How Much Should I Charge? (Probably More Than You Think)

If you started selling a service or product today, how would you know how much to charge? Today we look at some of the underlying psychology that goes into setting the perfect price.

Two Cents on Twitter: @twocentspbs

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Two Cents was created by Katie Graham, Andrew Matthews, Philip Olson CFP® and Julia Lorenz-Olson and is brought to you by PBS Digital Studios. We love dropping some knowledge on all things personal finance and helping you make better money decisions.

Two Cents is hosted by Philip Olson, CFP® and Julia Lorenz-Olson
Directors: Katie Graham & Andrew Matthews
Written by: Andrew Matthews
Executive Producer: Amanda Fox
Produced by: Katie Graham
Edited & Animated by: Andrew Matthews
Images by: Shutterstock
Music by: APM

SOURCES:

Confessions of the Pricing Man by Hermann Simon

[paigelego]

I feel the praise you guys don’t get enough is just how approachable and accessible the verbiage in these videos are. Sure you can learn this stuff in a textbook, but the academic language can leave people more confused than when they started off. Plus all the real life examples show how these concepts look in practice that just help further understanding.
I can’t sing these videos praises enough and just wanted to put this into words :D

[RJ-Isaac-TSOML]

This was a great video.

My wife flips furniture on FB and every once in a while she’ll have an item that isn’t selling. When this first happened she thought she should lower the price. I told her that she needs to raise it. She raised the price by 40% and sold it in a couple of days.

The reason for this is that when she had the item listed for $200 it looks arbitrary and is only attracting people wanting to spend $200. When she raised the price to $280 it looks more confident (because there are fewer 0s) and now it a $20 discount for those with a $300 budget.

[carlosavila]

I sold cans of soda, when I was in high school. They removed soda from the vending machines, so there was demand for it. A friend of mine sold soda too, but he would sell them out of his locker. I noticed that the cans he sold were warm. I learned from his mistake and refrigerated my cans, overnight. I started with two brands/flavors and expanded to a third. I don't remember the rate my friend charged, but I set my price at 50 cents. Once every few weeks, I would double my inventory and sell them at 3 for $1. These periodic promotions helped bring in new customers while showing appreciation for my current customers. My teenage years were all about side hustles, to take care of my financial needs, and help lighten the financial burden on my Mom.


Love your series of videos. Wish these were around earlier. I've made many financial mistakes, over the years; Currently digging my way out of a few.

[PiXimperfect]

You guys are the best financial advisors on YouTube. Unbiased, entertained, and brilliant teachers :)

[nekomatafuyu]

Another problem I see in the art communities is forgetting to count all their expenses (including time). So many people will add up just the material costs, forget costs such as petrol or labour (even if you're the only person working for yourself, you should be getting money out of the whole endeavour), then slap on a little extra as "profit". The end result is that they end up working for a couple of $/hr, or maybe even at a loss (if they're forgetting to take in to account costs such as petrol).
This also then has the knock-on effect that people see artwork at silly low prices, and assume that anyone charging a realistic price is charging way too much.

[Quickfistazor]

When I started freelancing (I'm a web developer), I took a look at the hourly rate of agencies in my domain and area and charged right in the middle. It was OK for a while, but it attracted clients with lower budget and brang in more problems because, those clients didn't have any idea how complex my work was and how much it was really worth; they wanted to have most complex app at the lowest price possible. When I rose my hourly rate 20% 2 years later, I ended up having more business with better paying clients that were aware of the complexity of my work! Best thing I've done so far!

[Matthew_Murray]

Anyone who does freelance needs to ask a simple question. “What would happen if I double my rate?” Think about it, you might say you would only get half the clients, BUT since the rate is double you are essentially coming out even for half the work as before. However this only works if you can provided quality necessary to justify the price to consumers

[yidingyang]

My dad gave me a watch box to sell. I posted a listing on Facebook, and someone offered for $200 cash. I looked around on eBay and found that the box could sell as high as $400 or even $500. I wanted to sell it fast, but I didn’t want to leave extra money on the table, so I started an auction on eBay, allowing for international sellers to bid as well. Someone in Thailand won the auction, and after shipping and fees I had a net profit of around $325, so I really love eBay auctions.

[vectoredthrust]

I remember vending at a weekend convention for the first time in my life, wondering about this exact same question. The answer I got from my dad was “set your prices so if you sell 70% of your stock, you’ve broken even.” Thankfully it worked, and I sold more than that, and made a healthy profit from my first venture into entrepreneurship ever.

Of course it helps that at conventions, people enter this weird mental state of being far more open to impulse spending and a lot less price sensitive than they normally would be. I wouldn’t recommend doing this for a food truck

[silverlina]

Just yesterday, my friend and I was talking about this. This video came at a great time! Thanks guys. Almost like you read my mind.

[Militarymoneyman]

So another way corporations set prices is based on a thing called “price elasticity of demand”... a basic version of it would be

Imagine I own a company called Fruit and sell a special smartphone called the Uphone, using a lot of data I determine that I could sell 1, 000 Uphones if the price were say $1, 000 (giving me $1, 000, 000 in revenue).... but if I sold them at $1, 050 that I would sell 975 Uphones (giving me $1, 023, 750 in revenue, and a little bonus of lower expenses since I sold less.... so a higher profit)

A corporation wants to maximize profit, and if they can generate a higher profit from selling fewer items at a higher price, they will.

[siddharthpandit]

You could also see the Example of Tata Nano.
Most Economic Car in Indian Market but media publicized it as Cheapest car, Public only heard Unsafe & Unreliable from there onwards. (BTW the car is pretty solid built with a chassis that does NOT compromise safety at all)
Also when People buy a car they are looking to show off. So they wont buy whats in their budget but rather go for something that impresses their colleagues/friends.
Product Placement & Public Opinion are two key things to consider while setting the prices.
Thanks Two Cents (Y)

[henrysiu]

I’ve learned from Uber and started “surge pricing” for my bbq service during the month of May and June (graduation and wedding season) and up my rates by 33% and I still keep plenty busy. It gets me higher quality clients and I do about the same amount of work and make more.

[flowergrowersmith]

Not just the video - even the COMMENTS are gold! Great stuff..

[yticivam]

I had to haggle my contract price for a graphic design and writing job. That's of course after the same client paying me the same rate for three previous contracts. You have to let them know you want that bump up, otherwise, you're always going to be that cheap person they always get. Not so good for your progressively aching and aging joints.

[LostMySauce]

I own a small marketing agency and the low price = low quality price mentality is definitely true. When we raised our prices, we actually got more inquiries and a few new clients.

[DanielIles]

I see this all the time with businesses I work with. *ALMOST ALWAYS* the price is too low.

If you think no one is buying because price is too high often it’s just that there isn’t enough money in marketing

[ThisisBarris]

I really dislike the use of luxury goods as a mean to exemplify how higher prices can generate demand. It ignores the fact that luxury goods don't come alone - there is the whole shop experience, the packaging, the branding, prestige etc. I promise you that any bloke who rises prices to appeal to the luxurious market without working on the luxury that goes around it while not succeed.

Great description of utility though - too many people ignore the non-physical aspect of it.

[angeleyes]

Freshman and Sophomore year of college I had to take Econ 101 &102 so I can verify that everything they say is true. As much as everyone complains about high prices the truth is that people associate low cost with low quality.

[VictorPaixaofun]

Amazing analysis, research, and details you've added in this video. Thank you and Congratulations!