Pricing Your Offer

Set a price for a service or product by knowing your floor, estimating what the outcome is worth to the customer, seeing what they would do instead, choosing a price structure, testing it with real quotes, and saying no below your floor.

Research, mixed: studies of how firms set prices find that customer value, competitor prices and costs each help under some conditions and that no single method is always best (Ingenbleek et al., 2003). Research on price fairness and on first offers is strong (Kahneman, Knetsch & Thaler, 1986; Galinsky & Mussweiler, 2001). The value stick is a formal model, not a field test (Brandenburger & Stuart, 1996). Price structures, the test steps and every threshold on this page are practice or rules of thumb.

Use it when:

• You are starting as a freelancer or consultant, or launching a new service.
• You are quoting a project you have never priced.
• You win nearly every deal (the price is probably low), or a yearly price review is due.

Skip it when:

• You sell a physical or repeat product and need to know whether each unit makes money: use 5.3 Unit Economics Sheet.
• The price is already fixed and you are negotiating terms with one buyer: use 5.11 Negotiation Prep Sheet.

A price sits between two limits. Below is your floor: what the work costs you, including your own time at the rate you need. Above is the customer's willingness to pay, which depends on what the outcome is worth to them and on what their next best alternative costs (Brandenburger & Stuart, 1996). Most people price from the floor or from competitors because the customer's side feels hard to know, and executives report that assessing and communicating value are the main obstacles to pricing on it (Hinterhuber, 2008). Value-based pricing does not always win, though: customer value, competitor and cost information each worked better or worse depending on how much better the product was and how hard the competition was (Ingenbleek et al., 2003). Know which one is setting your price.

Three findings shape the test. Asking people what they would pay gives biased answers compared with methods that put real money at stake (Miller et al., 2011), so a real quote teaches more than a survey. Customers judge a price rise by its reason: covering higher costs reads as fair, exploiting a jump in demand does not (Kahneman, Knetsch & Thaler, 1986; Xia, Monroe & Cox, 2004). And the first number on the table tends to anchor the outcome (Galinsky & Mussweiler, 2001; Gunia et al., 2013). Limit: the research is on firms and consumers, not solo freelancers, and none of it gives you a correct number.

The floor is the price below which the work loses you money or pays you less than you need. Count your own time, and count only the hours you can really bill.

Strong answer: (illustrative numbers) "Floor rate: (540,000 pay + 90,000 costs) / 1,050 billable hours = 600 per hour." Not: "I need about 500 an hour, I think."

What I sell, in one sentence, and for whom (one segment, see 6.2):

The job the customer hires it for (see 6.4):

For a product or repeat service, check the same logic per unit in 5.3 Unit Economics Sheet.

Illustrative example: the person, customers and all numbers are made up.

A freelance copywriter in Malmö, two years into her business, has charged whatever the client seemed willing to pay. Her floor: she needs 540,000 SEK a year before tax, has 90,000 SEK in business costs and, counting sales, admin and holidays honestly, about 1,050 billable hours. Floor rate: 600 SEK per hour. A regional chain of accounting offices wants website copy, about 25 hours, so a floor of 15,000 SEK.

The chain's site is its main source of inquiries. An agency quoted 45,000 SEK; the owner writing it herself has not happened in a year. She chooses a fixed price of 24,000 SEK with two revision rounds, and a smaller option at 14,000 SEK for the five key pages, which keeps her above her floor rate. She states the price first, in one sentence that leads with "a site that brings in inquiries". Over her next five quotes at the new level, three are accepted and the most common objection is timing, not price. She gives her one retainer client two months' notice of a raise, explaining that the scope has grown.