perceived value

The Power Of Pricing

by Paul Strikwerda in Articles, Career, Freelancing, Money Matters 23 Comments

Snow stormSNOW EVERYWHERE… and Max was in the thick of it.

His client was expecting him within the hour, and he was all dressed up but couldn’t go anywhere.

This was the account he had been grooming for months, and today was D-Day: Deal or No Deal. Snow or no snow. He had to get out of that airport.

“This is the worst snow storm we’ve seen in decades,” said the dispatcher. “No cab driver is going to go anywhere today. I’m afraid you’re on your own.” Max headed out anyway. Perhaps he could hitch a ride with one of the other passengers that was being picked up by brave friends or family members.

As the snow was coming down, visibility was at a minimum. All flights were canceled until further notice. Just as Max was about to head back inside, a black SUV came out of nowhere, and stopped at the pick-up spot. The driver rolled the window down:

“Need a ride?”

“How did you know?” said Max, as he hopped in. “I have to get to my presentation. Are you here to pick somebody up?”

“No one in particular,” said the driver. “But I’d be happy to take you.”

“Well, that’s awfully nice of you,” said Max. “Thank G-d for Good Samaritans.”

“Dream on,” said the driver. “It’s going to be one hundred dollars. Cash only.”

“You must be joking,” replied Max. “They said a cab would cost me no more than ten.”

“Well, why don’t you get a cab then?” asked the driver. “I’ll go and rescue some other grey suit in a hurry.”

“I’ll offer you 50,” tried Max.”

“Listen,” said the driver. “You look like a smart businessman. You and I, we don’t run charities. We’re both entrepreneurs. We see an opportunity. We jump on it. We take risks. Today I am risking my life and my car just so you can get to your meeting. That must be worth something, don’t you think?

“How about 60?”

“You don’t get it, do you?” said the driver. “My economics teacher taught me: ‘When something is scarce, it becomes more valuable.’ You have a major problem. I am offering you a solution. No one else will. If you want to stay, you’ve got to pay.”

“70?”

“Think of it this way,” sighed the driver. “This meeting you want me to take you to, must be important, right? Otherwise, why bother? Is there a lot of money at stake?”

“You got that right,” answered Max impatiently. “I’ve got one shot to seal a deal.”

“Well,” said the driver, “It’s none of my business, but what’s 100 bucks compared to the money you’ll bring in after that contract is signed?”

“Alright,” said Max as he took out the cash. “I get it. Now, drive!”

While the SUV was battling the elements, Max looked at his chauffeur and said: “I gotta give it to you, man. You know what you’re worth, and you’re not afraid to ask for it.

Some ten years ago, when Max started his freelance business, he had had such a hard time putting a price on the service he was providing. To help him focus, his startup coach had asked him a couple of simple questions:

  1. Do you consider yourself to be a pro?
  2. Do you want to run a for-profit business?
  3. Do you want that business to grow?
  4. What are the costs of running that business?
  5. What’s your break-even point?
  6. How much do you want to make?

In the past, Max had always treated his services as a hobby. That’s exactly what it was. There was no plan. No purpose. Just a passion. He spent hours and hours helping people and never worried about what to charge. That is, until he lost his day job, his benefits, and his security. Perhaps this was an opportunity to turn his hobby into a real business. That’s when things got serious and complicated.

“Here’s the good news,” smiled his coach. “You’ve got clients, don’t you? I mean, you’ve been helping friends all along. If you want to turn your hobby into a genuine profession, why not start close to home. You obviously offer something people want. You already have a market… Go for it!”

“Here’s the problem,” said Max. “I never really charged my friends anything. Most of them gave me pizza and a six-pack. I can already hear them say:

Why would we ever pay you if we can get you for free?

“Good point,” admitted the coach, and he went on: “My brother is a computer geek and he’s crazy about technology. But if he would do every single friend ‘a favor,’ he’d be fixing broken laptops all day and night and not make any money. Free pizza does not pay the mortgage. Besides, I don’t think he’d make the guys happy who repair computers for a living.

Now, I’m not saying that it’s not okay to help out a friend in need, but as soon as people found out that my brother knew how to fix a computer, everybody wanted to be ‘friends’ with him. He had to draw a clear line between real friends and those who were well below the rank of Facebook buddies. That’s what you have to do too, Max. No more giveaways. From now on, you run a business; not a charity.

One of your jobs as an entrepreneur is to manage your client’s expectations. Let me give you an example. If you take on a project you know you can easily do in two days, tell your client you can get it done in three. Guess who’s going to look good when you hand it in 48 hours later?

That way you not only create the expectation that you can beat a deadline. You’re also showing your client that she’s a top priority, and that you really know your stuff. Meanwhile, you’ve allowed yourself an extra day should anything unexpected come up. Does that make sense?

Pricing is one of the most important tools for managing your client’s expectations, as well as your bottom line. Your price point sends a clear signal to your market:

This is what I am worth.

Like it or not, there is a clear link between perceived quality and price. Otherwise, every wine connoisseur would drink Beaujolais out of a box, and Pottery Barn would be out of business.

Remember this: Your fee structure will help you attract the kind of customers you want to be working with, and the type of jobs you are shooting for. At the same time it will weed out the folks that cannot or will not afford you; the ones that are most likely to give you a hard time anyway.

Here’s the deal, though: Your fee must be backed up by experience and expertise on one hand, and by a realistic sense of your value in the market place on the other.

Simply put: Be an expert and do your homework. Don’t just pull a rate out of a hat. That’s lazy and crazy. Find out what the competition is charging. Then ask yourself: “Do I want to charge more, less, or the same?”

“I can’t imagine it’s that simple,” said Max.

“It’s not,” answered his coach. “Smart pricing decisions require at least three elements:

  1. Facts about your own cost of doing business
  2. The client’s evaluation processes
  3. Competitive activity

I know you really care about your work, Max. To you, it’s much more than a way to pay the bills. You’re an artist and somehow, some artists (and clients) believe that there’s a clash between creativity and cash. Doing what you love should be enough of a reward.

I don’t think Andy Warhol or Keith Haring would agree with that. Being creative and being commercial can go hand in hand, and since you’re in business to make money, let me give you a simple formula:

Profit = sales volume x price – cost

Have you ever heard of Hermann Simon? He’s a German economics professor and one of the leading experts on pricing. Together with Robert Dolan, he wrote a book called Power pricing: how managing price transforms the bottom line. He calls volume, price, and cost “profit drivers.”

Simon says something very interesting:

“The customer’s willingness to pay is not determined by the costs of a product but by its performance and resulting value to this customer.”

In other words: when people get a haircut, they conveniently forget that they’re also paying for the rent the salon’s forking over every single month, or for the training the staff receives so they can make every teenage boy look like Justin Bieber.

Clients don’t care about your costs.

You should.

That’s why you have to figure out the answer to this question: How low can you afford to go? What is your Price Floor?

A Price Floor is a point below which a product or service should not be sold. In the long term, the price must obviously cover the full costs of a product. Otherwise the seller cannot make a profit and will not survive. Volume never makes up for selling below cost. 

Every year, tens of thousands of self-employed people file for bankruptcy because they made one big mistake: they followed a dream and forgot to run the numbers. They are what I like to call ‘under-estimators’. Literally.

Knowingly or unknowingly, they started selling below cost in an effort to drive out the competition or even out of ignorance. Some started giving their work away for free, hoping to get exposure and attract business. Last time I checked, my local baker was handing out free samples but never entire cakes. And between you and me: he doesn’t strike me as a marketing genius.”

“Speaking of prices… a friend of mine just bought a brand name watch at a price that was too good to be true,” said Max. “It turned out to be fake.”

“Were you surprised?” asked the coach.

“Not at all,” said Max. “You get what you pay for.”

“That’s right. In part, price is about perception. That’s probably why your friend wanted to buy that Rolex rip-off in the first place.

Professor Simon puts it this way:

“Price is the economic sacrifice a customer makes to acquire a product or a service. The customer always compares this sacrifice with his perception of the product’s value. (…)

“In essence, a customer buys a product or a service only, if its perceived value -measured in money terms- is greater than the price. If selecting from several alternatives, the customer prefers the one offering the highest net value, i.e. the greatest differential of perceived value over price.”

Go to any tattoo parlor and see for yourself how much pain people are willing to suffer in exchange for the pleasure derived from a name, permanently painted in the perforations of their delicate flesh. Years later, they spend a fortune burning out their ex-hubbie’s initials with a laser beam… turning the man in question into an ex-boyfriend, once removed… But I digress. We were talking about perceived value, weren’t we?”

“You’ve mentioned volume, price, and cost,” said Max. “How exactly does the market factor into this? Isn’t a certain price ultimately the result of the interaction between supply and demand? That’s not something I have any influence over, is it?”

“Great point,” smiled his coach. “First off…

*          *          *         *         *

THE BLACK SUV slowly made its way through the winter weather.

“Care for some hot cocoa?” asked the driver as he pointed at a thermos.

“Yes please!”said Max.

“And help yourself to a muffin too,” said the driver. “This might take a while.”

“Well, you certainly know how to treat your customers,” remarked Max.

The driver smiled. “Always exceed your client’s expectations. That’s my philosophy.”

“Will you pick me up when I am done?” asked Max.

“Of course,” said the driver.

“I love return business!”

Click here for part 2.

Paul Strikwerda ©nethervoice 

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photo credit: It’s been DUMPING snow at Heavenly… via photopin (license)


Are you afraid of raising your rates?

by Paul Strikwerda in Articles, Career, Money Matters 25 Comments

“Those who can’t build value, have nothing left but to compete on price.” Paul Strikwerda

At the end of December 2011, Alex Rodriguez had 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?

Read the rest of this story in my new book. Click on the cover to access the website and get a sneak peek. Use the buttons to buy the book.

Making Money In Your PJs cover