What to charge?
Two weeks ago, 12 of us had a wide-ranging chat about pricing professional services — a subject that affects almost everyone with a small business. Punchline first: There’s no formula. But there are some approaches:
Pro-bono: We all work for free occasionally, and it feels good to be generous. I often help people out as a loss leader, and because it feels like the professional thing to do. Everyone present said they done the same.
Cost-based: You can add up your overheads, plus a mark-up of 15% say, and call that your price. But then the only way to make more money, without increasing your price, is to reduce your overheads, which may well reduce quality. The group talked quite a bit about what Seth Godin calls ‘the race to the bottom’ — a race you don’t want to win.
Time-based: I’m a scientist. I like the idea of formulas, and of the transparency they suggest. If my prices are formulaic, based on the hours I work, then it’s fine if my customers talk to each other, because my prices are fair and predictable. But the reality, at least for me, is that this is difficult to maintain. Some customers are, well, difficult. Sometimes I feel generous. Some projects bring a different kind of value to me. (Remember your other bottom lines: reputation, relevance, brand, and so on. You can leverage these types of capital almost as easily as cash.)
Value-based: This is where the money is, and most people present felt this was the place to focus. Charge in proportion to what your insightful judgment — your professionalism — is worth, usually on a turnkey (fixed-price) basis. Of course, your client may perceive your value differently from you. It’s up to you to help your client see the difference you make. Snags include feature creep, with the client expanding the scope after you’ve agreed on a price, and over-delivery. Do understand that turnkey pricing reduces risk for the client — there must be a price on that risk reduction.
Tim and Dave and I have been over all this and more in connection with The HUB’s pricing. One thing we’re trying to do (help us!) is:
Listen to your customers: Your customers know what they want to pay. Ask them! One of Tim’s strategies is to ask the customer to “pay what you can, and a little bit more”. The little bit more ensures buy-in, commitment, and seriousness. He can write more about that one day.
Have you nailed pricing in your line of work? What is your strategy?