Are you afraid of raising your rates?
“Those who can’t build value, have nothing left but to compete on price.” Paul Strikwerda
By the end of December, Alex Rodriguez will have earned $39,000,000. That’s 33 million in salary and winnings from the New York Yankees, and 6 million in endorsements. Not bad for a year’s work.
Do you think he’s worth it?
In 2006, entertainment tycoon David Geffen sold Jackson Pollock’s painting No. 5, 1948 for 140 million dollars. Assuming you had that kind of spare change, would you spend it on a painting described by some as “stunning drip”?
Can you tell me why 15-year old actress Abigail Breslin reportedly made $65K for 5 hours of voice-over work for the animated film “Zambezia”? Yes, that’s $13,000 per hour!
Let’s be honest: what did these people really do?
Mmm… let’s see. Rodriguez is pretty good at hitting a ball with some sort of stick; Pollock simply threw some paint on engineered wood, and all Breslin did was talk into a microphone. Why is that worth so much money?
Two words: PERCEIVED VALUE
Before I deal with the notion of perception, let’s first talk about the connection between cost, price and value.
Unless you are selling something that is basic and interchangeable (such as a commodity), there’s often no direct correlation between the cost to produce a certain article, the price the article sells for and the value people attribute to it. Art is an extreme example.
“No. 5, 1948” is currently the most expensive painting ever sold. Did you ever wonder how much Pollock spent on paints, brushes and the 8′ × 4′ sheet of fiberboard he drizzled on? Does it even matter?
What does matter is the subjective value of the painting and not the cost of the materials. In fact, to the new owner, the subjective value of Pollock’s masterpiece might very well be more than 140 million dollars.
Warren Buffet summed it up nicely:
“Price is what you pay. Value is what you get.”
That’s why people who only compete on price (those darn lowballers), are making a huge mistake. By doing so, they are devaluing what they have to offer, even before the client has had a chance to respond.
As soon as you start competing on price, you treat your valuable service or product as a dime-a-dozen commodity.
Peter Drucker was right when he said: “In a commodity market, you can only be as good as your dumbest competitor.”
Perceived value is in the eye of the beholder. It’s intangible. It’s a reaction to the assumed benefits you receive from owning and using a certain product or service. It’s an emotional response, based on a belief (and I define a belief as “a feeling of certainty”).
BELIEVING = SEEING?
A belief can be very powerful in overriding logical reasoning:
- as long as we believe that these dirty pieces of paper with the faces of dead people on it represent a certain value, we will continue to use them as money.
- people who were given two identical red wines to drink, said they got much more pleasure from the one they were told had cost more. Brain scans confirmed that their pleasure centers were activated far more by the higher-priced wine. (source)
- at least a third of the population consists of so-called placebo reactors. This means that if they feel that something is doing them good, it will indeed do them good.
Do you believe that?
Now, I’m not saying that “the market” has nothing to do with the way we put a price on goods and services. But economics is not always about numbers. It’s just as much about psychology. Let me give you two examples.
The law of scarcity states that if what you desire is in (seemingly) limited supply, its perceived value increases. This, in turn, increases the urge for people to want it and want it now. That’s why marketers love to create the perception of scarcity by saying things like “for a limited time only,” or “while supplies last.” Don’t miss out, people!
WALL STREET WISDOM
How about the stock market? What causes stock prices to change? Well, the idea is that the price movement of a stock indicates what investors feel a company is worth. For that, they look at things like earnings. Without profit, no company can survive.
However, during the dotcom bubble, some internet companies were valued at billions of dollars without ever making a profit. Their value was based on the perception of Wall Street, a strong feeling that these companies would do well in the future.
Feelings overruled facts.
Whoever said “Feelings don’t lie,” was in for a rude awakening!
For one last blast about the power of perception, let’s look at politics.
Why did republican hopeful Herman Cain suspend his bid for the White House? Did it really matter whether or not he had had extramarital affairs? If anything, his campaign was killed by allegations.
What mattered was that Cain was not able to change the perception of the public. Where there’s smoke, there must be fire, right?
BACK TO YOU
Now, let’s move away from politics, placebos, wine and the stock market, and talk about how all of this relates to your pricing strategy. Let’s summarize:
The price people are willing to pay greatly depends on how people evaluate what you have to offer. Value is a matter of perception. Perception is personal and therefore subjective. Perceptions influence a client’s expectations upfront, and the level of satisfaction after the purchase has been made.
Here’s the good news: because perceptions are subjective, they can be changed. That’s what branding, marketing and advertising are for. A successful campaign can turn simple pants made of rugged blue cloth into desirable designer denim.
True Religion’s top-selling jeans, the Super T, cost about $50 to make and sell wholesale to retailers for $152 a pair. The average price in stores is $335. (source) Gucci Low-rise flared jeans sell for $720. Talk about perceived value…
Most solopreneurs don’t have the funds to hire Saatchi & Saatchi and have them create a campaign to convince customers. Luckily, there are other -much cheaper- ways to position yourself in the market and sell your services at a higher price. This has to start with one question:
Do YOU believe you’re worth it?
Alex does. Abigail does, and so do their agents.
And guess what? The New York Yankees and Triggerfish Animation Studios agree!
They know that the added value A-rod and Abigail bring to their game, is much, much higher than their salaries.
You and I see price. They see value.
The pricing of art is an example of the art of pricing.
I can guarantee you that since 2006, the price of Pollock’s painting has gone up considerably.
Have you raised your rates lately? Are you selling yourself based on price or on value?
In the next installment, I’ll look at ways you can add value to what you have to offer, so you can stop selling yourself as a commodity, and start positioning yourself as a premium service.
Are you sold yet??
Paul Strikwerda ©2011
www.nethervoice.com
P.S. Be sweet. Please retweet!
