Entry by Erica Ramus

Thoughts on Pricing

  11 Comments

This quote below is from Seth Godin... I thought it was appropriate.

My take on pricing is that I do NOT create an hourly schedule for my consulting clients. I meet them, evaluate what is needed/asked for, and then tell that client my fee for the service. It is based on my past experience of how long it will take me to complete / how hard it is / how much hassle .... etc. It is not a formula. It is my gut instinct and that is it. I don't print a schedule in writing. If the client doesn't want to accept my fee then either we negotiate or he goes elsewhere. That would be considered "market pricing" -- If the fee is not "worth it" in the client's mind, then they won't pay. I rarely ever have anyone walk away. 

11 Comments

I keep screwing the quote up. Above is from ME..... here is godin's quote:

 

The pricing formula (S&S)

 

Years ago, my bosses and I needed to finalize the pricing for a new line of software I was launching. In the room we had MBAs from Harvard (2), Stanford, Tuck and, I think, Wharton. We had three prices in mind, and the five of us couldn't agree. So we did the only scientific thing: we flipped a coin (two out of three, just to be sure).

Pricing your product is actually simple, as long as you consider it from the buyer's point of view. How much it costs you to make something is irrelevant. They don't care (of course, you can't price something at a loss and hope to stay in business for long). The two keys to the analysis:

Substitutes: Every purchase is a choice, and that means the buyer can choose to do nothing or buy something else instead. If there are easy and obvious substitutes to what you sell, that has to be built into your pricing. If you make something rare and unique, you still might not be able to charge a lot--because people can always choose to buy nothing. A 42 carat diamond, for example, might be hard to replace, but it's not worth $100 million unless someone actually chooses to buy it.

Part of the work of design and marketing is to help people understand that there are no good substitutes for what you have to offer, meaning, of course, that you can happily charge more.

Story: The other half of the pricing formula is the story the price itself tells. A Prius at $40,000 or a Prius at $10,000 is the same car, but the price becomes a dominant part of the story. You can tell a story of value/cheapness/affordability, or a story of luxury. If you price your product or service near the median, you're telling no story at all with the price, giving you the chance to tell a story about some other element of what you sell.

If you're not happy with your pricing options, focusing on your costs might not be the right path. Instead, focus on how the design or delivery change the availability of substitutes, and how the price becomes part of the story of your product.

 

Erica - THANK YOU. To me, this is the epitome of a knowledgeable professional - to look at a project/task/problem, evaluate it based on the specifics of THAT project/task/problem AND client and provide a proposal that is unique to that project/task/problem AND client.

I can see how having some sort of personal hourly rate in mind might help in coming up with the proposal - or at least a general range - but big picture - yes, this is how I approach everything I do as a self-employed person who charges people for my time and expertise.

Would love to hear others' thoughts!!

Jen -- it's important to factor in experience. I can do this because I have been doing it 11 years. I have easy clients and hard ones. I price differently depending on situation and can make that judgement pretty quickly. I don't agonize over pricing. 

Erica... again... this is exactly what I've been thinking. Where is this quoted from?

I'm guessing that this approach will resonate with some and not at all with others... and that's okay! Some of us approach such things as more of an art than a science (and yes, experience factors into that!) and others are much more comfortable with formulas that either they or someone else comes up with.

I price homes in somewhat the same fashion, although I do certainly take the objective parameters into account. But my final pricing recommendation is based on my gut reaction - WHAT do I think a buyer will pay for this house given my experience working with buyers? And I trust that gut instinct much more than I trust the number that a fancy-schmantzy CMA program spits out (unless that number agrees with my gut, which it often does!).

Now, if I were pricing a home in a market I'm not familiar with, I won't have that natural gut reaction and will have to depend more heavily on the numbers and statistics... so perhaps someone who hasn't ever priced their services or given much thought to what their time and expertise are worth might need more of a formula...

 

I get morning emails from Seth Godin's blog. That was today's quote.

I've been reading a lot of posts lately and just haven't had time to jump in.  Here's my take on pricing services.

Most consultancies have what is called a "methodology" (or just "method") that is a well documented, step-by-step outline of an entire process from beginning to end.  There may be different methods for different types of clients and engagements.  Whereas those consulting firms would have a different method for handling finance vertical clients compared to oil & gas clients, there would be some similarities in the approaches used.  The steps in the methods clearly identify the types of resources needed for each step.  In real estate it might be people like assistant, junior REALTOR, etc.  Each of those people has an hourly rate.  If you can't vary the people, vary the rate for one person (you) based on the type of work done.  When bidding a project, you identify which steps, and thus which rates, apply to this client.  Calculating the steps times the rates, added up, gives you an overall project cost.

When negotiating pricing with a client, the method shows what is done.  If the client agrees with the work schedule, and you've calculated the cost of those steps as per above, then they can negotiate on overall price.  Never negotiate on individal rates - just overall project discount.  Generally, prices were always high and discounted down.  It gives the client a sense of "getting a deal" while not compromising the "average billing rate" obtained by the consultant(s).  One key measure of a consultancy is that rate (along with total number of billable hours).  By not negotiating down on the hourly rates of individual steps, any engagement with a time & materials option won't be overall discounted.

The aspects of comparing pricing to competitors is another story.

How you arrive at a rate, cost or fee--by gut or by computation still requires a process, which each of you laid out in your comments. We are in agreement--different strokes (Methods) for different folks.

Excellent dialog.

Having come from a corporate management consulting firm, it was always easy for me to take the "science" approach:

  • Overhead expense (cost of being in business) +
  • Direct expense (direct cost of servicing a client including employee compensation) +
  • Desired Profit

Setting a price on a service must also take into account competition and differentiated value (what differentiates me from my comeptitors) and why would a potential client choose me over my competitors at my price. I could then change my price as necessary to be competitive if there was not much of a value difference.

After becoming an independent contractor I found I was competing with traditional commission models so I adjusted my price for services to be in the competitive range, not cheap, and let my competitive value work. It always did.

So, the science is to determine what you might be worth on a task (or hourly basis) and the art was adjusting to be competitive.

So, the science is to determine what you might be worth on a task (or hourly basis) and the art was adjusting to be competitive.

Or, as I put it... at what price am I (more or less) happy to provide this service and also believe my customer will be (more or less) happy to pay it.

I like what Bryan wrote... I feel we are not a discount...  I feel we are less expensive than the Tradition Broker because they (the client) are not paying for the entire package but we will be well paid for the time we spend on a specific task.  I feel once the public sees that by sharing the risk and only paying for the services they need will produce a large volume of clients in this economy.

This page contains a single entry by Erica Ramus published on January 23, 2012 8:16 AM.

The lost art of becoming a true expert was the previous entry in this blog.

Do not throw in the towel is the next entry in this blog.

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