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The Psychology of Pricing

I have a conversation about pricing almost every week. It usually starts when a client tells me my prices are too high and I have to explain that actually we are very good value for money.

It might sound a little trite but my clients come to me to help them improve their business. Well, if I can’t do the right things in my business- if I can’t get my pricing and my cash flow right, then who am I to tell them what to do in theirs?

The big companies of this world, the Amazon’s and the Apple’s don’t give you anything for free. If you want that extra thing, you pay the extra money for it. I am happy that our pricing is bang on and that we charge for everything. It’s something I advise all our clients- and any other business to do.

I suspect throughout the pandemic, the majority of people have not increased their prices, but their cost base has gone up, so now it’s probably a good time to take a look and review your pricing.

On the Mind Your Business podcast, we always try and offer business owners some advice on the important decisions needed to run a successful business and our discussions around pricing mainly centred on:

  • How to set your price at the right level
  • How to convey the value of your offer to your customers
  • The different ways you can price your business
  • How much business owners give away for free

Cause and Effect
Often the root cause of a low pricing policy is not having the confidence and courage around the value of your service or your product. Alan and I discussed that one way to consider your pricing strategy is cause and effect. Ask yourself, how good is your service, or how good do you want it to be? If you link your pricing structure directly to service quality, then the higher the quality of the service, the easier it is to raise the price, especially if you can demonstrate greater value.

Work less for more
Most service businesses set their pricing based on units of time. in general, you can buy it by the hour, half-day, full day or longer depending on the job you want done. The problem is that there’s a finite amount of time that can be sold so business owners need to value their time. If you don’t, your customers aren’t going to either. You’ve got to attach a value to that time and then if something’s going to take an extra hour, then bill for it.

A note of caution here, what you should never do is do some additional work and then bill the client without ever talking about it. Too many businesses get ambushed by unexpected bills and it just kills relationships.

Of course, whether you sell time or another resource, the ideal scenario is to sell less but for more money. That way you can keep your service levels high and don’t spread yourself too thinly. A trap I find a lot of business owners fall into is that they start out offering a really high quality service, but their pricing is way too cheap. As they grow, they bring on more clients, who do business with them because of the quality service; the low price point is an added bonus. The problem comes when they try to scale up, but maintain the same level of service. They fill up their client bank but aren’t remunerating themselves enough so they end up with too many clients, without the resource to deal with them and so end up giving themselves too much to do. Eventually, this means the quality of service dips and clients start to leave. Eventually they become a bottom-of-the-barrel business because of their own good intentions.

Create additional services
If you’re worried that an increase in price will mean you lose some clients, well firstly this isn’t always a bad thing, knowing who you want to sell to is a key part of a business strategy, but secondly a way to maintain or increase a price point and maintain clients is to find something else you can sell to them-a kind of added extra- that gets them used to paying more.

Repricing for new customers
The other thing to do is to reprice new customers. You may have a legacy price for the clients that came on board at the start of your business, but as you grow, test the market and see what price point you should go to. Keep the older clients on their price plan if you must, but don’t be afraid to charge market rates as you evolve or as you develop offer a better service.

Should you put a price list on your web site?
A question that goes around a lot is whether a business should list its prices on its web site. Lots do, we currently don’t. Some feel it is important to be transparent with their pricing structure, others feel they should have a conversation about value first, before talking about price. I think both are valid.

In many service businesses, the delivery can be bespoke and only when you truly understand a client’s needs can you provide an accurate quote. There may be degrees of difficulty or specialisms or investment associated with the work and the price must reflect that. But there is also something in the boldness of saying, this is our price, it’s good value, we’d love to do business with you and this is what you pay for our service.

The downside of no available pricing is that prospective clients can enter your sales funnel, who are totally unsuitable for your business. You have lots of good conversations, you are a good fit, but when you discuss price you find that their budget won’t stretch. Often, you still take that client on, even at the wrong price. This is an example of where indicative pricing may help filter your prospects at the start of the buyer journey.

Your Mission Statement
A good mission statement defines your purpose as a business. The advantage of a strong mission statement is that you can communicate it through any interaction or touch point, which in turn can inspire customers to want to do business with you. Even better, if your mission statement conveys a high service quality, it can be reflected in your price.

How much do business owners give away for free?
We see this all too often, the leakages in small businesses caused by owners going above and beyond what the competition does. If you’re in trades or you sell a product then it happens marginally less because you can account for stock wastage but particularly in service businesses, because there is no real price for the extra thing you can haemorrhage revenue.

If you don’t have a price list that outlines all of the services you offer, clients won’t see the additional value in things you do, they just see it all as part of one big bundle. If you break your products or services down and are clear on what additional things cost, the client can make a choice. They may decline the additional service, to avoid the additional cost, but it removes the need for unnecessary stress – or lost revenue.

In summary
We discussed a lot about the psychology of pricing and why it’s almost certainly time for business owners to review theirs. Charging too little not only reduces your margin, but also jeopardizes the quality of what you’re doing. If you do decide to raise your price, consider adding an additional service, something your clients’ value to compensate for the increase in costs. We also talked about whether you should have prices on your website; whether you should be transparent, or discuss value first. My feeling is that indicative or minimum pricing can filter out the wrong type of client from your sales funnel right at the start.

The final point I discussed with Alan was using client feedback to set your pricing. Take your best five clients, ask them about the value they think they are getting from you and what they would be prepared to pay for it. If you charge £200 for something, but the clients would pay £350, then the next three times you meet potential new customers quote £350. You might find that your conversion rate stays the same, because then you’re finding your level. Then try the next three at £400. You will quickly find the point at which the market puts a price on your value and that’s where your pricing should be.

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