The Power of Pricing: Define Your
Worth, Costs And Competition
By Paul Strikwerda
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 that 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?
FOR PRICING, TOO
Pricing is one of the most important tools for managing your clients' expectations, as well as your bottom line.
Your price point sends a clear signal to your market:
This is what I am worth.
WHAT PEOPLE PERCEIVE
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.
Your fee structure will help you attract the kind of customers you want to be working for, 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.
AND MEAN IT
Here’s the deal, though. Your fee must be backed up by:
Simply put: Be an expert and do your homework.
Don’t just pull a rate out of a hat. That’s lazy and crazy.
DETERMINING YOUR RATE
Find out what the competition is charging.
Then ask yourself: “Do I want to charge more, less or the same?”
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
CREATIVE VS. COMMERCIAL
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. Well, 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
SIMON SAYS ...
Have you 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:
In other words, when people get a haircut, they conveniently forget that they’re also paying for the rent that the salon is forking over every single month, or for the training the staff receives so they can make every teenage boy look like Justin Bieber.
CARE ABOUT COSTS
Clients don’t care about your costs. But 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?
KNOW YOUR 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. Ask Dilbert.
DREAMS VS. REALITY
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.
Professor Simon puts it this way:
HOW MUCH PAIN?
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?
ABOUT PAUL ...
Paul Strikwerda is a 25-year veteran of the voice over industry whose Nethervoice service features German and Dutch voice-overs, translation and evaluation services. Born in Holland, he has worked for Dutch national and international radio, the BBC and American Public Radio. Although 90% of his work is in English, Strikwerda also records in Dutch, German and French. Clients include Novartis, Johnson & Johnson, and the Discovery Channel. He also publishes an informative and entertaining blog, Double Dutch.
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