Master Product Pricing for Designers: 5 Value-Based Strategies, No Time Wasted
Hey hey!
A couple weeks ago I was with one of my students and was asked about how to price for product design. This student immediately applied this advice and closed a $12,000 contract for a new app within 4 days.
This weeks memo is going to share with you what I shared with them.
This topic is often misunderstood, which leads to underpricing your work or just not making a profit. However, understanding your value and product pricing is key to unlocking higher earnings and client satisfaction.
So let's get started!
The Core Idea
The key to mastering product pricing lies in avoiding some common mistakes:
Not understanding your value: Many designers undervalue their work and charge less than they should. This not only affects their earnings but also sets a wrong precedent in the market.
Ignoring market rates: Not being aware of the prevailing market rates can lead to either overcharging or undercharging your clients.
Not considering all costs: Often, designers only consider the time spent on designing, ignoring other costs like software, electricity, and overheads.
Using a one-size-fits-all approach: Different projects have different complexities and requirements. It’s essential to customize your pricing accordingly.
Not communicating clearly: Sometimes, designers don't clearly communicate what’s included in the price, leading to misunderstandings later.
The root cause of these mistakes is often a lack of knowledge or preparation. So how can we navigate these pitfalls? Let's explore together:
Step 1: Know Your Worth
The first step toward mastering product pricing is knowing your worth.
Here's why:
Your worth is determined by the unique skills, experience, and perspective you bring to the table.
Without a solid understanding of your worth, you may end up underpricing your work, which not only affects your earnings but also sets a wrong precedent in the market.
Over time, this will lead to burnout and financial instability.
Moreover, undervaluing yourself may lead clients to underestimate the quality of your work.
This is crucial in industries like IT, SaaS, and e-Comm where the competition is fierce, and setting the right price can make or break your success.
Real-life Example:
Consider Sarah, a product designer with a decade of experience.
She has worked with various startups, helping them design user-friendly interfaces and impactful user experiences.
Over the years, she has honed her skills in user research, wireframing, prototyping, and usability testing.
Now, let's say a new tech startup approaches her to design the interface for their mobile application.
Sarah knows that a beginner product designer, with limited experience, might charge around $30 per hour.
However, Sarah has a wealth of experience and a portfolio filled with successful projects, so she knows her services are more valuable.
If Sarah charges the same as a beginner, she undervalues her expertise and the value she can bring to the client.
It can also lead the client to question the quality of her work since her rate doesn't reflect her expertise.
Charging a rate that matches her skills, experience, and the value she provides, let's say $125 per hour, is a fair reflection of her worth.
This rate accounts for her expertise, the unique perspective she brings to the project, and the high-quality work she consistently delivers.
Practical Approach:
To accurately determine your worth and set appropriate prices for your services, consider the following framework:
Assess your skills: List down all the skills you possess that are relevant to your industry. Be specific and include any specialized skills that set you apart from others.
Evaluate your experience: Consider the number of years you have been working in your industry and the different projects you have completed. Your experience adds value to your services.
Analyze your unique value proposition: Identify what makes you unique. Do you have a specialized skill set? Do you offer a particular style that others don’t? Are you particularly efficient or known for your attention to detail?
Research market rates: Compare your skills, experience, and unique value proposition with the prevailing market rates. This will give you an idea of where you stand in the market.
Factor in your costs: Make sure to account for all your costs, including software, hardware, overheads, and any other expenses related to your work.
Set your prices: Based on the above factors, set your prices. Make sure it reflects your worth and is competitive in the market.
Key Takeaway:
Knowing your worth is crucial for setting the right prices for your services.
It involves assessing your skills, evaluating your experience, analyzing your unique value proposition, researching market rates, and factoring in your costs.
Setting prices that reflect your worth will not only ensure fair compensation but will also help you to establish a strong reputation in your industry.
Remember, your pricing should be a reflection of the value you provide, not just the time you spend.
Step 2: Research Market Rates
After assessing your worth, the next step in mastering product pricing is to research the market rates.
Here's why:
Understanding the prevailing market rates is essential to ensure your pricing is competitive.
It allows you to position yourself accurately within the market, making sure your prices are neither too high nor too low.
If your prices are too high, you risk losing potential clients to competitors.
On the other hand, if your prices are too low, you may attract the wrong kind of clients and may not make enough profit to sustain your business.
This is particularly important in industries such as IT, SaaS, and e-Commerce, where prices can vary significantly based on the level of expertise and specialization.
Real-life Example:
Consider a product designer who has developed a niche in creating user-friendly interfaces for mobile applications.
They have worked with several clients and have a solid portfolio showcasing their work.
Now, they have been approached by a start-up to design the interface for their new app.
The designer, eager to get the project, quickly quotes a price based on the time they think it will take to complete the work.
However, they did not research the market rates for similar projects.
As a result, they end up quoting $2,000 for a project, whereas the market rate for a similar project, considering the designer's experience and expertise, is around $5,000.
By not researching the market rates, the designer undervalued their work and left $3,000 on the table.
This not only impacts the designer's earnings but may also lead the start-up to question the quality of the designer's work since they are charging significantly less than the market rate.
Practical Approach:
To research market rates effectively, follow this framework:
Identify your competitors: Start by identifying other professionals or businesses in your industry that offer similar services. Make a list of around 5-10 competitors.
Analyze their pricing: Check their websites or contact them directly to find out their prices. Make a note of the prices for services similar to what you offer.
Consider their expertise and experience: Take into account the expertise and experience of your competitors. Are they more experienced than you? Do they offer specialized services?
Evaluate additional services: Consider any additional services your competitors offer that could affect their pricing. For example, do they offer 24/7 customer support?
Average the rates: Once you have gathered all the necessary information, calculate the average rate for your services.
Key Takeaway:
Researching market rates is a crucial step in setting your prices.
It involves identifying your competitors, analyzing their pricing, considering their expertise and experience, evaluating additional services, and averaging the rates.
This will help you to set competitive prices that reflect your worth and the value you provide.
Remember, your goal is to set prices that are fair to both you and your clients, while also being competitive in the market.
Step 3: Consider All Costs
Once you know your worth and have researched market rates, the next step is to consider all costs associated with providing your services.
Here's why:
Considering all costs is vital to ensure you make a profit.
This includes not only the direct costs, such as materials and software, but also indirect costs, like overheads and marketing.
If you don’t factor in all costs, you may end up with a lower profit margin than anticipated or even make a loss.
This is particularly important for industries like IT, SaaS, and e-Commerce where there are various costs involved, from software licenses to hosting and marketing.
Real-life Example:
Let's consider Steven, a product designer who works with SaaS startups.
Steven was hired by a startup to redesign their product interface.
Eager to get the project, he set his price based on the direct costs only, which included the software he needed and the hours he estimated it would take to complete the design.
He didn't consider indirect costs like the time spent in meetings with the client, the research needed to understand the user's needs, and the electricity and internet he used while working on the project.
Steven charged the startup $3,000 for the project, thinking it would cover his costs and leave him with a decent profit.
However, by the end of the project, he realized he spent an additional 30 hours on research, client meetings, and revisions, which he had not accounted for.
This oversight meant that his actual hourly rate was much lower than he had intended, leaving him with a much smaller profit than anticipated.
Steven learned the importance of considering all costs, both direct and indirect, when pricing his services.
Practical Approach:
To ensure you consider all costs, follow this framework:
List direct costs: Start by listing all the direct costs associated with providing your service. This includes materials, software, outsourcing, etc.
List indirect costs: Next, list all indirect costs, such as marketing, customer support, overheads, etc.
Estimate time: Estimate the time it will take to complete a project or provide a service. Don’t forget to include the time spent on communication, administration, and any other non-billable hours.
Calculate total costs: Add up all direct and indirect costs and the value of your time to get the total cost.
Determine profit margin: Decide on a profit margin that you want to achieve. This will vary depending on your industry and the value you provide.
Set your prices: Add your desired profit margin to the total cost to get your final price.
Key Takeaway:
Considering all costs is essential to ensure you make a profit.
It involves listing direct and indirect costs, estimating time, calculating the total cost, determining your profit margin, and setting your prices accordingly.
By factoring in all costs, you can set prices that are fair and competitive while ensuring you make a profit.
Remember, it’s not just about covering your costs, but also about valuing your time and expertise.
Step 4: Customize Your Pricing
After considering all costs, the next step in mastering product pricing is to customize your pricing.
Here's why:
Customizing your pricing is important because it allows you to adjust your prices based on the client, the project, or the value you provide.
It is not always appropriate to have a one-size-fits-all pricing strategy as different clients have different needs and budgets.
Customizing your pricing can help you to attract a wider range of clients and maximize your revenue.
This is particularly important in industries like IT, SaaS, and e-Commerce, where there are many variables that can affect the cost and value of a project.
Real-life Example:
Jessica is a product designer who specializes in legacy software products in the healthcare industry.
She was approached by a large hospital chain to redesign the user interface of their legacy patient management system.
The hospital chain has a higher budget compared to Jessica's usual clients, and they require specialized knowledge in healthcare software, which Jessica has.
Jessica usually charges $50 per hour for her services.
However, considering the complexity of the project, the specialized knowledge required, and the value she would be providing to the client, she decided to customize her pricing.
She proposed a fixed price of $20,000 for the entire project, which included not only the design work but also the architecture, user testing, and ongoing support for a fixed amount of time.
The hospital chain agreed to the price, as they recognized the value Jessica was providing and the specialized knowledge she had.
By customizing her pricing, Jessica was able to charge a price that reflected the value she provided and secured a lucrative contract that helped to boost her portfolio and reputation in the healthcare industry.
Practical Approach:
To customize your pricing effectively, follow this framework:
Understand the client’s needs: Start by understanding the client’s needs and requirements. What is the scope of the project? What is the client’s budget?
Consider the value you provide: Consider the value you provide to the client. Is this a specialized service that few others can provide? Is there a high demand for your services?
Evaluate the client: Evaluate the client. Are they a repeat client? Are they likely to refer you to other clients?
Adjust your prices: Based on the above factors, adjust your prices accordingly. This may involve offering a discount for bulk orders, charging a premium for specialized services, or adjusting your prices based on the client’s budget.
Communicate your pricing: Clearly communicate your pricing to the client. Explain the reasons for any adjustments and the value you provide.
Key Takeaway:
Customizing your pricing is essential to attract a wider range of clients and maximize your revenue.
It involves understanding the client’s needs, considering the value you provide, evaluating the client, adjusting your prices, and communicating your pricing.
Remember, it’s important to be flexible with your pricing, but also to ensure you are still making a profit and valuing your time and expertise.
Step 5: Communicate Clearly
After customizing your pricing, the final step in mastering product pricing is to communicate clearly.
Here's why:
Clear communication is crucial in any business interaction, but it's especially important when it comes to pricing.
Miscommunications about pricing can lead to misunderstandings, missed opportunities, and damaged relationships.
Whether you are discussing pricing with a new client, negotiating a contract, or sending an invoice, it's essential to be clear, transparent, and professional.
Real-life Example:
Amir is a product designer who specializes in creating internal enterprise products.
He was approached by a large corporation to redesign the user interface of their internal project management tool.
The corporation has a global team, and the tool is used by employees worldwide.
Amir knew that this was a big project and would require a lot of his time and expertise.
After a series of discussions, he provided a detailed proposal outlining the scope of work, timeline, and his pricing.
The corporation, impressed by Amir's portfolio and approach, agreed to the proposed pricing and timeline.
However, a week into the project, the corporation asked for additional features to be added to the tool, which were not part of the original scope.
Amir took the time to understand the requirements for the additional features and then provided a detailed breakdown of the additional time and costs involved.
He explained that adding these features would require more design and development time, and therefore, the cost and timeline of the project would need to be adjusted.
The corporation appreciated Amir's detailed explanation and transparency and agreed to the revised pricing and timeline.
Amir then incorporated the additional features into the design, and the project was completed successfully.
Both parties were satisfied with the outcome, and the corporation commended Amir for his professionalism and clear communication throughout the project.
Practical Approach:
To communicate clearly about your pricing, follow this framework:
Be transparent: Be upfront and transparent about your pricing. Break down each component of your pricing and explain the value you provide.
Use simple language: Avoid jargon and use simple, clear language that the client can understand.
Listen to the client: Listen to the client’s questions and concerns and address them clearly and professionally.
Confirm understanding: Confirm that the client understands and agrees to the pricing before starting any work.
Provide written documentation: Provide written documentation of the pricing, including any discounts or additional charges, and get the client’s approval in writing.
Key Takeaway:
Clear communication is essential to avoid misunderstandings and build trust with your clients.
Be transparent about your pricing, use simple language, listen to the client, confirm understanding, and provide written documentation.
Remember, a well-informed client is more likely to be a satisfied client, and clear communication is key to achieving this.
Recap
Mastering product pricing is a crucial skill for any designer, whether you are working in IT, SaaS, or e-Commerce.
Your pricing not only affects your bottom line but also your reputation and relationships with clients.
Therefore, it is important to have a well-thought-out pricing strategy that considers your worth, market rates, all costs, and is customized to each client and clearly communicated.
Actionable Framework
Know your worth: Understand the value you provide to your clients and don’t undersell yourself. Your pricing should reflect your skills, experience, and the market demand for your services.
Research market rates: Research the market rates for your services. This will help you to price your services competitively and fairly.
Consider all costs: Consider all the costs involved in providing your services, including materials, time, and overheads. This will help you to price your services profitably.
Customize your pricing: Customize your pricing based on the client, the project, and the value you provide. This will help you to attract a wider range of clients and maximize your revenue.
Communicate clearly: Be transparent about your pricing, use simple language, listen to the client, confirm understanding, and provide written documentation.
By following this framework, you can create a pricing strategy that is fair, profitable, and builds strong relationships with your clients.
Remember, the key to successful pricing is to value your time and expertise, be flexible, and communicate clearly with your clients.
