one must navigate!
So what is a fair price?
Your service cannot compete with your competitors on price alone. The price is not everything. It is only one of the components of the value proposition.
When the idea of what you want to do becomes clear, it is essential to analyze what exists in the market, what is offered, to whom, why, what is missing, at what price, with what benefits, what services, what limits. This market study allows you to determine the place you want to occupy in the market. And by ease, some who have gone through this phase will prefer the average price, which is demanded by most market players.
Then, it will be necessary to put in perspective the cost structure and the maximum but realistic supply capacity to calculate the cost price.
Once the cost price is calculated, the unit margin is added to formulate the sales price to achieve the positioning of the price. It is the margin that makes it possible to achieve the sales price corresponding to the chosen positioning.
The process of price calculation is quickly summarized here because it is not the subject of this article, but this crucial phase takes time. Moreover, you have to work on several hypotheses before you can choose the positioning and indicate your selling price.
This is probably why this step is often neglected and why many prefer to choose the easy solution; the low price. you will have understood that while in the short term this strategy is a very fast strategy to start without hesitation. However, in the medium or long term, it will at the very least have negative or even destructive consequences and put the activity and its entrepreneur in great difficulty.
This article was written in collaboration with Laetitia Veys, Business & Life Coach at BizzUp. If you want more advices on how to fix your rates, reach out to us to get in contact with Laetitia.