How You Should Really Be Pricing Things
July 5, 2017
I've been in the service game for a long time now and one of the most significant lessons that I've learned is that pricing your services and later, your products is not as easy as it sounds.
You have to contend with so many factors that you believe will affect the prospect's decision to buy from you that it's easy to become beset by analysis paralysis.
I want to dig into this subject a little more later but right here, up front, I want to drive something home that any experienced businessperson will tell you:
You are pricing yourself, your services and your products too low.
Why do we price too low?
There are so many variations on this, but the people with whom I speak generally suffer from some version of imposter syndrome.
In particular, it is imposter syndrome manifesting itself in the belief that they have to price the service or product “to win the custom”, which in turn leads to constantly pricing things “fairly” and offering pre-emptive discounts.
Now, I've added the word “fairly” in quotations for a reason here.
“Fairly” pricing a job typically results in underpricing that service or product to a point where you believe that the prospect won't question it.
The issue that I have with this approach is that by doing this, you undermine your product or service. You actually show that you don't believe that it's worth what you say it's worth because you're willing to price it just to close a deal.
And that leads to bad money. We don't want bad money in our businesses.
I've actually lost a lot of work, service work at least, by doing this.
Think about this: when was the last time you bought the cheapest item that you researched?
So very often we just don't think like that as buyers, so often we actually assess whether or not we trust the person delivering the product or service, we assess the risk of buying the cheaper option and we look at why the cheaper option is really cheaper.
Plus, we make assumptions about “cheap” that lead to us to believe that the experience in purchasing will be so much worse than if we just invested a little more in the slightly more “expensive” version.
Yet we still price things “fairly”, and we continue to believe that by doing so we're doing the right thing.
What does genuinely fair pricing look like?
“Fair: treating people equally without favouritism or discrimination.”
Whilst pursuing the notion that the way we currently price is “fair”, we forget one thing: we aren't being fair to ourselves.
Honestly, no one wants to buy a product or a service that they feel is too cheap because they know that the person selling it will simply need to move on to the next sale and the next sale in order to carry on bringing the cash into the business.
It's a perpetual cycle that can only be broken by changing how we approach pricing things.
Service businesses are especially susceptible to these issues.
After all, product pricing can be continually tested and often you get more than one bite at the cherry with a prospect, they go through a pretty heavy research process and of course, you can test different pricing strategies out with each contact, plus you can introduce scarcity and rewards based on purchase behaviour.
Service businesses very often only get one chance to pitch a service to a prospect and, if the price is deemed to be wrong, that project is often lost.
The way to combat this is to really assess what “fair pricing” means to you, to your business and to your prospects.
And then it's up to you to marry the value of the project to the value that you bring to the table and the overall value that the client will receive over the lifetime of working with you.
Don't focus on selling a singular service that is time limited, focus on the results that the prospect can expect to see after you've completed your project, and for the longer term based on their investment in you.
A new outlook on pricing your services
When I first began selling web services, I'd be asked to quote for a website build and all I would do was estimate how many hours it would take me or the team to deliver it, multiply that by our hourly rate, add a little “wiggle room” to account for scope creep and then pitch the project based on that.
The problem with this was that I didn't spend enough time figuring out why the prospect came to me, or what they really wanted to achieve with the project.
I was too focussed on delivering an output that I forgot to look at the big picture and where this output fit into it.
Consider this: if I'd been asked to quote a website project for a new startup accountancy firm, and it would take me 100 hours at £50 per hour, would my £5,000 project price be accepted?
That company doesn't see the value in a £5,000 website. They only see the value in having “something basic“; a website that serves the purpose of just being there.
It's more likely that the second website that they build will be the website that holds more weight with them.
But, what if I was asked to provide a quote for a website build for a £30m turnover business that intended on this being phase one of a three-stage digital marketing overhaul?
The website is simple, will still only take 100 hours at £50 per hour, and thus should surely be pitched at £5,000, too?
Well, I'd probably lose that project too.
Because weighed against the long-term value to the prospect (this is the first phase of an entire company-wide digital marketing overhaul, remember) and the importance that the company places on the website build, it's simply too cheap.
The perception is that you can't possibly deliver something that they hold in high regard based on that investment.
And typically they're right, because when pricing that project I'm seeing it as a straightforward trade of time for money.
Your experience holds value. As do your opinions.
When you're pricing your services, it's vital to not only measure up how long it will take you to deliver what you've been tasked to deliver to the highest of standards but to consider why you've been asked to pitch for this.
What makes you the prospect's ideal choice, and what will that prospect gain in terms of long-term value to their business based on the output you deliver?
How long will they “dine out” on your work, what could the complete return be on the investment in you & your services and truly, what are you genuinely worth to them?
Price fairly. Never price “fairly”.
Don't forget, the more you expect from yourself, the more you WILL excel!