Olive Insights

Sarah Petty (00:02)
Welcome back to Olive Insights podcast. I am solo today talking about a topic that I know many business owners struggle with and that is pricing. It can be both a bit of an art and a science. So this topic has come up a lot recently with my own clients and I also had a conversation with a business owner not long ago about how to know if they are pricing their services correctly.

and whether they're undercharging. And this is a fear that a lot of business owners have. And even as I started out my own business, Oli business partners, I had to go through some testing and trialing of pricing to make sure that I got it at the right level. So it is hard to know. Yes, there's some science behind it and we'll absolutely go through some thinking behind that. But it also is a bit of an art and sometimes a bit of testing and trialing as well.

Pricing is one of the absolute most powerful levers in your business, but it is also a really uncomfortable one. Talking about money and asking for money and increasing your pricing is a really uncomfortable, sometimes icky conversation to have. But today I just want to take the ick out of the conversation and out of the room. Price is just another part of doing business.

If people are dealing with you, they're becoming one of your clients or customers, they're expecting to pay a price. They're expecting to pay for the value that they're receiving. So it is just another part of the exchange of value in business. So let's clear out any taboo around pricing. And today we are just talking about it as another aspect of business. If you take away the ickiness from pricing, it will

not be such an awkward conversation with your clients. Just talk about it like it's a regular part of business and it won't be as big a deal as you think it might be. So I want to start with this. Pricing is not just about what you put on your invoice. It is about your value, your positioning and the sustainability of your business. It's about the story that you're telling about your business.

and the way that your clients perceive and value what you do. So it's not just the number, it is all about the value. So why does it feel so hard? For a lot of us, pricing feels really personal. When someone pushes back on your price, it can feel like they're questioning your worth, but the truth is it's actually not about you. It's about whether you're clearly communicating the value of what you're offering.

In service businesses, this is especially tricky because they're intangible, right? A client can't pick up your work the way they pick up a product in the store. They can't weigh it, compare the packaging, look at a shelf full of alternatives. They have to take your word for it. And that makes undercharging one of the most common mistakes that I see. Now, yes, a client can shop around and ask other providers.

and get quotes and pricing across a number of different alternatives. But often with services as well, the service is very bespoke and it will be dependent on the business's capabilities, skillset, experience, ⁓ inclusions in the service. So it's not a standardized, commoditized product ⁓ that something like shopping for a grocery item might be.

So that can make it really hard to understand the value and the value will be different to every business and the value will be different to every client.

Early on, see many founders just pick a number they think that people will pay. And if you've set that price too low, it can feel really hard to raise it down the track. You get stuck there. You get almost anchored to that low price. But as your experience grows, your confidence grows and the impact that you're delivering gets bigger, your pricing has to evolve too. So if you've made that mistake early on, don't worry.

There is ways to step out of it and to slowly increase your pricing and without the losing the clients and the retribution that you think might occur. So let's start with what I call the three pillars of pricing. When I talk to clients, we often talk about these three pillars. So these are the three big factors that you need to consider when you're setting or resetting your pricing. The first one is your margin.

This should be the absolute baseline pricing. So your prices must cover your costs and leave room for some profit. Costs aren't just the obvious ones, either like subscriptions or paying a team member to deliver the work. They include things like your time as the owner and founder, insurance, other software that you use, the admin hours that nobody sees. If you ignore these things, you'll always feel like you're running to stand still.

Margin is really important to assess in this situation and knowing what your break even point is. So your break even point is the point at which you cover all of your costs and you break even. So your revenue would be the same as your expenses and you would break even. That is the absolute bare minimum that you want in business. But ideally you want to be making a profit where your revenue exceeds your expenses and you're able to make a profit, have a sustainable business. Profit means that

You're more likely to be in business for the long run. ⁓ If you're just breaking even every year, it's going to be very hard to maintain that business on ongoing. So have a look at your margin from an individual product perspective, but also have a look at your margin from your total business perspective. And it's important to understand what that number is because that will build the base for your pricing. So your base should be covering that absolute

break even point ⁓ and then adding your margin on top for the profit that you want to make.

The second pillar is the customer perception of value. So this is where it gets quite interesting. Value isn't just about what you deliver in terms of the work. It's about what it actually means to the customer. So yes, a report that you create might take you three hours to do, but if that report is helping a client to make a decision that saves hundreds of thousands of dollars in their business, that value is

far beyond your hours. The same goes for speed. If you can deliver something in two days instead of two weeks, that urgency is worth a premium. So it's quite common for businesses to be offering, to be asking for some sort of rush fee if you want something done quickly, ⁓ or if it is going to add a huge amount of value to their business, they would be charging a premium. And think about it this way. Yes, as the service provider, it might take you two or three hours to do that piece of work.

But it's all the years of experience, all the investment in your capability, your learning, your team, your business processes, the software that you use, all of that is adding up to deliver that value for a customer. So yes, it might take you a couple of hours to do, but it's because of your 10, 20, 30 years of experience that you're able to do this and provide the value. And that is what the client is paying for. If I want something done

really quickly by someone who's never done this type of work before, I'm going to be expected to pay a very cheap price because the quality is not going to be very high. But if I want to know that I'm dealing with an expert who's had years of experience that knows their stuff, that will give me the right advice, then yeah, I'm willing to pay that price for that. Even if it's ⁓ an hour of work for them, I'm paying for that experience, that knowledge and that certainty of investing in that.

service provider.

The third pillar then is the market position. So where do you want to sit within your industry? Are you at the premium end, the luxury end, you're seen as high quality service, you know, a trusted expert that people pay more for. Do you want to be accessible and affordable? Are you dealing with startups or early stage businesses and you want an easy accessible service for them? Neither answer is wrong, but you have to be intentional about it.

don't just guess. The worst pace to be is kind of in the middle and not knowing what your strategy is. You're not the cheapest, you're not the best, and you just blend into the market noise. So understand what other competitors in the market are doing, where are they pitching their services, and you don't have to copy what they do or replicate their pricing strategy, but just understand what else is out there and then think about where you sit in the market.

So don't necessarily price yourself at the low end, but just think about what is someone willing to pay for that service? You know, the other thing is there is a reality to how much a person will pay for a certain service. And there's a general expectation in the market that some services you expect to pay more because of the experience, qualifications, expertise than others. So, for example, I would expect to pay more for working with a lawyer ⁓ than I would with maybe

hiring a cleaner and that's not you know, that's just the value of the service the years of experience that a lawyer has the risk mitigation that they will provide the. The qualifications that they have all of those type of things. So yeah, there are some services where you wouldn't expect it to be on par, but there's kind of a range now if I was hiring a cleaning service would I want to pay?

$10 an hour for someone who did a really quick job but didn't really do it properly. Would I be willing to pay 40, $50 an hour for someone who came in and absolutely nailed it and my surfaces were shiny and it was all clean and tidy and beautiful. Sometimes you're willing to pay for that premium service.

Now, I want you to think beyond the invoice. So this is the shift I want every business owner to make. Your price is not a reflection of your hours. It's a reflection of the value that you create. Please, please think about that. It is not just about the hours that you're doing. And if you can get away from charging on an hourly basis, I know some industries that is somewhat the norm and you can't move away from it easily. But if you can charge on value,

rather than hourly pricing. Think about speed of your work, the quality of your work, the expertise you're providing. Is it flexible? Is there a risk that you're taking on? Is there a risk that the client's taking on? All of these things build up the value of your service. If you're available when your client needs you the most, that's value. If your years of experience mean you can solve a problem in one hour, that would take the client 10, that's value.

If you can keep your client out of trouble or save them from making a costly mistake, that's value. One of the best ways to frame this is your clients aren't buying your time. They're buying certainty, outcomes and results. So they most of the time don't care how long it is going to take you to do the work. They just want the result.

Now let's talk about boundaries because this is where pricing pressure really shows up. Often discounting is the default move for many business owners. It's a way to try win a deal, get a client over the line, but it's also the fastest way to undermine your value and your profitability. Once you discount, you're training that client to expect it again. So instead of just dropping your price,

Think about trading value because there are conversations you'll have with clients where just purely what you're requesting is out of their budget. So how can you make that work for them without just giving them a pure discount that's eating into your profitability? Maybe you can offer a smaller scope of work, reduce the scope of work that you've proposed to them. Maybe you can extend the timeline. So instead of delivering it in a week is going to be four weeks.

Maybe you adjust the deliverables to be smaller, shorter, not as many, whatever that might be. This way, you're really protecting your price integrity and your own profitability while still showing flexibility for the client to be able to work with something that's affordable for them. And here's the reality check. If nobody ever pushes back on your pricing, you're probably not charging enough. Some resistance is normal.

It means you're getting closer to the true value of what you do. So think about that. If every customer is saying, yes, you're never getting a pricing objection, most likely you are way too cheap. Something else that often gets overlooked by service providers is capacity. So if you're a coach, consultant, other type of service firm, time is the scarcest resource for you. You only have so many hours in the week.

which means your availability has value. So think of it this way. If you've only got space to take on five clients at any one time, every slot should be priced accordingly. The scarcity creates demand. It also gives you permission to raise your prices as your pipeline fills. And if you're filling those five places easily and you've got a wait list of people, then absolutely increase your price. And some of those will drop off the wait list and not be willing to afford it.

That's okay. Maybe it's not for them, but don't feel like you have to discount just because someone else can't afford it. When you start viewing your time as a limited capacity, you'll see that every yes from a client comes at the cost of another opportunity. Pricing should reflect that trade off.

I want to now address some myths because they always creep into the way that we think, particularly when it comes to pricing. So myth number one is that pricing higher will scare clients away. In reality, pricing can actually attract clients who value the quality of your work and they'll be more committed. You know, it's often talked about

with business owners that the client that you're charging $5,000 to will be much easier to deal with than the client that you're charging $500 to. Or the client that's really pushed you hard on price and you've ended up discounting. So if you have a client that you're working with, you've been delivering amazing value to them, they can see the value, they feel like the value is outweighing the price, putting up a price increase to them, most of the time, they are not gonna blink an eyelid.

because they can see the value that you're providing. And it's not unfair because you're providing value way beyond that price. So higher pricing won't necessarily scare away clients. ⁓ If anything, it will keep your good ones in check.

Myth number two is that you have to match your competitors. So the truth is most competitors are guessing as well. We're all trying to work this out. So use market awareness as a bit of a guide, but don't just copy blindly what other people are doing. ⁓ Pitch your services based on your experience, what you're seeing your clients want. ⁓ And yet don't feel like you have to just copy the next person. Myth number three.

is that you should only raise your prices once a year. Well, actually, you can adjust your prices whenever you feel you need to when your value increases. Have you added new skills? Have you got higher demand? Have you added new software or tools that you're using? Have your spots become more scarce? Maybe you are filling up those coaching programs. So you can think about pricing at any point and raise your prices. It doesn't have to be

and annual price review. These myths keep people trapped. The real goal here is alignment. Your price should align with the value you deliver, the market that you want to play in, and the business that you want to build.

Let's now pull in a few financial measures that can really help you think about pricing in a more structured way. One of the best ones is your customer acquisition cost. If you're not thinking about this yet as a service provider, it's something I would highly encourage you to start measuring. How much does it cost you to bring in a new client? So this is the cost of

sales and marketing. So what are you spending on marketing? Is it ads? Is it social media? Is it other forms of advertising? What are you spending on sales, your time in sales calls, follow ups, all of that kind of thing. If your customer acquisition cost is say, $1,000 and your average client spends about $1,200, you don't really have that much room for profit.

So you want to think about what you're spending on acquiring clients and then how much they are actually spending with you. The second one is the lifetime value of your client. So this is the total revenue you will get from a client over their lifetime with you. So as they ⁓ come on board as a client in your business, maybe they start by attending a webinar and then they go into your coaching program and then they have one-on-one coaching with you. And what does that

lifetime value, adding up all of those things. What does that look like? So if your cost, if your customer acquisition cost is that $1,000, but your lifetime value of a client is 10,000. So it costs you $1,000 to achieve a $10,000 client, then that's a relatively healthy ratio and is worthwhile. Lastly, you want to know your runway and your

burn rate. So these things tell you how long your cash will last and how quickly you're spending it. Your runway is how much cash, how much time have you got before your cash runs out and your burn rate is how quickly you are spending cash each month. If your pricing isn't supporting this and making sure that you have extended runway, you will always feel squeezed in your business. These numbers tell you whether your business model is sustainable or not.

And really pricing is at the heart of that. So if you're listening and realizing, ⁓ my prices are a bit too low, here are a couple of practical steps to take. So firstly, start with any new clients. Adjust your rates gradually rather than all at once. So new clients don't know what old clients were paying. So as they come on board, they're getting the benefit of all of the work that you've done with old clients.

So you can increase your pricing to new clients. For existing clients, if you want to do a price increase, it's just all about giving notice and communicating the value that they're receiving. Don't just bring it on them with no notice, but frame it around the outcomes you've delivered to them and not just all about you and your rising costs. Like, yes, obviously that's a part of it. They will understand that. But if you've been consistently delivering value to them and you communicate this in advance,

it won't be a big deal. You may also like to think about introducing new packages or product tiers so clients can choose a level of support that fits them without discounting your core value offer. And remember, pricing is about creating a fair exchange of value where your business is sustainable and your clients feel like they're getting more value than what they paid for. So to wrap it up, pricing is both an art and a science.

The science is knowing your costs, your numbers, your financial metrics and making sure that you're making a margin on the pricing that you're charging. The art is about telling the story, positioning your brand, communicating your value. And when you blend the two together, you really stop seeing pricing as a number, you pluck out of thin air and start seeing it as a strategic decision that shapes your business. So the next time you're setting a price or thinking about a price increase,

Here are a couple of questions to ask yourself. Am I covering my costs and building in margin? Am I showing value to the customer, not just the hours that I'm taking to do the work? Am I positioning myself where I want to be in the market? Having a think about these things, articulating your value, being open and honest with your clients, all of these things make pricing a real

non-issue and just another lever in your business to create value for both you and your clients. Thank you for tuning in today. And if you've got a question that you'd like answered, please go to our website at olibusinesspartners.com.au slash podcast and you can submit your question for potentially being answered on a future episode. Thank you.