Job Pricing – Don’t Underestimate Your Value
I am amazed and surprised when I see business owners posting online about how much they should be pricing for a particular job or service. Determining the right pricing requires you to understand what you actually sell.
Every customer is buying more than your time. They are buying experience, the investment you have made in developing your skills, and the resulting expertise. If you base your price solely on the time it takes to complete a job or service, you turn what you sell into a commodity.
Pricing is not a one-size-fits-all exercise. Too often we focus on just making money and not maximizing the amount of money we are making. Ask yourself if you would be happy making twenty percent on one million dollars, or ten percent on two million dollars in sales? What happens is that we focus on our costs, what needs to be charged to cover those costs, and enough extra to make life good. What we often miss are the intangibles that can mean the difference between ten, twenty, or even thirty percent to the bottom line.
No matter what pricing model and strategy you choose, there are a number of intangibles to consider when setting your pricing. Overlooking these intangibles, may result in undercharging your customers. This is a disservice to you and them.
Linda Lopeke with SmartStart identifies fifteen intangibles to consider when setting your price. She uses the acronym P.R.I.C.E. in identifying the factors:
P: reflects your planning, productivity, and performance level, i.e. novice or expert.
R: reflects your public recognition, business relationships, and industry reputation.
I: reflects your influence, intelligence, and impact with respect to results.
C: reflects your capability, competency, and consistency of your product, program, and service delivery.
E: reflects your efficiency, effectiveness, and excellence of execution with respect to the finished product and throughout the pre-sales, sales, and post sales process.
Review your current pricing against the factors above. Does your current pricing or the pricing you are considering reflect the intangible values you bring to your customers? If it does not it’s time to change your pricing.
Remember to evaluate your pricing annually because your value will increase over time.
The rates in your market will vary depending on the industry, skills required, and services offered. They are most often dictated by the demand for your level of experience, expertise, reputation, and creditability. If pricing hourly, don’t penalize yourself as you gain experience and develop your skills; raise your rates.
Next, compare your pricing to similar services in your market to get an idea of how to position yourself. Don’t let what others are charging dictate your pricing; remember, they are not you. While it may appear that these two sentences contradict each other, they don’t. It is important to understand the pricing in your marketplace and how your pricing relates to it. If you are 20% higher, than expectations are going to very different for you. You need to make sure you are providing that additional value.
After evaluating your offering against P.R.I.C.E., you need to weigh each factor differently depending on your customers. For example, if each category is equally important to your customers’ satisfaction each would represent 20% of the price you are charging. However you could have situations were one or more of the categories has a greater impact or is more highly valued by your customers. You can the weigh the factors differently and adjust your numbers accordingly.
Does this mean offering different rates for different customers? Yes. This is not uncommon. Not everyone pays the same price for a car.
Consider What Your Market Values
It’s important to know the market you are serving and the economic value of what you are selling. This enables you to quantify and justify the reasons for your pricing and develop a compelling argument from why people and companies should buy from you.
Another thing to consider to ensure you are charging the right price for your product or service is to think carefully about your target market’s values and what your unique contribution will be in each of those areas. Doing so will give you more confidence in asking for what you deserve.
In addition to the above, you need to also think about the personal, business, and ethical considerations your pricing must reflect. This should include knowing your floor and ceiling rates.
Once you have reviewed P.R.I.C.E. and your competitors, you need to develop your minimum and maximum pricing. Your minimum price will always be, or should be, your costs plus $1.00.
Once you have established your minimum price, it’s time to experiment. Add twenty-five to thirty percent to your minimum and see the effect on sales. If sales stay the same or increase, you have room for further increases. Continue to work the numbers until you have a price that reflects your value and one supported by the market.
A few things to remember:
- The more similar your service or product is to the competition, the more similar your price will need to be. The exception to this is if you are recognized as the leader in your industry and are in high demand.
- Always start your price testing at the high end. It is harder to raise prices versus lowering them. The exception to this is if you are branding yourself as a low cost solution provider.
- Don’t confuse price with worth. There will always be someone who doesn’t see your value. Don’t let it be you.
At the end of the day, the most important thing in pricing is the value you bring to the customer. The article, “Value added – definition and meaning” in Market Business News, April 2017, summed it well: “Rather than purchasing a product or service, customers buy the value and utility that a company puts into its goods or services. The value a company adds to its products is what convinces its customers to purchase them.”