an entrepreneur calculating business finances and setting a pricing strategy
Stabilise a Business

Is Your Pricing Strategy Setting Your Business Up for Failure?

July 22, 2023 / 282 Comments

Your business is busy, so it is frustrating that you feel like you are barely scraping by. Why aren’t all these clients translating into cold hard cash? This is a common issue in new businesses, and there may be many reasons why your business is booming but you are not making money. One of those reasons is that your pricing strategy is setting your business up for failure. This happens when your profit margins are too low to make money at your current capacity.

Is your pricing strategy setting your business up for failure? Let’s look at how you can tell and how you can create a profitable pricing strategy.  

What Is a Pricing Strategy?

A business pricing strategy is the method you use to ensure your business makes a profit from your products and/or services. Strategy is the operative word here; you can’t just pull a number out of thin air; you need to create a strategy that takes into account the following:

  • The expenses to deliver that product or service.
  • Your current capacity and what is required to increase that capacity.
  • Your profit as a business owner.
  • The sales and promotions you want to run throughout the year.
  • The cost of acquiring customers.
  • Your taxes – potentially both business and personal.

Depending on your business, there might be operating costs, licensing fees, etc., to account for as well.

Your business pricing strategy should ensure that your business is profitable at a moderate operating level and will allow you to increase your operating capacity in the future.

How Bad Pricing Strategy Can Set Your Business Up for Failure

Bad pricing sets your business up for failure because the profit margins are so slim that you cannot make any substantial profit on the work you are doing. And that’s the best-case scenario. Many businesses with a bad pricing strategy are operating at a loss. When businesses are operating at a loss, the business adds more customers, thinking it will improve their profit. However, every new customer they serve just digs them deeper into the hole they are in.  

When you feel like you are working so hard but getting nowhere, your pricing strategy is the first thing you should look at. Ask yourself, is your pricing strategy setting your business up for failure? Because a bad pricing strategy cuts your business off at the knees before you’ve even started.

A bad pricing strategy can set your business up for failure in the following ways:

  • It leaves no room for growth without significantly increasing your pricing.
  • It doesn’t allow you, as the business owner, to take home any profit. (In some cases, business owners with bad pricing strategies are putting personal funds into their business rather than paying themselves.)
  • It has you working harder and harder with very little to show for your efforts.
  • It can turn away your dream customers because your prices are too low or too high.
  • It doesn’t provide the insights you need to evaluate your business performance and look for ways to optimise your operations.
  • It forces you to make decisions based on price rather than quality, meaning your materials, tools, and even help are not of the quality you would like to have.
  • It means you can never run promotions because you are just gouging yourself even more when you lower prices.
  • It means that your business always feels like it is one lean month away from failure.
  • It means that your business is a constant source of stress rather than the fulfilling and exhilarating venture you imagined it to be.
  • It keeps you one step behind the competition because you are always in emergency mode rather than being able to think of your next step. You also don’t have the funds to jump on the opportunities that you see.

There is so much that goes into a successful business, so it feels reductive to say that business success is all about math. However, in the most basic sense, it is. If the numbers in your pricing strategy don’t add up, then no matter what you do, your business will never be successful.

A business pricing strategy should mean that when you make a sale you are making money, not losing money.

Pricing Strategy for Service-Based Businesses

When looking at how to create a profitable strategy for a service-based business, time is a significant factor – more so than in an e-commerce business. The capacity to deliver that service is capped at the number of hours the people delivering that service can work. Capacity also needs to factor in time for developing both the service and the skills of the service providers, downtime between clients, and in some cases, creative recharge.

That is based on your ability to have people whose only job is to provide those services. When you start your service-based business, you might be wearing all the hats and need to account for client acquisition, admin, and product development. All this to say, a pricing strategy for service-based businesses needs to be based on the number of hours you feasibly have to provide that service.

Let’s say you’re a solopreneur graphic designer. When you sit down and calculate everything you do in a week to run your business, you realise that, actually, you only have 10 hours each week for client work. The other 30 hours are spent on the following:

  • Content creation
  • Product development for a passive income source you are developing
  • Marketing
  • Discovery calls
  • Business planning
  • Social media engagement
  • Bookkeeping
  • Improving your skills

Let’s say your main service is logo design which takes you approximately 5 hours per week when you factor in communication with the client and revisions. So you can handle 2 clients per week without breaking a sweat. That’s great, right?

The only problem is when you set your pricing, you set them based on the fact that you thought you would easily be able to get 20 hours per week of graphic design work, and you’d be able to handle that much work and still take most afternoons off. (You’re not the only one – every single business owner has had a rude surprise at how different the reality is.)

So when you’re doing 10 hours each week, you’re barely scraping by and putting in long hours to have a half-decent week. And you’re not even consistently getting 10 hours per week of work – there are some weeks where you only get 5 hours per week and some weeks where you have no clients.

Your pricing needs to be structured in a way that if you only ever got 1 client per week, you would be fine. You wouldn’t be living large, but you would be able to cover your business and personal bills and still have some fun money left over. 2 clients per week would mean you make your desired income.

This pricing strategy makes it a lot easier to perform a cost-benefit analysis on hiring help for your business. Let’s say that content creation is slowly driving you crazy, and you are looking to hand it off to someone who can do it better at the first opportunity. You can look at how long your content creation takes you and, therefore, how many more clients you would be able to onboard by outsourcing that role.

As a graphic designer, the bulk of your content creation is probably on Instagram and maybe Pinterest. You spend approximately 10 hours each week creating social media content, worrying about your social media content, and engaging with people on social media. (Let’s be honest, you probably spend 20 hours worrying about social media content alone!)

Outsourcing your social media content means that you have the time available to serve 2 more clients per week, and you know exactly how much profit that will give your business. That number allows you to look at social media management packages to see which ones you can hire while still profiting from those extra clients. You can also present these social media managers with the goal you have for hiring a social media manager – to generate 4 clients per month for your graphic design business. (Depending on your conversion rate, maybe that’s 8-12 leads per month.)

By creating a pricing strategy for your service-based business based on the time you have to realistically provide those services and the fact that you will not always be operating at full capacity, you create a profitable foundation for your business. Because your pricing is created to generate significant profit at 10 hours per week, you know that when you hire a second graphic designer who could do 20 hours per week (accounting for creative recharge) that they will cover their wage, the people and tools covering the back-end, AND make a profit for your business.

Pricing Strategy for E-Commerce Businesses

E-commerce businesses can vary significantly based on whether you are hand-making your products, manufacturing them, or drop-shipping them. If you are hand-making your products, then follow more of a service-based business pricing strategy, as your income is capped by the number of hours you can realistically create your products. Manufacturing and drop-shipping businesses focus more on the cost of creating products.

The first step in how to create a pricing strategy for e-commerce businesses is to write down how much it costs to create and ship units of your products. This includes:

  • Production costs
  • Design costs
  • Packing materials
  • Labor costs
  • Shipping costs
  • Fulfilment costs

Then, calculate the customer acquisition cost for each product and the overheads of your business. We recommend having these calculations in an Excel spreadsheet to make your life easier in the future. You can update it quickly when your expenses change and calculate how you need to adjust your pricing. This is a great example of how to create a simple spreadsheet for your e-commerce product costs.

If you have multiple line items, then perform these calculations based on each line item so you know each product is profitable.

The next step in creating a profit strategy for your e-commerce business is to calculate how many products you need to make to create a profitable business with room for growth. For example, if you are working alone in your business, your target needs to pay you the average wage for this kind of work plus a significant profit for your business. This is so that when you hire more people, your business becomes more profitable rather than eating into your profit margins. Once you have your number, calculate how many products you need to sell to hit that target based on your current profit margin. Based on this figure, a few things may happen:

  1. The number may be impossibly high, so you need to adjust your prices until you can realistically hit your target.
  2. The number may be impossibly high, so you need to reduce the cost per product. 
  3. The number may be impossibly high, so you need to reduce your customer acquisition costs or create a strategy to increase the number of items per order. 
  4. The number may be lower than expected, which is great news. Your pricing is not setting your business up for failure.
  5. The number may be similar to your current sales figures, which, if you are a new business, means that you are on the right track.
  6. The number may be similar to your current sales figures, but you are not seeing the profits you are expecting. If this is the case, go back to the numbers and see if you missed anything. There may be additional costs, wastage, or promotions you haven’t accounted for.
Creating a profitable pricing strategy requires a little maths to understand your expenses and capacity.

How to Create a Profitable Pricing Strategy

We have just looked at how your business pricing needs to be based on your realistic capacity. Having a profitable pricing strategy will help you to price new products and services, decide what promotions to run, and update your pricing to reflect changes in your business.

The problem is there is no one-size-fits-all pricing strategy, even if we are talking about two businesses that sell the same product. That is because pricing reflects a business’s overall strategy, values, and goals. Let’s use a graphic designer who creates logos as an example of different approaches to pricing strategy.

Graphic Designer A works with non-profit organisations to create logos for their business. Their reason for starting a business was to earn a living in a fulfilling way. They don’t want to make 6-figures or have a large team; they just want to earn a decent living helping people who help people. Based on that, Graphic Designer A’s pricing strategy may focus on reducing their operating costs so that they can make a living while still keeping their prices low. It is important to them that they keep their service prices low so that the non-profits have more money for their cause.

Graphic Designer B sees logo design as the starting point of building a relationship with clients. They have just started their business but see themselves expanding in the next 12-24 months to add more services and hire more graphic designers to conduct those services. After providing their clients with amazing logos and wowing them with incredible services, Graphic Designer B’s former clients will be warm leads for their new web design and packaging design services when they launch. In that sense, their logo design services represent the start of the funnel as a low-cost product. That means that Graphic Designer B wants to keep their pricing reasonable while still profitable enough that they can put aside money for growth. When they do start their new services, Graphic Designer B may decide to add more profit margin into their new services and slightly reduce the margin in their logo design to ensure a constant supply of new warm leads.

Graphic Designer C wants to do one thing and do it really well. Their goal is to become the go-to logo designer for pet and pet-related businesses. Because logo design is their only service, they need to set their prices higher than Graphic Designer B. Luckily, their specific niche allows them to charge higher prices because they have a large portfolio of beautiful pet logo designs – many for well-respected brands in the industry. Their client acquisition cost will also be lower because their marketing is extremely targeted, and their clients are raving about their new logos. Their pricing strategy is focused on adding quality and value, not reducing costs and prices.

These are just 3 examples. There are many different approaches you can take to create a pricing strategy for your business.

Understanding your costs and the minimum price that will make your business profitable is just the start of how to create a pricing strategy. Your pricing strategy needs to also account for the following:

  • Your desired image in your industry and amongst customers (premium and high-end brands charge more and rarely have sales.)
  • The sales and promotions you will run. (Niche-specific promotion events and the pricing of each promotion. Also, consider introductory offers to get your initial reviews and testimonials.)
  • Your growth goals and future plans for your business. (Even if your business is currently a side hustle, your pricing should reflect where you want to be in the future. Because the clients who are currently paying you £50 for logo design will not stick around when you start charging £500 for logo design next year. That is too much of a jump. You want to set your pricing up so that you don’t have to overhaul your pricing in the future.)
  • What role each product or service plays in your business.
  • The desired ROI of marketing costs. (Some products or services may not make sense for paid advertising because the conversion or ROI is too low. Some products are sold at a loss because they convert to other products and services which are highly profitable.)

The goal of your pricing strategy is to plan in advance what pricing you need to have to reach your business goals. That way, when you need to set a price for a new product, run a promotion, or consider a discount, you can make an informed decision instead of pulling a number out of the air.  

Does a Profitable Pricing Strategy Solve All Problems?

No, there is a lot more involved in building a successful business than just getting your pricing right. However, your pricing strategy is a large piece of the puzzle and means that you will make a profit when you land clients. That eliminates so much stress from your business already. Because it is stressful when your business is busy and, by all accounts, should be profitable, and yet you’re barely scraping by.

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