The Art of Pricing

John Tabita

The most commonly-asked question in SitePoint’s business forum is “How much should I charge?” And answering that is as easy as “How much should a car cost?” If you don’t think pricing and price negotiation is an art form, then you’ve never tried to purchase a car from a car salesman.

Knowing what to charge requires context. The reason “How much should I charge?” is so difficult to answer is lack of context. Context is how our minds make value comparisons and judgments. If you’ve never sold a website before, you have no point of reference to know if, for instance, $1,000 is too much or too little to charge.

On the other hand, if you live in NYC and have been getting twice that for the past two years, then you know $1,000 is “not enough.” But if you’re in Lima, Ohio and can’t get people to pay more than $600, then charging $1,000 means you’re pricing yourself out of the market.

Information provides context. So you need data—lots of it, in the form of ‘yes’-es and ‘no’-s to figure out your optimal price point. And you don’t get that by bidding on one job every couple of months. You get it from bidding on a lot of jobs (which means you ought to be aggressively prospecting, but that’s another article entirely).

But even if you’re bidding on a lot of projects, chances are they vary in scope, which makes an “apples-to-apples” comparison difficult. That’s why targeting a specific niche or vertical can ease your pricing woes.

To illustrate my point that pricing requires context, answer this question:

“Is $100 is a lot of money?”

Without the necessary context—what you’re getting in return—it’s impossible to respond with any answer other than, “It depends…” While $100 would be a lot of money to pay for a pencil, it would be a bargain for a new iPad. Maybe I’m not getting anything in return and that $100 was in my wallet that just was stolen. In that case, $100 is an awful lot of money.

If you fail to frame your price within the proper context, your customer certainly will—by comparing it to another expense like his or her insurance, rent, or car payment.

I’ve said that you should price your services based on the value you create, not the hours you work. If you can capture that “value” in dollars and cents, then it’s easy to do a simple return on investment (ROI) analysis to demonstrate how much revenue your solution can generate over a period of time. This works well when selling paid or organic search which will result in a lead or a direct sale for your client.

But sometimes ROI is less tangible. How can you provide value to a church or non-profit, for example, when the return on investment is not measured monetarily?

Remember, clients are not buying your costs: they’re buying outcomes. So you have to establish what the desired outcome would be for these types of organization, then determine what that outcome is worth to them. Worth, or value, is merely anything someone is willing to pay for.

But value comes in two flavors: real and perceived. With the right seasoning, it’s possible to change your prospects’ perception of value. Pricing, like cooking, is an art.

The key to changing this perception lies within the Law of Reciprocation.

This powerful, yet unspoken, rule says we ought to repay a favor, kindness, or gift another person has bestowed upon us. Buy a friend a drink and your friend feels obligated to pick up the next round (if he doesn’t, find yourself some new friends).

Strange as it may seem, the Law of Reciprocation will help put the price of your service into its proper context and, at the same time, change your client’s perception of its value.

Sound too good to be true? Then come back next week to find out.

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  • http://www.bluesmoke.ro Daniel

    I set my price very simple. I think about how much time the project will take and then I think about what reasonable amount of money would be for me to survive one month and to pay my bills. If it’s something simple, that requires about a week of work, I split that in to 4 and get the right amount of money I should ask. Most projects I do take about a month to complete, so I ask for the full amount of money.

    In my country this is a problem. People don’t perceive what I do as valuable. They see all free WordPress themes all over the Internet and they assume that you’re gonna do that for them for free. It’s really hard to land a client around here. I have to explain to them every time the context and that I have to eat and survive too, not just them.

    • http://www.adrenalinaestudio.net Ruben D. Gutiérrez

      Daniel, then look for clients in other place, in my experience people in my country don´t see yet the value of a mobile site. And is very hard to sell them a simple and fair valued mobile site. In the other side small bussines owner in USA, Australia are looking for mobile sites well done and with a good price. So i sign up in several freelancers websites, and i get some very good clients. Is not easy, but maybe if you offer your service to a market that needs and apreciates the work you do, you´ll get well paid.
      That is an aproach, the other is self promote you and teach your clients, if you tell the benefits and features that diferentiate your work from a free theme, and do this consistently for sure the good clients will understand and you just need them to make money, the clients that want all free are useless for you
      Good luck and a lot of succes

  • http://visibleranking.com Michelle Sullivan

    I don’t do freelance web design, but I guess another point you can make when dealing with client about pricing in general (not just web design) is to emphasize how much time (=how much money) the client can save by choosing a professional/specialist like you. I can do my own accounting/tax stuff but I choose not to because it would cost me lots of time. In my situation, I’d rather spend that time with friends and family and spend money having someone else (professionals) work on my accounting.

  • http://www.njyp.com Glenn

    I deal with independent business owners all day, everyday. The majority of my time is spent “hunting” for new business. When approaching a new prospect, 3 things are essential:

    1. Find the right prospects. Not everyone is a potential client.

    2. Meet with the decision maker(s). This is not easy, even in an SMB setting. Many times people will tell you they make the decision because they are part of the family, blah blah blah. In my experience, this is not the case 99% of the time.

    3. This is where John is absolutely correct, you have to make it relevant to their situation. For example:

    Restaurant

    Customer avg value per transaction- $22.00
    Number of visits per year- 15
    Avg annual value- $330 (22 x 15)

    50 new customers- $16,500 in new top line revenue

    Let’s say your solution costs $4,000 overall

    That is a +300% ROI on their investment. THAT gets their attention!

    Presented the right way, your price becomes a non-issue.

    John has created an excellent resource here with his other posts. Read all of them.