Here’s the problem, there are too many business owners and companies that charge too little for their services, especially small businesses. The reasoning is that most small companies are people who got out of the workforce in order to start their own business. Therefore, it’s been instilled in their head that they must “exchange time for money”.
So in turn, many people decide: “Hey, as long as I’m able to pay my bills, I should be good.” This mentality is fine to a certain point, we all must pay our bills, however, if you want your business to expand, you must first learn the art of value based pricing.
What Exactly is Value Based Pricing?
It only costs the major company Nike, approximately 5$ to produce one of their shoes. However, in the United States, one of their shoes could easily cost more than $100. The large company could have said: “Hey, we can make profit if we sell a lot of shoes for $6 – and since we move so much volume, I’m sure we can have a legitimate company”.
They could have done this, but they would not have been maximizing their services. They let the market dictate how much they should charge their shoes. Based on doing research on “perceived value”, excellent advertisement, and branding, they were able to increase the price of their shoes – despite the fact that their shoes probably do the same thing as any other brand.
Therefore, it is critical for you to realize that you are worthy of charging more for your services, and you don’t have to feel bad about doing it! Think about it, if someone were to sell you a Lamborghini for $1000, you would probably think: “What’s wrong with it?” In this example, the person selling you a Lamborghini is not only doing themselves a disservice, they are putting negative thoughts into your head about that specific product!
Common Pricing Models (That Keep Many Business Owners Down)
Here are some common pricing mistakes that can keep the regular business owner down!
Competitor Pricing – Many business owners look around to see how much their competitors are pricing and just do it based on that. This is fine if you are in a highly regulated environment such as insurance sales, however, if you are free to charge whatever you want, why limit yourself to the competitors? Many people aren’t looking to save money, they are looking to acquire value for their dollar! Therefore, yes, it’s a great idea to see what others are charging just in case you face objections with business owners, however, do not let it directly influence how you approach your pricing.
Cost Plus Pricing – This is probably the most common type of pricing. Many business owners calculate their business and living expenses, find the break even hourly rate, and charge a little more so that they can have some money for growth. This is an excellent way to get off the ground, but it’s a horrible way if you are looking to maximize your profit. For example, if there is a person who is selling electric scooters.
The Disadvantages of Cost Plus Pricing
There are a multitude of disadvantages to this type of pricing. Let’s take a person who does wedding photography. If they charge hourly for the wedding and the amount of work it takes to do one show, the amount of money they earn will depend entirely on the length of the wedding. If it’s a short wedding, the person is obviously punished in term of their billable hours, and if it’s a long wedding – the person earns more, yet has less free time to grow their business. In order to do this, it is critical to begin the value based pricing process.
Critical, In Order to Price Your Services, Speak With the Customer
In order to know how valuable your services are, speak with your customer! The wedding photographer will want to ask the couple questions about their specific situation. The wedding photographer should ask the soon to be married couple one simple question: “Why?”
“Why do you want wedding photography?”
This will probably lead to a conversation in which the couple goes on about how in love they are; how happy the memories will make them happier in the future; how they want the pictures to reflect how much love & trust there is between the two of them; and so they can show their friends and family. Through this, the wedding photographer can come up with some new services such as more durable picture frames, offering a swipe file or cloud services so that the wedding photos are never lost, and to offer a professionally designed wedding slideshow so that they can present to family and friends on the television during get-togethers.
How Do I Know How Much To Charge?
As you can tell, knowing how much to charge for each service from talking to the customer can be rather difficult, however, it is all about packaging. There is no standard procedure that will tell you how to price your services and that’s the beauty of value based pricing, there is no limit! When a person has a flat tire and agrees to a higher rate by an emergency tire service, the person may be disappointed that they had to spend that money, however, their disappointment will be aimed at the situation, not at the person providing the service. Furthermore, if the service is good and an emergency comes up in the future, or if that person has a friend in the same emergency – the emergency tire repair shop will get repeat customers.
Now you’re asking: “But how did the emergency tire person know how much to charge in the first place?”
There are two ways to do this:
- Run pricing experiments to see how much you should charge for this service. Keep raising the prices of your services until you face a lot of resistance. That’s when you know when to stop. Large companies are constantly optimizing their prices for maximum profit.
- Simply ask people to put themselves in a situation have them give you their perceived value of their service. Some customers may not be able to answer right away, however, they can give you some excellent insight into the mind of your customer.
For business to business goods, there is a more set standard of pricing. You can base it on how much you believe your product or service will benefit the other company, and earn a percentage of that profit. For example, if you think that after 1 year, the company will earn $200,000 extra because of one hour of your service – you should charge a percentage. If you need a starting point some experts state that one can charge between 10-20%, however, as you increase your brand awareness, reputation & trust, this percentage can increase substantially.
By performing these three steps, you can make sure that you are maximizing profit and getting the most out of your efforts! With this type of pricing structure, it is very possible to from working nearly every single day, to working less than one month a year and still earning a full-time income! It’s all about pricing, repeat customers, and referrals! Furthermore, if you charge the right amount, those customers will be happy and refer others to you as well!