For a small to mid-size business, it can be difficult to figure out what to charge for a service. Large companies can run focus groups, quantitative research, or otherqualitative analysis of target populations to estimate product worth. This is usually unthinkable for small businesses.
Where ever you are in your product pricing decisions, I hope you have researched competitors, looked into pricing structures, costs, and potential profits. Hopefully, you have estimated how many clients you need to have based on different pricing models and have budgeted accordingly. Mostly, I hope you have built a pricing structure and worked in what you thought was fair – not too much & not too little.
So what pricing model is best? Here is where your pricing model might take you –
Just as an example, let’s pretend you are a dog walker and after some research, the average pricing in your area is $15.00 per visit. (I realize pricing should best vary per area & $15.00 is not necessarily the average pricing in your area.)
Charging higher than the average:
Pricing: $16.00 or $20 per visit.
You are going to attract those people who are willing to pay more. They may expect more and hopefully your service is already excellent. They will most likely be very happy with you as long as you remain consistent and do not disappoint.
To the client you appear as a ‘better’ and higher priced business. People will treat you this way and expect a ‘better’ business. In turn, you have an improved outlook about your business because you’re getting paid well for what you do. AND because you feel positive about your business, your clients are happier, and the business does well. It’s cyclical.
Their pricing rationalization was most likely: ‘you pay more for better service.’
Also, when it comes time to reasonably raise prices, it will generally be accepted by those who feel this way because they feel good about the service they receive for what they pay. A ‘pricing with the times’ is more acceptable.
Pareto’s Principle (80/20 Rule): (http://betterexplained.com/articles/understanding-the-pareto-principle-the-8020-rule/) Originally, the Pareto Principle was based on wealth. 20% of the people have 80% of the wealth. It’s also applicable to most situations in life — 20% of your clients, bring in 80% of the income; 20% of clients give you 80% of your problems, etc. This rule also internally repeats. Of the top 20%, there is a 4% division who is responsible for the 80% of the top 20%, and so on.
Using a higher priced method, of 100 people who look at your business 4 might end up buying. For the run-of-the-mill average business, this can be GREAT for long-term growth. (I’ll explain what it takes to go from long-term to short-term growth below.)
(Please keep in mind this is just an example; many aspects are at play when it comes to getting buyers. You can have a brick of gold that no one will buy if you can’t market, sell, or maintain your business effectively.)
Charging The Average
Your clients will be a mixture of reasons of why they are with you. Afterall, this is where MOST of the companies charge. If everyone charges $15, then you charge $15. From those 100 people who call; let’s say you get 20 clients. You may feel as if you want to be different and stick out more than the others. In this case, you will say you do with services, etc… but you won’t get paid more unless it’s through upsells, additional fees, etc. Businesses at this level are more tempted to bring in additional fees than at the ‘higher priced’ level because they feel as if they should be earning more. This feeling of ‘charging additional fees’ is usually even greater for businesses who under charge.
Though ‘the need to market’ depends on multiple recipes for success, in this regard, a business does not need always need to market or ‘get their business name out’ as much as a high end business because general client conversion is greater in ‘average’ prices.
When looking at the numbers and your own personal goals, it might make more OVERALL sense to charge the ‘same’ as average priced businesses because odds are you’ll likely be getting more clients.
(Keep in mind this does not apply to the psychology behind coupons, special discounts, or other similar deals.)
If everyone charges $15, you charge $14.00… or $8.00
Within a few dollars, clients will think of your pricing as a ‘deal’ and you’re more apt to get MORE clients who wish to save money. You get more clients, but they might watch their dollars more. Therefore, when it comes time to charge more, you may see more retaliation or grief for raising prices. However, keep in mind that you will also be attracting more clients.
Similar to average prices, you’re more apt to want to charge more for ‘extras’ and even more apt to feel ‘stressed’ or ‘burnt’ out because you feel you are not getting paid enough if YOU are doing the work. (From personal experience though, once you hire everyone to do the work for you — not getting paid enough starts to fade as other problems may arise that relate to not getting paid enough… — but that’s a whole other blog.)
A funny thing happens when people start to seriously undercut the competition. Studies show that the MORE you undercut the competition, the MORE potential clients start to have preconceived notions and immediately think of you as ‘less trustworthy’ and ‘less ideal’ to what they want. (Regardless of the truth.)
Think of buying a can of soup. Which is your initial reaction to what might be healthier or better tasting? A $0.50 can of soup, a $1.25 can of soup, or a $4.99 can of soup.
As businesses undercut TOO much — the principle of 80/20 returns and only 4% of the people are attracted to your business. I’ve seen businesses charge $8 or $10 compared to the $15 and gain no business.
Most of the time when in either of the extremes, the business is focused on pricing — and this is how client’s see your business. The BULK of businesses are average pricing and this is what people are used to. If pricing is not normal, consumers ask themselves why it is not. If you do not explain pricing or do not properly prepare them for the pricing, chances are they will be less accepting of it.
Here’s my take:
If you have a GREAT marketing campaign & you can bring in MORE people than the standard business — then by all means, charge more! According to Pareto, you’ll need 4x the amount of people to see your business to get the same amount of clients as a ‘standard’ priced business. HOWEVER, it’s cyclical. The more who see you, the better branded you become & the more you (can) grow.
Also, please note that if you are charging an average or a below average price — that if you suddenly or over a short time increase your prices to ‘elite’ pricing, you will be attracting different clients (and no longer those who are with you.) Just as an example, I have a client I consulted with who was of ‘standard’ pricing, but was over-run with walks. She had spoken with a different consultant who told her to change all of her prices to $22 per walk. When she did (over a 6 month period), she LOST EVERY ONE OF HER CLIENTS and had to start over.
There are certainly ways to increase pricing to be a ‘higher priced’ business… but keep in mind your current clients have come to you for certain reasons — and money usually is one of them.
(This article is also published on paulfranklin.info)