What is a Fair Price?
Or: Pricing Products for Social Enterprise
There’s a common occurrence when doing freelance design work. You’ll be meeting with a new client. Everything is going well. You’ve established the scope of work. you’ve shared some drafts to get a general feel for what they’re looking for and what they need. Then you bring up your fee for the amount of work they’ve proposed and this new client is shocked and appalled that you would bring up money. “Why would we pay you? We’re bringing you so much exposure!”
This should seem ridiculous to you as a social entrepreneur. You know that your work has costs, and that exposure does not put food on the table, nor does it keep the lights on. There can be exceptions when you have a reciprocal relationship where you provide service to each other, or when you are part of an extended network of support. These are exceptions, not the rule.
Knowing this, you have to price your products and services somehow, so how do you pick a price? How do you charge enough to be viable as a business? Will charging more make it more difficult to achieve your broader goals? Will it make it easier?
There are more than a few ways of pricing products and services. There are some methods that are based on your costs, some that are based on the value that you provide, and some that are based on a fixed rate of profit. Most methods have some merit, so let’s examine the pros and cons.
This is the Walmart and thrift store end of pricing. The name of the game is to make your products cheaper than any viable alternative. The defining features of bargain pricing schemes is to lower your costs, increase the amount of sales you make, and make a very small profit on each item you sell. The idea is that you will be appealing to the people who want a deal.
I deliberately put both Walmart and thrift stores in the same category. Although the stores are very different, they both operate within the same price range, and because of that they are each other’s competition. Reduce costs either by receiving items by donation or by pressuring suppliers, and sell at a low price to attract many customers. They have different practices, but they both use bargain pricing.
All informed pricing strategies require that you know your fixed costs, variable costs, and average number of sales. For this strategy, you will use this knowledge to craft a bargain price that still has a small profit margin.
Fixed Cost: Costs that do not increase with more output. These are costs such as buildings, long lasting machinery, and salaries.
Variable Cost: the cost of producing each unit of your product. This includes materials, credit card processing fees and shipping costs.
This strategy can work when you have a product that can be produced at a low price and high quantities. It also works if you are selling a low cost digital product. Bargain pricing can also be used as a great way to launch a new product or service, as low cost can help you establish a foothold in the market.
This strategy is difficult for small organizations to pull off and continue to pull in enough revenue to make a profit. Because of the small margins and low prices, at some point you will likely need to raise your prices and this could drive away the very customers that bargain pricing is designed to attract. Bargain pricing can also lead to your brand feeling cheap or low quality.
I do not recommend bargain pricing for small social enterprise unless they are in a few specific situations. If your social enterprise is serving customers who are in lower income brackets, it can make sense to lean on bargain pricing to make an impact through your sales. Bargain pricing can also make sense for a low cost entry level product or service that can be used as a first contact with customers.
With both of these situations, I would recommend having a higher priced option for those who want higher quality, or need more support. For the entry level product situation, I would recommend having a variety of more specific products or services for sale that build upon the entry level offer for customers who want more.
Fixed Profit Pricing
With this method, sometimes called cost accounting or cost-plus pricing, you start by calculating all the costs that are associated with providing your product or service. Once you have an estimate of both your variable costs and your fixed costs you will divide your fixed costs by an estimated number of sales.
Once you know your unit cost you then decide how much you want to make in profit per product you sell. You could select a constant percentage, or pick a unique profit margin for each product. Ideally the margin that you select is enough to cover any surprise costs, provide an operating fund from which to expand or improve your operations and to invest into your mission.
This strategy is a great starting point if you’ve never intentionally thought about how your pricing is set. This is one of the simplest ways of setting prices, although you should be careful and make sure your prices align with your brand values.
It might be difficult to set fixed profit prices for new products that only have estimated costs, rather than reliable numbers. In these situations, make sure to add some extra percentage to your profit margin to account for potentially higher costs.
I would recommend fixed profit for small social enterprises that haven’t intentionally priced their products before. It would also work well for co-ops that distribute some of the profits to members at the end of each year, as it can act as an advance for the members that shop at the coop, and it shows the benefits of the coop to the members. I would also recommend fixed profit pricing for managers who prefer stability and consistency, as it is a stable process and it ensures that as your costs change, your prices will also move to reflect the change in costs.
This pricing model is based on the value that the end user will get from your product or service. The strategy behind value-based pricing is used by many types of businesses from luxury brands to custom service providers, and even includes software-based companies that offer multiple versions of software.
When examining value-based pricing, you need to have a better understanding of what the customer wants, needs and how they benefit from your products. For example, value-based graphic design agencies will not offer you a price before they get to know your organization and what they can offer you. They start with a customer interview and help you understand what you need, and how they can fit into the puzzle. They understand the benefit that having better promotional materials can bring and they establish an estimate based on how their work will improve the prospects of their customers.
You do still need to make sure you are making a profit on each sale. This might mean you remove features from your product until it is both profitable and useful for your customer. It might also mean that you can’t provide your main service to each customer, and you might need to develop a low price but repeatable template or software to fill the gap.
Lets say for example that you run a social enterprise that builds gardens on the roofs of large businesses. The businesses that you build for have different expectations of how they will benefit from having a garden on their premises. In this example we’ll assume that the employees of the businesses have found that they are more efficient when they have access to green spaces for breaks at work. You’ve found that the gardens typically give the businesses an extra 10% efficiency (for easy math). If you’re approaching a new business that has an annual staff budget of $500,000 then your benefit to the customer is $50,000, which would easily justify a build cost of $10,000.
This pricing strategy is great if you have a product or service that is of high quality, and you can prove your quality. This enables you to move away from competing on price, and instead compete based on the service or value that you offer as a business. Value-based pricing also enables you to pump up your brand because you are competing based on the value you bring, value that you can clearly explain.
This method of pricing is very difficult to pull off at the very beginning of an enterprise, because you need to have a thorough understanding of how your work impacts your clients and customers, and how much those customers are willing to pay for those benefits. This strategy is also a significant shift in mindset for many people, and it can be difficult to shift away from a price per hour, or cost plus margin way of thinking.
I recommend that social enterprises that are trying to move towards value-based pricing create a couple different packages of products or services based on the value that they have seen with previous customers. This works best with a basic package, a basic plus package, and a premium package. Value-based pricing does not need to be super expensive, it just needs to reflect the value that the customer receives.
One of the key elements of value-based pricing is that you will need to go above and beyond for each customer. They will be expecting significant results because of your higher fees, and you should be leaving every customer feeling that they have been blown away by your service. Value-based pricing requires excellent management and a high level of customer-service.
Remember, your customers aren’t just paying for your time and materials. They’re also paying for all the experience that you’ve gained by thoughtfully solving other problems like theirs. Once you've established that you are different from your competitors and provide a unique perspective, you will find that a specific kind of customer finds their way to you. They will come specifically for the experience of working with or buying from you.
Now that you have a couple options to start creating prices for your products and services, consider how they might be packaged and sold. Should your social enterprise be competing for the lowest price? Do you just need a simple method to help you break even and start building an operating budget? Might you have the right kind of product or service to try value-based pricing?
None of these choices are permanent, and you can try using them in combination or by selling different versions.
And as you set your prices: remember, Keep it Simple.