The Art of Pricing
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.